Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
>>> Philippines - Washington is not Amused, Another CIA/ISIS Joint Destabilization Campaign Underway
June 26, 2017
William Engdahl
Journal NEO
http://21stcenturywire.com/2017/06/26/philippines-washington-is-not-amused-another-ciaisis-joint-destabilization-campaign-underway/
The only word I find for it is cloddish. I refer to the latest CIA-instigated attempt to initiate regime change against outspoken Philippine President Rodrigo Duterte. The so-called ISIS terror attack in the minerals-rich southern Philippines island of Mindanao, a predominately Muslim part of the mostly Christian nation of 100 million people, took place literally in the midst of President Duterte’s talks in Moscow with Russian President Vladimir Putin.
The Duterte Putin talks in turn followed Duterte’s attendance in Beijing on May 15 for the first New Silk Road or Belt Road Forum. America’s colonial asset since 1898 was clearly walking away from the Washington “reservation.”
The terrorist siege in Marawi City is blatantly a desperate Washington try to topple the very popular (80% popularity in polls) Duterte, who successfully won the Presidency last June over a US-backed Mar Roxas, a US-educated former Wall Street banker. Since taking office Duterte has made bold and quite courageous steps to steer the former US Colony towards a Eurasian alliance with China and Russia as his major supporters. In Beijing in October last year, Duterte met China’s Xi Jinping and signed numerous trade deals with China. Critically, taking an opposite policy to his pro-US predecessor Benigno Aquino III, Duterte agreed to resolve the South China Sea dispute between Philippines and China through peaceful diplomatic talks, and to as he put it, “seek a separation from the United States.”
Since then Duterte has sought closer ties with Russia as well, in a further effort to bring his nation out from under the yoke of a de facto US control. This does not sit well with the circles of the so-called Deep State in Washington –the CIA and their nefarious friends. Should the US lose the Philippines, it would pose a devastating strategic geopolitical loss to the US military containment strategy against China and Russia in the Pacific. Devastating.
The recent attacks and siege in Mindanao were nominally done by the terrorist Maute gang and Abu Sayyaf criminal terrorist organizations, both nominally tied to the US-created ISIS fake Islamist operation, a CIA terrorist project created with Saudi money going back to the CIA’s Osama Bin Laden Al Qaeda Mujahideen Operation Cyclone during the 1980’s against the Soviets in Afghanistan.
Duterte’s Eurasian Pivot
It comes as no surprise to anyone closely following the evolving dialogues between Duterte and the leaders of China and now, Russia that the CIA would try to destabilize Duterte at this critical time. They simply hide behind the black skirts of their psychopathic drug-running Maute and Abu Sayyaf, both now tied to the CIA and Mossad-created and Saudi-financed ISIS.
In Moscow, despite having to cut short his talks with Putin to fly back home and deal with the terrorist crisis in Mindanao, the Philippine leader and his Secretaries of Defense and Foreign Affairs managed to sign a number of critical agreements with Russia. These included 10 major agreements aimed at deepening bilateral defense, strategic and economic relations. The two countries signed an Agreement on Defense Cooperation, a legal framework for military-to-military exchanges, training, intelligence-sharing. The Philippines and Russia also signed an intelligence exchange agreement to bolster counter-terror cooperation. That does not please Washington at all.
A ‘Country Bumpkin’ Not
Western mainstream media has delighted in portraying the 71-year-old veteran politician Duterte as a crude country bumpkin, a lower-than-peasant creature who is only capable of vulgar statements, such as when shortly after his inauguration he called the US Ambassador to Manila a ”gay son of a bitch“ for criticizing Duterte’s war on drug lords and dealers plaguing the country. Whether Duterte was factually correct, he clearly won sympathy of millions of his countrymen for having the courage to stand up against the American power.
After closely watching Duterte and his choice of close advisers now for almost a year, I’ve come to the conclusion a country bumpkin Duterte is definitely not. Rather, he is a shrewd political actor who is determined to bring his country out of the colonial servitude status it has held since the first Spanish colonialization in 1565.
Duterte is the first Mindanaoan to hold the Presidential office. Ethnically he is of Visayan descent. This fact is not irrelevant. The Visayans in Mindanao and other Philippine islands led a war for independence against Spanish occupation in 1896.
The United States, posing as the supporter of the Visayan-led war of independence from Spain, betrayed the trust assured the Philippines, double-crossed them and signed a Treaty with Spain, the Treaty of Paris of 1898, under which Spain ceded Cuba and The Philippines to the United States. The USA refused to recognize the independence of their erstwhile ally, the Philippines, and took the country by military force, America’s first genuine imperial grab. The nascent First Philippine Republic then formally declared war against the United States in 1899, unsuccessfully. It was put under US military control. It took until 1946 before the country could be recognized as an independent sovereign state, at least in name.
That historical heritage of Duterte as a Visayan clearly is a living fact for Duterte. He graduated Philippines University and earned a degree in law in 1972. As a lawyer, he was prosecutor in Davao City in Mindanao and later Mayor, one of the longest-serving mayors of the Philippines with seven terms over 22 years. As Mayor, Duterte passed the city’s Women Development Code, the only such code in the country. Its aim is “to uphold the rights of women and the belief in their worth and dignity as human beings.” He pushed for the Magna Carta for Women in Davao, a comprehensive women’s human rights law that seeks to eliminate discrimination against women. As President he has made a domestic focus on poverty reduction.
There is clearly more to the man than lurid western media reports reveal. Now this very popular President is determined to make his country a sovereign nation able to choose with whom it allies and for what ends, and how its economy develops. This is why the CIA and its fake Jihadist networks are being jacked up to try to get rid of Rodrigo Duterte.
ISIS: Bloody Pawprints of CIA and Mossad
The networks of the US Deep State, primarily the CIA have chosen their favorite cover, the otherwise laughable deception of head-choppers calling itself the Islamic State or ISIS or ISIL or DAESH (CIA central casting seems to have trouble settling on a name).
In reality IS, or the groups that spring up conveniently in Syria, in Iraq, in Chechnya–wherever the CIA decides it needs a terror hit squad–are trained mercenary killers, trained variously by CIA or Pentagon Special Forces; by Pakistani ISI intelligence, at least formerly, or by Mossad, also known as Israeli Secret intelligence Service, or by MI-6. In the Philippines, the IS alleged affiliates, especially the Maute group that has laid siege to Marawi City, are little more than a criminal band that finances itself by terror, occasional beheading to exert ransom in a protection racket, recruiting child fighters. Recently the networks of the CIA have been pouring in their foreign mercenaries from Syria, Libya and other places to beef up Maute’s gang for the attack on Duterte’s rule, portraying it as a religious-based “liberation struggle.”
ISIS came out of the CIA’s Al Qaeda franchise called Al Qaeda in Iraq. In 2010 its name was changed to ISIS. Then as Israeli journalists pointed out the embarrassing fact that the English acronym for the Hebrew spelling of Mossad was ISIS (Israeli Secret Intelligence Services abruptly they decided to call their band of mercenaries with their black flags and US M16 assault rifles, IS for Islamic State. Conveniently in Syria they control the very territory where competing Qatari and Iran gas pipelines to the Mediterranean would run. Curiously, despite the fact they are active in the Golan Heights where Israel has its eye on stealing a huge amount of newly-discovered Syrian oil, they have never attacked Israel. The one time an accidental hit on an Israeli target took place, IS apologized…Do real head-choppers ever apologize?
When the fake CIA Sarin gas attack in Ghouta in 2013 failed to get a UN mandate for all-out war to depose Bashar al Assad–Obama’s infamous “red line”–the NATO and NATO-linked networks created the monster they now call IS in 2014.
Today the CIA uses IS as the cover to justify keeping US forces in Iraq after the government asked them to leave; a cover to bomb Syria in order to topple Assad, something Russian presence has made embarrassingly difficult since September, 2015. And they use it to recruit thousands of young psycho recruits from over the Muslim work, train them and send them back to places like Chechnya in Russia or Xinjiang in China, or Balochistan Province in Pakistan where the Chinese have built a new deep water port at Gwadar on the Arabian Sea near Iran, the heart of its $46 billion China–Pakistan Economic Corridor (CPEC), a strategic part of its One Belt, One Road Eurasian infrastructure project.
Now the West’s favorite terrorist mercenaries are being told to take down Duterte in the Philippines. They probably are too late and have badly underestimated their adversaries. But then with the deterioration over recent decades in the quality of American university education, the current generation of strategists at Langley likely missed the basic course in Sun Tzu’s the Art of War, especially the part that cautions generals who wish to be victorious to “know yourself and know your enemy,” something that Duterte seems to have thought about. How the IS destabilization try in the Philippines unfolds in coming weeks may well determine a major turning point towards creation of the emerging China-Russia-centered Eurasian Century.
<<<
>>> U.S. and China on Collision Course
By James Rickards
December 22, 2016
https://dailyreckoning.com/u-s-china-collision-course/
China’s capital and currency markets are on a collision course with the U.S., and by extension, the entire world. Economists are fond of saying if something can’t go on forever, it won’t. That truism applies to China.
Huge profits will be made by those who see this China train wreck coming and act in time.
The idea of economic stress in China sounds strange to most ears. China has come from the chaos of the Cultural Revolution to the world’s largest economy measured on a purchasing power parity basis in just 35 years. Even using nominal GDP, my preferred metric, it is the world’s second largest economy.
China’s economy grew over 12% per year in 2006-2008, and again in 2010. Even at the depths of the global financial crisis in 2009, annual Chinese growth was still over 6%. Chinese growth ran between 8% and 6.7% from 2011 to 2016. These growth rates are extraordinary compared to the 0% to 2% annual growth achieved by the major developed economies since 2007.
But, beneath that glossy surface all is not well. Much of China’s growth was completely artificial. It would not be counted if China were subject to more rigorous accounting standards.
China’s growth consisted of about 45% investment. That compares with about 30% investment in developed economies. Investment is fine if the investments have positive expected returns and are not financed with excessive debt. But, China fails both of those tests.
Much Chinese investment is completely wasted on “ghost cities” (major metropolitan complexes that are completely empty). As well as white elephant prestige projects such as the multi-billion dollar Nanjing South train station with 128 mostly unused escalators. Assuming half of Chinese investment is wasted, then GDP should be reduced 22.5%. This turns 6.7% growth into 5.2% growth at best.
The situation gets even worse when you consider the amount of debt being used to finance this wasted investment. China’s bank assets have grown from about $2.5 trillion to $40 trillion in the past 10 years, a 1,500% increase. And that’s just the tip of the iceberg.
Most Chinese debt is “off the books” in so-called wealth management products (something like the CDOs that sank Lehman Brothers in 2008), and derivatives. China has a huge “shadow banking” system of provincial guarantees, inter-company loans and offshore transfer pricing schemes. When all of this debt is taken into account, China looks like the greatest Ponzi scheme in history.
If the situation is so unstable and overleveraged, why hasn’t it collapsed already? The answer is that China is the greatest currency manipulator of all time. China used a 35% “maxi-devaluation” of the yuan in 1994 to make its currency globally competitive and boost its exports. Then it used central bank intervention from 1994 to 2006 to keep its currency at that depressed level.
This 12-year currency manipulation enabled China to build its factories, create jobs, pile-up dollar surpluses and prop up its banking system. Of course, much of this growth came at the expense of U.S. manufacturing jobs that were being lost by the millions over this same period. Only after 2007 under intense U.S. political pressure did China allow the yuan to appreciate to a more reasonable level given its factor inputs and terms of trade.
Now China is again resorting to its currency wars playbook. Since 2014, China has allowed the yuan to devalue from 6.0 to 1 dollar down to 6.9 to 1 dollar. Right now the yuan is poised to break through the significant benchmark of 7.0 to 1 dollar.
The difference between now and 1994 is that the U.S. is paying attention. In particular, President-elect Donald J. Trump has threatened to label China a “currency manipulator” on his first day in office on January 20, 2017.
This escalation of currency wars tension comes at a time when there is heightened risk of a real war with China. Soon after his election, Trump received a congratulatory phone call from the president of Taiwan. That might seem like a routine courtesy, but not from the Communist Chinese perspective.
Beijing views Taiwan as a “breakaway province” and not a separate country. U.S. politicians usually tiptoe around this issue, but not Trump. He not only chatted with Taiwan’s president, but he questioned the U.S. “One China” policy in a tweet.
Trump’s actions set off alarms in Beijing. The Communist leadership decided to send Trump a message by stealing one of our Navy underwater drones operating in Philippine waters, nowhere near the disputed South China Sea waters claimed by China.
The underwater drone was later returned, (after Trump tweeted that the Chinese should “keep it”), but the point was made. Geopolitical tensions between China and the U.S. are definitely on the rise.
With China heading for a credit crisis, and U.S.-China political relations strained, what does this portend for the Chinese yuan and a budding currency war?
The first indication is that a new Chinese maxi-devaluation may already have begun. Of course, the Chinese will not move 35% at one time as they did in 1994. They are moving in small steps.
But, even a 3% devaluation on August 10, 2015 was enough to send U.S. stock markets down 11% in the next three weeks.
A 10% maxi-devaluation today, less than one-third of what China did in 1994, would send U.S. stocks plunging 30% in days at the prospect of an all-out trade war with China.
How likely is a new maxi-devaluation? It could be coming in a matter of weeks.
The reason the yuan has been going down lately is not government manipulation but capital flight. Wealthy Chinese are trying to get their money out of China as fast as they can because they fear a new maxi-devaluation is coming.
China has burned through $1 trillion of foreign exchange reserves in the past two years to accommodate the demand for dollars from this capital flight. China’s holdings of U.S. Treasury debt have crashed from $1.265 trillion in November 2015 to $1.115 trillion as of October 2016 according to U.S. Treasury data.
China’s overall reserves have fallen from about $4 trillion in 2014 to $3 trillion today. Of that amount, about $1 trillion is illiquid and another $1 trillion will be needed to bailout China’s banks in the coming credit crisis. That only leaves $1 trillion as a precautionary reserve to defend the yuan. China’s capital flight continues at about $100 billion per month. This means China will be broke in one year.
If China wants to avoid going broke, it only has three choices according to Mundell’s “Impossible Trinity.” It can raise interest rates to defend the currency, slap on capital controls, or devalue the yuan.
Interest rate hikes will kill the economy and accelerate the credit crisis. Capital controls will choke off new foreign direct investment and force capital flight into illegal channels without actually stopping it. A maxi-devaluation is the simplest and easiest way out of the box for China.
Why hasn’t China devalued already? Part of the reason is to avoid being labeled a “currency manipulator” by the U.S. This could cause retaliation in the form of tariffs. That is why China has been pursuing a slow, steady devaluation instead of a maxi-devaluation.
But, now Trump says he will label China a currency manipulator anyway. Perhaps with one of his “first day” executive orders as soon as he is inaugurated. If Trump does that, and he well may, then China has no reason to delay its maxi-devaluation because the U.S. will have taken away China’s only motivation to play nice.
The resulting currency and trade war will make the 11% stock market correction of 2015 look like a picnic. All global markets will be affected. The U.S. will suffer, but China will suffer more.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Duterte aligns Philippines with China, says U.S. has lost
Reuters
http://www.msn.com/en-us/news/world/duterte-says-us-has-lost-aligns-philippines-with-china/ar-AAjaEvu?OCID=ansmsnnews11
BEIJING, Oct 20 (Reuters) - Philippine President Rodrigo Duterte announced his "separation" from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks.
Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate.
"In this venue, your honors, in this venue, I announce my separation from the United States," Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.
"Both in military, not maybe social, but economics also. America has lost."
Duterte's efforts to engage China, months after a tribunal in the Hague ruled that Beijing did not have historic rights to the South China Sea in a case brought by the previous administration in Manila, marks a reversal in foreign policy since the 71-year-old former mayor took office on June 30.
His trade secretary, Ramon Lopez, said $13.5 billion in deals would be signed during the China trip.
"I've realigned myself in your ideological flow and maybe I will also go to Russia to talk to (President Vladimir) Putin and tell him that there are three of us against the world - China, Philippines and Russia. It's the only way," Duterte told his Beijing audience.
Duterte's remarks will prompt fresh concern in the United States, where the Obama administration has seen Manila as an important ally in its "rebalance" of resources to Asia in the face of a rising China.
The administration agreed a deal with Duterte's predecessor granting U.S. forces rotational access to bases in the Philippines and further doubts will be raised about the future of this arrangement.
In Washington, the U.S. State Department said it was "baffled" by Duterte's comments and would seek an explanation when Daniel Russel, the top U.S. diplomat for East Asian and Pacific Affairs, visits Manila this weekend.
"We are going to be seeking an explanation of exactly what the president meant when he talked about separation from the U.S.," said State Department spokesman John Kirby. "It's not clear to us exactly what that means in all its ramifications."
Both the State Department and the White House portrayed Duterte's comments as being at odds with the close, long-standing alliance between the two countries. They said Washington would welcome closer ties between Beijing and Manila, however.
"The U.S.-Philippine alliance is built on a 70-year history, rich people to people ties and a long list of shared security concerns," White House spokesman Eric Schultz told reporters, noting that the administration has not received any request from Filipino officials to alter bilateral cooperation.
A few hours after Duterte's speech, his top economic policymakers released a statement saying that, while Asian economic integration was "long overdue," that did not mean the Philippines was turning its back on the West.
"We will maintain relations with the West but we desire stronger integration with our neighbors," said Finance Secretary Carlos Dominguez and Economic Planning Secretary Ernesto Pernia in a joint statement. "We share the culture and a better understanding with our region."
RED CARPET WELCOME
China has pulled out all the stops to welcome Duterte, including a marching band complete with baton-twirling band master at his official greeting ceremony outside the Great Hall of the People, which is not extended to most leaders.
President Xi Jinping, meeting Duterte earlier in the day, called the visit a "milestone" in ties.
Xi told Duterte that China and the Philippines were brothers and they could "appropriately handle disputes," though he did not mention the South China Sea in remarks made in front of reporters.
"I hope we can follow the wishes of the people and use this visit as an opportunity to push China-Philippines relations back on a friendly footing and fully improve things," Xi said.
Following their meeting, during which Duterte said relations with China had entered a new "springtime," Chinese Vice Foreign Minister Liu Zhenmin said the South China Sea issue was not the sum total of relations.
"The two sides agreed that they will do what they agreed five years ago, that is to pursue bilateral dialog and consultation in seeking a proper settlement of the South China Sea issue," Liu said.
China claims most of the energy-rich South China Sea through which about $5 trillion in ship-borne trade passes every year. Neighbors Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.
In 2012, China seized the disputed Scarborough Shoal and denied Philippine fishermen access to its fishing grounds.
Liu said the shoal was not mentioned and he did not answer a question about whether Philippine fishermen would be allowed there. He said both countries had agreed on coastguard and fisheries cooperation, but did not give details.
SEA DISPUTE TAKES 'BACK SEAT'
Duterte's tone towards Beijing is in stark contrast to the language he has used against the United States, after being infuriated by U.S. criticism of his bloody war on drugs.
He has called U.S. President Barack Obama a "son of a bitch" and told him to "go to hell," while alluding to severing ties with the old colonial power.
On Wednesday, to the cheers of hundreds of Filipinos in Beijing, Duterte said Philippine foreign policy was veering towards China.
"I will not go to America anymore. We will just be insulted there," Duterte said. "So time to say goodbye my friend."
The same day, about 1,000 anti-U.S. protesters gathered outside the U.S. Embassy in Manila calling for the removal of U.S. troops from the southern island of Mindanao.
Duterte's abrupt pivot from Washington to Beijing is unlikely to be universally popular at home, however. On Tuesday an opinion poll showed Filipinos still trust the United States far more than China.
Duterte on Wednesday said the South China Sea arbitration case would "take the back seat" during talks, and that he would wait for the Chinese to bring up the issue rather than doing so himself.
Xi said issues that could not be immediately be resolved should be set aside, according to the Chinese foreign ministry.
China has welcomed the Philippines approaches, even as Duterte has vowed not to surrender any sovereignty to Beijing, which views the South China Sea Hague ruling as null and void.
China has also expressed support for his drug war, which has raised concern in Western capitals about extrajudicial killing.
<<<
>>> Russia and Turkey finalize plans for gas pipeline that will allow Moscow to bypass Ukraine
Olesya Astakhova and Nick Tattersall
Reuters
http://www.businessinsider.com/russia-and-turkey-finalize-plans-for-turkstream-gas-pipeline-2016-10
ISTANBUL (Reuters) - Turkey and Russia signed an agreement on Monday for the construction of a major undersea gas pipeline and vowed to seek common ground on the war in Syria, accelerating a normalization in ties nearly a year after Turkey shot down a Russian warplane.
Turkish President Tayyip Erdogan hosted Russia's Vladimir Putin at an Ottoman-era villa in Istanbul for talks which touched on energy deals, trade and tourism ties, defense and the conflict in Syria, where the two leaders back opposing sides.
"Today has been a full day with President Putin of discussing Russia-Turkish relations ... I have full confidence that the normalization of Turkish-Russian ties will continue at a fast pace," Erdogan told a joint news conference.
The warming relations between NATO member Turkey and Russia comes as both countries are dealing with troubled economies and strained ties with the West.
Putin said Moscow had decided to lift a ban on some food products from Turkey, imposed after the Turks shot down a Russian fighter jet near the Syrian border last November, and that both leaders had agreed to work toward the full-scale normalization of bilateral ties.
They signed a deal on the TurkStream undersea gas pipeline, which will allow Moscow to strengthen its position in the European gas market and cut energy supplies via Ukraine, the main route for Russian energy into Europe.
turkstream
Russia's drive to reroute gas to Europe around Ukraine, including by expanding the Nord Stream pipeline to Germany, has met with heated opposition in Brussels since Moscow annexed Ukraine's Crimea region in March 2014. Reuters
The plan for TurkStream emerged after Russia dropped plans to build the South Stream pipeline to Bulgaria due to opposition from the European Union, which is trying to reduce its dependence on Russian gas.
Erdogan also said plans for a Russian-built nuclear power plant in Turkey would be accelerated. Time lost on the Akkuyu project because of strained relations would be made up, he said.
In 2013, Russia's state nuclear corporation Rosatom won a $20 billion contract to build four reactors in what was to become Turkey's first nuclear plant, but construction was halted after the downing of the Russian jet.
Deep divisions on Syria
Putin received Erdogan in a Tsarist-era palace outside his home city of St Petersburg in August, when the two leaders, both powerful figures ill-disposed to dissent, announced plans for an acceleration in trade and energy ties.
But progress on Syria, over which they remain deeply divided, has been more problematic. Erdogan described the topic as "very sensitive", but said he had discussed Turkey's military operations in Syria with Putin on Monday.
Both men said they had agreed on the importance of delivering aid to the city of Aleppo, whose opposition-held eastern sector has been encircled by Russian-backed Syrian forces for all but a short period since July.
"We have a common position that everything must be done to deliver humanitarian aid to Aleppo. The only issue is ... ensuring the safety of aid delivery," Putin said, adding he had agreed with Erdogan to intensify military contacts.
Russia has backed Syrian President Bashar al-Assad with a year-long air campaign against the rebels fighting him. Turkey backs the rebels and wants to see Assad out of power.
On Saturday, Russia vetoed a French-drafted U.N. Security Council resolution that would have demanded an end to air strikes and military flights over Aleppo. A rival Russian draft text failed to get a minimum nine votes in favor.
Erdogan said there would be further talks with Russia over the conflict in Syria. But there was little sign of any concrete progress toward reconciling their differences.
"We discussed ... how we can cooperate on this matter, especially on humanitarian aid to Aleppo, what strategy can we implement so people in Aleppo can find peace," Erdogan said.
"We will come together with our foreign ministries and top military leaders and intelligence officers."
<<<
>>> The Russian Resurgence
James Rickards
September 28, 2016
http://dailyreckoning.com/the-russian-resurgence/
The Russian Resurgence
U.S. relations with Russia have run hot and cold for the past ten years.
In March 2009, shortly after the Obama administration first came into office, Hillary Clinton met with Russian Foreign Minister Sergei Lavrov in Geneva. It was her first meeting with Lavrov since Clinton had become secretary of state.
Relations between Russia and the United States had been under stress because of Russia’s invasion of Georgia in 2008 during the George W. Bush administration. Obama and Clinton wanted to reset the relationship and move into a less adversarial posture.
As a goodwill gesture, Clinton asked her aides to create a large red reset button (similar to the “easy” buttons used in the old Staples advertising campaign) with the word “reset” in Russian. The button was put in a case and presented to Lavrov as a gift at the Geneva summit.
There was only one problem. State Department experts used the Russian word “??????????” on the button for the English “reset.” Lavrov looked at the gift and politely informed Secretary Clinton that ?????????? actually means, “overcharge.” Oops.
Clinton and Lavrov pushed the button anyway for the cameras. Russian-U.S. relations have been downhill ever since.
When Obama and Clinton came into office, the President of Russia was Dmitry Medvedev. At the time, Vladimir Putin was Prime Minister. Putin had been president from May 2000 to May 2008, but was subject to term limits. Medvedev and Putin simply switched roles with Medvedev becoming president and Putin becoming prime minister.
Technically this made Medvedev the chief executive and commander-in-chief in Russia. Yet, few doubted that Putin still controlled Russia from his slightly subordinate position.
This de facto relationship was confirmed in May 2012 when Putin again assumed the role of president. Medvedev stepped aside and assumed his former role as prime minister. It was a complicated game of musical chairs, which gave Putin the presidency until at least 2020.
Nevertheless, Obama and Clinton found Medvedev (who was president in 2009) to be more to their liking than Putin. Medvedev is more diplomatic and has a more global outlook than Putin, who is a staunch Russian nationalist. From 2009 to 2011, Russian – U.S. relations warmed slightly, notwithstanding the red button gaffe.
In 2012, Russian-U.S. relations were again strained due to U.S. plans to put an anti-missile shield in Poland. During the 2012 U.S. election cycle, Obama distanced himself further from Russia because he was appealing for ethnic votes from anti-Russian Poles, and other Eastern Europeans living in the U.S.
Still, Obama wanted to keep lines of communication open and looked forward to diplomatic deals with Russia. On March 26, 2012, just seven months before the U.S. election, Obama was caught on camera at a summit conference whispering to Medvedev that he would have “more flexibility” after the election. Medvedev promised to pass that message to Putin who was about to replace Medvedev as president.
Russian-U.S. relations had another thaw early in 2013 after Obama’s reelection, but it was short-lived. On the night of November 21, 2013, demonstrations broke out in Independence Square (Maidan Nezalezhosti) in Kiev against the Russian-backed government of Viktor Yanukovych. The protests peaked in February 2014. Yanukovych and his cronies fled the Ukraine.
Putin suspected that the Maidan protests were secretly funded by the British intelligence agency MI6, and the CIA. In order to secure Russian interests in Ukraine, Putin invaded Crimea, and began supporting anti-Kiev ethnic Russians in eastern Ukraine. In response, the U.S. and its NATO allies imposed harsh economic sanctions on Russia.
The sanctions included a ban on major Russian companies (such as Gazprom and Rosneft) refinancing their euro-denominated debt in western capital markets. Since Russian companies could not refinance their debts, they began to draw on central bank hard currency reserves to retire the debt. In turn, this began to deplete Russia’s reserves and force higher interest rates and a devaluation of the ruble.
The ruble sank like a stone beginning in March 2014. It fell from about 28 rubles to the dollar to 70 rubles to the dollar by early 2015 when relations were at their worst. (On an inverted RUB/USD scale, this fall would be from $0.035 to $0.014).
The ruble regained some strength to the 50:1 level ($0.020) when it became clear that the Russian economy, although weakened, was more resilient than U.S. financial warriors had expected.
Then Russia got whacked a second time with the collapse in oil prices. This collapse began in mid-2014 around the time of the Ukraine crisis. It reached its most intense phase in mid-2015 when oil fell below $40 per barrel on its way to $29.00 per barrel by early 2016.
Russia is the world’s third largest oil producer (after the U.S. and Saudi Arabia), and second largest oil exporter (after Saudi Arabia). The damage to the Russian fiscal situation was immediate and led to a recession in the world’s ninth largest economy.
This second blow to the Russian economy pushed the ruble to 81:1 ($.012) by January 2016. The Russian economy was in crisis.
Then a confluence of factors emerged to cause a rally in the ruble and a turnaround in the Russian economy. Here’s where they stand today:
•Despite recent volatility, oil prices are staging a rebound. From a low of $29.00 per barrel, they are over $44.00 per barrel today. This is a major lifeline for Russia.
•Iran is now open for business after concluding a nuclear deal with the U.S. Many U.S. and European companies are reluctant to re-enter the Iranian market because there is still ambiguity about the scope of sanctions relief. Russia has no such reluctance. They are moving ahead with deals in nuclear power, weapons, refineries, and other infrastructure.
•The cheap ruble actually helped Russian companies keep expenses under control, and convert dollar earnings into more rubles to pay local operating costs. This has bolstered the earnings of major Russian companies.
•The Central Bank of Russia has been aggressively buying gold with its dollar reserves. This was a brilliant strategy. They bought gold when the dollar was strong and gold prices were near seven-year lows. The dollar strengthened recently but should now enter another weakening phase. With the dollar weakening and gold holding firm above $1,300 Russian gold reserves (priced in dollars or SDRs) should get a boost.
•With a weaker dollar, other commodity prices should rise. Russia is a major exporter of nickel, palladium, iron and timber.
•U.S. allies, especially Germany and France, are growing tired of the sanctions regime, and are looking for opportunities to get back to business as usual with Russia.
In short, all of the factors that were working against Russia from 2014 to 2016 (cheap oil, strong dollar, sanctions, and low commodity prices) should now work in Russia’s favor.
From the perspective of a U.S. investor, the Russian stock market offers two ways to win big. The first is a fundamental rebound in the Russian economy. The second is a stronger ruble, which means that the dollar price of Russian stocks goes up even faster than the ruble price if the currency is unhedged.
The mainstream media would have you believe Russia is a basket case. It really isn’t, and smart investors see strong opportunity.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Syria Explained...In A Nutshell: (And we wonder why the rest of the world thinks the USA is evil)
It’s All About Pipelines In Syria——Assad’s Death Warrant
by Mike Whitney
September 17, 2016
“Secret cables and reports by the U.S., Saudi and Israeli intelligence agencies indicate that the moment Assad rejected the Qatari pipeline, military and intelligence planners quickly arrived at the consensus that fomenting a Sunni uprising in Syria to overthrow the uncooperative Bashar Assad was a feasible path to achieving the shared objective of completing the Qatar/Turkey gas link. In 2009, according to WikiLeaks, soon after Bashar Assad rejected the Qatar pipeline, the CIA began funding opposition groups in Syria.”
— Robert F. Kennedy Jr., Why the Arabs don’t want us in Syria, Politico
The conflict in Syria is not a war in the conventional sense of the word. It is a regime change operation, just like Libya and Iraq were regime change operations.
The main driver of the conflict is the country that’s toppled more than 50 sovereign governments since the end of World War 2. (See: Bill Blum here.) We’re talking about the United States of course.
Washington is the hands-down regime change champion, no one else even comes close. That being the case, one might assume that the American people would notice the pattern of intervention, see through the propaganda and assign blame accordingly. But that never seems to happen and it probably won’t happen here either. No matter how compelling the evidence may be, the brainwashed American people always believe their government is doing the right thing.
But the United States is not doing the right thing in Syria. Arming, training and funding Islamic extremists — that have killed half a million people, displaced 7 million more and turned the country into an uninhabitable wastelands –is not the right thing. It is the wrong thing, the immoral thing. And the US is involved in this conflict for all the wrong reasons, the foremost of which is gas. The US wants to install a puppet regime in Damascus so it can secure pipeline corridors in the East, oversee the transport of vital energy reserves from Qatar to the EU, and make sure that those reserves continue to be denominated in US Dollars that are recycled into US Treasuries and US financial assets. This is the basic recipe for maintaining US dominance in the Middle East and for extending America’s imperial grip on global power into the future.
The war in Syria did not begin when the government of Bashar al Assad cracked down on protestors in the spring of 2011. That version of events is obfuscating hogwash. The war began in 2009, when Assad rejected a Qatari plan to transport gas from Qatar to the EU via Syria. As Robert F Kennedy Jr. explains in his excellent article “Syria: Another pipeline War”:
“The $10 billion, 1,500km pipeline through Saudi Arabia, Jordan, Syria and Turkey….would have linked Qatar directly to European energy markets via distribution terminals in Turkey… The Qatar/Turkey pipeline would have given the Sunni Kingdoms of the Persian Gulf decisive domination of world natural gas markets and strengthen Qatar, America’s closest ally in the Arab world. ….
In 2009, Assad announced that he would refuse to sign the agreement to allow the pipeline to run through Syria “to protect the interests of our Russian ally….
Assad further enraged the Gulf’s Sunni monarchs by endorsing a Russian approved “Islamic pipeline” running from Iran’s side of the gas field through Syria and to the ports of Lebanon. The Islamic pipeline would make Shia Iran instead of Sunni Qatar, the principal supplier to the European energy market and dramatically increase Tehran’s influence in the Mid-East and the world…”
Naturally, the Saudis, Qataris, Turks and Americans were furious at Assad, but what could they do? How could they prevent him from choosing his own business partners and using his own sovereign territory to transport gas to market?
What they could do is what any good Mafia Don would do; break a few legs and steal whatever he wanted. In this particular situation, Washington and its scheming allies decided to launch a clandestine proxy-war against Damascus, kill or depose Assad, and make damn sure the western oil giants nabbed the future pipeline contracts and controlled the flow of energy to Europe. That was the plan at least. Here’s more from Kennedy:
“Secret cables and reports by the U.S., Saudi and Israeli intelligence agencies indicate that the moment Assad rejected the Qatari pipeline, military and intelligence planners quickly arrived at the consensus that fomenting a Sunni uprising in Syria to overthrow the uncooperative Bashar Assad was a feasible path to achieving the shared objective of completing the Qatar/Turkey gas link. In 2009, according to WikiLeaks, soon after Bashar Assad rejected the Qatar pipeline, the CIA began funding opposition groups in Syria.
Repeat: “the moment Assad rejected the Qatari pipeline”, he signed his own death warrant. That single act was the catalyst for the US aggression that transformed a bustling, five thousand-year old civilization into a desolate Falluja-like moonscape overflowing with homicidal fanatics that were recruited, groomed and deployed by the various allied intelligence agencies.
But what’s particularly interesting about this story is that the US attempted a nearly-identical plan 60 years earlier during the Eisenhower administration. Here’s another clip from the Kennedy piece:
“During the 1950's, President Eisenhower and the Dulles brothers … mounted a clandestine war against Arab Nationalism — which CIA Director Allan Dulles equated with communism — particularly when Arab self-rule threatened oil concessions. They pumped secret American military aid to tyrants in Saudi Arabia, Jordan, Iraq and Lebanon favoring puppets with conservative Jihadist ideologies which they regarded as a reliable antidote to Soviet Marxism….
The CIA began its active meddling in Syria in 1949 — barely a year after the agency’s creation…. Syria’s democratically elected president, Shukri-al-Kuwaiti, hesitated to approve the Trans Arabian Pipeline, an American project intended to connect the oil fields of Saudi Arabia to the ports of Lebanon via Syria. (so)… the CIA engineered a coup, replacing al-Kuwaiti with the CIA’s handpicked dictator, a convicted swindler named Husni al-Za’im. Al-Za’im barely had time to dissolve parliament and approve the American pipeline before his countrymen deposed him, 14 weeks into his regime…..
(CIA agent Rocky) Stone arrived in Damascus in April 1956 with $3 million in Syrian pounds to arm and incite Islamic militants and to bribe Syrian military officers and politicians to overthrow al-Kuwaiti’s democratically elected secularist regime….
But all that CIA money failed to corrupt the Syrian military officers. The soldiers reported the CIA’s bribery attempts to the Ba’athist regime. In response, the Syrian army invaded the American Embassy taking Stone prisoner. Following harsh interrogation, Stone made a televised confession to his roles in the Iranian coup and the CIA’s aborted attempt to overthrow Syria’s legitimate government….(Then) Syria purged all politicians sympathetic to the U.S. and executed them for treason.” (Politico)
See how history is repeating itself? It’s like the CIA was too lazy to even write a new script, they just dusted off the old one and hired new actors.
Fortunately, Assad –with the help of Iran, Hezbollah and the Russian Airforce– has fended off the effort to oust him and install a US-stooge. This should not be taken as a ringing endorsement of Assad as a leader, but of the principal that global security depends on basic protections of national sovereignty, and that the cornerstone of international law has to be a rejection of unprovoked aggression whether the hostilities are executed by one’s own military or by armed proxies that are used to achieve the same strategic objectives while invoking plausible deniability. The fact is, there is no difference between Bush’s invasion of Iraq and Obama’s invasion of Syria. The moral, ethical and legal issues are the same, the only difference is that Obama has been more successful in confusing the American people about what is really going on.
And what’s going on is regime change: “Assad must go”. That’s been the administration’s mantra from the get go. Obama and Co are trying to overthrow a democratically-elected secular regime that refuses to bow to Washington’s demands to provide access to pipeline corridors that will further strengthen US dominance in the region. That’s what’s really going on behind the ISIS distraction and the “Assad is a brutal dictator” distraction and the “war-weary civilians in Aleppo” distraction. Washington doesn’t care about any of those things. What Washington cares about is oil, power and money. How can anyone be confused about that by now? Kennedy summed it up like this:
“We must recognize the Syrian conflict is a war over control of resources indistinguishable from the myriad clandestine and undeclared oil wars we have been fighting in the Mid-East for 65 years. And only when we see this conflict as a proxy war over a pipeline do events become comprehensible.”
That says it all, don’t you think?
http://www.counterpunch.org/2016/09/15/assads-death-warrant/
<<<
>>> Get Ready for “Unencumbered” Interest Rate Policy
James Rickards
September 8, 2016
http://dailyreckoning.com/get-ready-unencumbered-interest-rate-policy-2/
Get Ready for “Unencumbered” Interest Rate Policy
A promise is a comfort for a fool. ~Proverb
Janet Yellen’s recent speech at Jackson Hole, Wyoming, was eagerly awaited, and a complete non-event. The headlines were dominated by breathless accounts of Janet Yellen’s speech at a Federal Reserve conference in Jackson Hole.
The robot scanners read the speech first; it took a while for humans like me to catch-up. But I’ve since had the chance to digest it. What was striking about the speech was how ordinary it was. As I predicted she would, she threw a bone to the hawks (“the case for an increase in the federal funds rate has strengthened”) and then threw another bone to the doves (“as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course”). She also talked about “data dependence,” etc., and then went to lunch.
The conference at which the speech was delivered was titled “Designing Resilient Monetary Policy Frameworks for the Future.” That title at least suggested that some new thinking and new policies might be on display. They weren’t.
Yellen basically said that interest rate cuts, quantitative easing, interest on excess reserves and forward guidance were sufficient to pull the U.S. economy out of a future recession if needed.
In short, Yellen said the Fed’s existing toolkit is adequate, and is unwilling to consider more radical tools or remedies. If you like weak growth, money printing and market manipulation, get ready for more of the same.
She took negative rates off the table (she said they were “impossible”). She also agreed that “helicopter money” (really fiscal policy supported by Fed bond purchases to finance deficits) could be useful, but made it clear that it was up to Congress to implement that and the Fed would not lead the charge.
Investors should ignore Fed noise. But that doesn’t stop markets from overreacting to every syllable of Fedspeak. Gold investors just have to live with day-to-day volatility until the world finally realizes that central banks are impotent and can safely be ignored in favor of global macroeconomic fundamentals.
Does this mean Jackson Hole was a nonevent for gold investors? Not at all. Yellen was not the only one speaking there. Another major speech was by an economist named Marvin Goodfriend, from Carnegie Mellon University. His speech was called The Case for Unencumbering Interest Rate Policy at the Zero Bound.
On its face, the Goodfriend speech was about negative interest rates — and just because Yellen doesn’t like them now doesn’t mean they’re not coming in the future. That negative rate idea has been around for a few years. But Goodfriend’s focus was to promote “unencumbered” negative interest rate policy, which means getting rid of things standing in your way.
Specifically, the No. 1 thing standing in the way of negative rates is cash. If citizens can go to cash, that makes it difficult to impose negative rates on digital bank accounts. That’s also not a new insight. The war on cash has been going on for a while, and prominent economists from Larry Summers to Ken Rogoff have called for an end to cash. Rogoff did so just recently, in a front-page article in the “Review” section of TheWall Street Journal.
What is new in all of this are ideas that Goodfriend presented to the Fed to neutralize the role of cash. His preferred way is just to “abolish paper currency,” as his paper outlines in Section 5A. But then Goodfriend laments that “the public is likely to resist the abolition of paper currency.” He’s right about that.
So Goodfriend comes up with a new concept called the “flexible market-determined deposit price of paper currency.” (Seriously, I’m not making this up; you can find it in Section 5B of his paper.)
In plain English, this means the “money” in your bank account and the “money” in your purse or wallet would be like two different kinds of currency. There would be an exchange rate between the two, just as there is an exchange rate between dollars and euros. The Fed could set this exchange rate at whatever level it wanted and would not be obligated to “defend” that rate at any particular level.
What this means is if you go to the bank and withdraw $1,000, the bank might only give you $980 in cash because of the “exchange rate” between your bank account and cash. Or if you deposit $1,000 in cash, the bank might only credit your bank account $980 because of the same “exchange rate” between your cash and the bank account balance. In short, it’s a way to impose negative interest rates on physical cash.
It’s true that Goodfriend is an academic, not a policymaker. But Yellen and other Fed bigwigs like William Dudley and Stanley Fischer were sitting in the audience. In my experience, this is how things start. Some ivory-tower academic writes about a policy proposal.
A few other ivory-tower academics and beltway think tanks take the idea and run with it. Then one of those academics gets appointed to a policy position. The next thing you know, the policy is in effect.
That’s how I saw SDRs coming years in advance, and that’s how I see the war on cash coming now. That’s why I also see a war on gold…
Curiously, academic policymakers have spent so many years disparaging gold they seem to have forgotten that gold is money. Once the war on cash heats up — and certainly when that war is in full swing, out in the open — people everywhere will turn to gold as an alternative form of money. And then, once policymakers see the massive shift to gold, they will launch a war on gold also.
So my advice to people interested in gold is — get it now while you still can. What are you waiting for?
But it’s not just the government and the banks that are doing everything they can to make it impossible for you to get your own money in the form of cash. Now they have a new partner — big business! It seems that businesses have their own war on cash. They hate handling it and it’s expensive to transport, store and insure. More and more, businesses are refusing to take your cash.
This is just another form of discrimination against the poor who may not have banking accounts or who rely on check cashing services and live paycheck to paycheck. It’s also aimed at you because it forces you into a digital system where your money can be hit with negative interest rates, service fees, account freezes, bail-in charges and other forms of theft.
When pigs are going to be slaughtered, they are first herded into pens for the convenience of the slaughterhouse. When savers are going to be slaughtered, they are herded into digital accounts from which there is no escape.
The war on cash may be a losing battle for you and me, but there is still shelter in physical gold, silver, land and other hard assets.
The key defensive play is to obtain your gold now, while you still can, before the war on gold begins. As this realization sinks in, it will create more demand for physical gold, which is already in short supply. That demand-driven tail wind for physical gold will take gold mining stocks much higher.
These scenarios are more disturbing, and the tempo more rapid, than I imagined just a short time ago.
The time to position yourself in gold and gold miners is now; don’t wait.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Dollar in Crisis
James Rickards
September 8, 2016
http://dailyreckoning.com/the-dollar-in-crisis/
The Dollar in Crisis
The conditions that gave rise to a dollar crisis in 1971 are emerging again in 2016, but with a different kind of international monetary system.
Since 1980, the world has been on a de facto “dollar standard” in place of the former gold standard. In accordance with the basic insight of Triffin’s Dilemma, the U.S. has still had to run large, persistent trade deficits to keep the world well-supplied with dollars in order to finance global growth, trade and investment.
The U.S. achieved this worldwide dollar supply by making the dollar a reliable store of value and by making U.S. Treasury debt the largest and most liquid market in the world. Trading partners no longer considered it necessary to convert dollars to gold (either at a fixed price or a market price). They were comfortable building up huge portfolios of Treasury debt.
At their heights, the reserve position of China exceeded $4 trillion, while the reserve positions of Japan and Taiwan were approximately $1 trillion each. Oil exporters such as Abu Dhabi and Norway had sovereign wealth funds with assets in excess of $1 trillion each. The overwhelming majority of this vast wealth was invested in U.S. dollar-denominated assets, and most of that took the form of U.S. Treasury debt.
The U.S. and its trading partners became co-dependent. The U.S. depended on its trading partners to keep buying Treasury debt, and our trading partners depended on the U.S. to maintain a stable dollar and a liquid Treasury debt market. Meanwhile, the U.S. kept running up trade and budget deficits and our trading partners kept running up trading surpluses and huge reserve positions.
This was Triffin’s Dilemma on steroids.
If these trends persisted, eventually the U.S. would go broke (as it had in 1971). But until then it seemed as if the game could go on indefinitely, and everybody was a winner.
However, this new dollar-deficit game began to break down in 2010, and the breakdown accelerated in 2013. Just as the heroes of 1980 were a president and a Fed chairman, Reagan and Volcker, the parties responsible for the breakdown were also a president and a Fed chairman, Obama and Bernanke.
Obama’s Currency War
The breakdown started in 2010 when President Obama declared a currency war. The idea was to cheapen the U.S. dollar in order to give the U.S. economy a boost in the aftermath of the financial crisis of 2008, and the severe recession of 2007–09.
The theory was that a cheap dollar would stimulate U.S. exports and create exported-related jobs. In addition, the cheap dollar would import inflation to lower real interest rates and help the Fed meet its inflation targets.
Part of the rationale for the new currency war was that the U.S. is the world’s largest economy and the U.S. needed help. If the U.S. economy sinks, it takes the world with it. Conversely, if the U.S. economy can achieve self-sustaining growth, it can act like an engine to pull the rest of the world out of its slump. A rapid devaluation of the dollar was meant to boost growth in the U.S. and indirectly boost world growth.
The effects of the new currency war were immediate and dramatic. The dollar fell 14% in just over a year, from mid-2010 to late-2011, as shown in this chart:US Dollar Index
As is usually the case when academic economists get involved in policy roles, the White House theory turned out completely different in reality. The U.S. did not achieve significant progress toward self-sustaining growth as a result of a cheaper dollar. And the rest of the world suffered slower growth (China, Japan and Korea) and a sovereign debt crisis (Greece, Spain, Portugal and Ireland).
The currency war weapon had misfired. The world was not better off. But there was an important piece of collateral damage. Suddenly confidence in the dollar began to wane.
The carefully constructed “dollar standard” that had been engineered by Volcker and Reagan and then continued by James Baker and Robert Rubin as Treasury secretaries (under presidents Bush 41 and Clinton) started to fail.
It was around this time that Russia and China dramatically increased their purchases of gold. It was also around this time that the IMF began laying the foundations for a new monetary standard based on its “world money” called the special drawing right, or SDR.
The world was looking for an alternative to the dollar since the U.S. was no longer committed to upholding the dollar’s value.
The second blow to the dollar standard came from Ben Bernanke and the Federal Reserve. After Japanese and European growth were hurt by the weak dollar in 2011, Bernanke decided to engineer a strong dollar beginning in 2012. The thinking was that the U.S. economy was robust enough to bear a strong currency, while Japan and Europe would benefit from a weaker yuan and weaker euro.
Japan moved first in December 2012 with Prime Minister Abe’s “three arrows” plan, also known as Abenomics. The three arrows were a weaker yen, fiscal stimulus and structural reform. In fact, only one of the three arrows was ever used at the time. Fiscal stimulus was not used until July 2016. Structural reform was not used at all. The only arrow used from the start was the weak yen.
Then it was Europe’s turn. Mario Draghi, head of the European Central Bank, famously said on July 26, 2012, that he would do “whatever it takes” to support the euro. He followed up in June 2014 with negative interest rates, and then followed up again in January 2015 with euro QE.
The yen and the euro both crashed once the Fed agreed to this about-face. The USD/JPY cross rate dropped from 79.50 just before Abenomics to 125.50 in June 2015. The EUR/USD cross rate went from $1.45 in August 2011 to $1.05 in November 2015.
The Fed assisted the process of weakening the yen and the euro by tightening monetary policy in the U.S., beginning in May 2013. This tightening came mostly in the form of forward guidance and the manipulation of market expectations, but it was effective nonetheless.
In May 2013, Bernanke suggested the end of quantitative easing in his famous “taper talk” speech. In December 2013, the Fed began the actual taper by reducing purchases of long-term assets such as 10-year Treasury notes. By November 2014, the taper was complete. In March 2015, Bernanke’s successor, Janet Yellen, ended forward guidance by removing the word “patient” from the FOMC statements. Finally, in December 2015, the Fed achieved “liftoff” by actually raising rates 0.25%.
All of these moves were steps in the continuous process of tightening U.S. monetary policy.
By January 2016, the weak euro, weak yen, strong dollar and Fed tightening were all in place. There was only one problem. The Fed, as usual, had grossly miscalculated the underlying strength of the U.S. economy.
Now, in late 2016, the dollar shortage has started to morph into a debt crisis and potential liquidity crisis. For the second time in 50 years, Triffin’s dilemma has come into play.
The world was fine as long as the U.S. supplied dollars through its monetary and fiscal policies. But, as soon as the U.S. exercised discipline with tighter monetary or fiscal policy, the dollar shortage hit home and the world began to contract.
The solution to Triffin’s Dilemma in 1971 was to devalue the dollar against gold. But today, the world is no longer on a gold standard. Where can the money come from to bring liquidity back to the world during a new global liquidity crisis?
There are only two ways to liquefy the world. The first is to use a new form of money, the SDR. The second is to use the world’s oldest form of money — gold.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Triffin’s Dilemma and the Future of SDRs
James Rickards
September 21, 2015
http://dailyreckoning.com/triffins-dilemma-and-the-future-of-sdrs/
Triffin’s Dilemma and the Future of SDRs
If you don’t know who Robert Triffin is, you should read this closely.
Triffin was a Belgian economist who lived from 1911–1993. He was regarded as one of the leading authorities on gold, currencies and the international monetary system during his career. He made many notable contributions to international economics, but his most famous was the articulation of what became known as “Triffin’s dilemma.”
The paradox of Triffin’s dilemma was pointed out in the early 1960s, yet its implications are just now coming into full view. Far from a relic of the past, Triffin’s dilemma is the key to understanding the future of the international monetary system.
Triffin’s dilemma arose from the Bretton Woods system established in 1944. Under that system, the dollar was pegged to gold at $35.00 per ounce. Other major currencies were pegged to the dollar at fixed exchange rates. The architects of the system knew that these other exchange rates might have to be devalued from time to time, mostly because of trade deficits, but the devaluation process was designed to be slow and cumbersome.
A country that wanted to devalue (for example, the U.K. in 1967) first had to consult with the International Monetary Fund, IMF. The IMF would typically recommend structural changes, to fiscal policy, tax policy and other areas designed to cure the trade deficit.
The IMF also stood ready to offer bridge loans of hard currency to help the deficit-hit country withstand temporary stresses while the structural changes were implemented. Only if the structural changes failed and the trade deficits were persistent would the IMF allow devaluation.
That was the process for countries other than the U.S. As far as the U.S. was concerned, the link between gold and the dollar was fixed for all time and could never be changed. The dollar/gold link was the anchor of the entire system.
This fixed link between the dollar and gold made the dollar the most prized reserve currency in the world. That was the hidden agenda of Bretton Woods. With the dollar as the main reserve currency, U.K. pounds sterling, a competing reserve currency, would eventually fall by the wayside.
The U.K. relied on Imperial Preference among its trading partners in the British Commonwealth to gain trade surpluses, and also relied on the willingness of those Commonwealth partners to hold sterling in their reserves. The Bank of England assumed Commonwealth members would not ask to convert the sterling to gold. Imperial Preference came under attack by the General Agreement on Tariffs and Trade, the GATT, which was also part of Bretton Woods. (Today, GATT is known as the World Trade Organization, WTO.)
Bretton Woods was a one-two combination punch designed by the U.S. to destroy the British empire. GATT undermined Imperial Preference. The dollar-gold link undermined sterling. It worked. The U.K.’s trade deficits persisted, and the Commonwealth partners demanded their gold. Eventually, the pound sterling was devalued, and the empire dissolved. It was replaced by a new age of U.S. empire and King Dollar.
There was only one problem, and Robert Triffin pointed this out. If the dollar was the lead reserve currency, then the entire world needed dollars to finance world trade. In order to supply these dollars, the U.S. had to run trade deficits.
The U.S. sold a lot of goods abroad, but Americans quickly developed an appetite for Japanese electronics, German cars, French vacations and other foreign goods and services. Today, China has replaced Japan as the main source of exports to the U.S.; still, Americans have not lost their appetite for imports financed by printing dollars.
So the U.S. ran trade deficits, the world got dollars and global trade flourished. But if you run deficits long enough, you go broke. That was Triffin’s dilemma. Any system based on dollars would eventually cause the dollar to collapse because there would either be too many dollars or not enough gold at fixed prices to keep the game going. This paradox between dollar deficits and dollar confidence was unsustainable.
This system did break down in the 1970s. The solution then was to abolish the dollar-gold peg in 1971, and demonetize gold in 1974. But there was a third leg of the stool invented in 1969 — the IMF’s Special Drawing Right, SDR.
The SDR was a new kind of world money printed by the IMF. The idea was that it could be used as a reserve currency side by side with the dollar. This meant that if the U.S. cured its trade deficit, and supplied fewer dollars to the world, any shortfall in reserves could be made up by printing SDRs.
In fact, SDRs were printed and handed out repeatedly during the dollar crisis from 1969–1980. But then a new King Dollar age was started by Paul Volcker and Ronald Reagan, with some help from Henry Kissinger, the king of Saudi Arabia and private bankers like my old boss Walter Wriston at Citibank.
Under the new King Dollar system, U.S. interest rates would be high enough to make the dollar an attractive reserve asset even without gold backing. Remember those 20% interest rates of the early 1980s?
Henry Kissinger also persuaded Saudi Arabia to keep pricing oil in dollars. This “petrodollar deal” meant that countries that wanted oil needed dollars to pay for it whether they liked the dollar or not.
The Arabs deposited the dollars they received in Citibank, Chase and the other big banks of the day. The bankers, led by Wriston at Citibank and David Rockefeller at Chase, then loaned the money to Asia, South America and Africa.
From there, the dollars were used to buy U.S. exports like aircraft, heavy equipment and agricultural produce. Suddenly, the game started up again, this time without gold. This new Age of King Dollar lasted from 1980–2010.
Still, it was all based on confidence in the dollar. Triffin’s dilemma never went away; it was just in the background waiting to re-emerge while the world binged on new dollar creation and forgot about gold. The U.S. ran persistent large trade deficits during this entire 30-year period as Triffin predicted. The world gorged on dollar reserves with China leading the way in the 1990s and early 2000s.
The new game ended in 2010 with the start of a currency war in the aftermath of the Panic of 2008. Trading partners are again jockeying for position as they did in the early 1970s. A new systemic collapse is waiting in the wings.
The weak dollar of 2011 was designed to stimulate U.S. growth and keep the world from sinking into a new depression. It worked in the short run, but now the tables are turned. Today, the dollar is strong, and the euro and yen have weakened. This gives Japan and Europe some relief, but it comes at the expense of the U.S., where growth has slowed down again.
The new dollar-yuan peg with China has also contributed to a slowdown in China. There’s just not enough global growth to go around. The major trading and finance powers are cannibalizing each other with weak currencies. Soon the U.S. and China may devalue relative to Europe and Japan, but that just moves the global weakness back to them.
Is there no way to escape the room? Is there no way out of Triffin’s dilemma?
A new gold standard might be one way to solve the problem, but it would require a gold price of $10,000 per ounce in order to be nondeflationary. No central banker in the world wants that, because it limits their ability to print money and be central economic planners.
Is there an alternative to gold? There is one other way out. That’s our old friend, the SDR. The brilliance of the SDR solution is that it solves Triffin’s dilemma.
Recall the paradox is that the reserve currency issuer has to run trade deficits, but if you run deficits long enough, you go broke. But SDRs are issued by the IMF. The IMF is not a country and does not have a trade deficit. In theory, the IMF can print SDRs forever and never go broke. The SDRs just go round and round among the IMF members in a closed circuit.
Individuals won’t have SDRs. Only countries will have them in their reserves. These countries have no desire to break the new SDR system, because they’re all in it together. The U.S. is no longer the boss. Instead, you have the “Five Families” consisting of China, Japan, the U.S., Europe and Russia operating through the IMF.
The only losers are the citizens of the IMF member countries — people like you and I — who will suffer local currency inflation. I’m preparing with gold and hard assets, but most people will be caught unaware, like the Greeks who lined up at empty ATMs last month.
This SDR system is so little understood that people won’t know where the inflation is coming from. Elected officials will blame the IMF, but the IMF is unaccountable. That’s the beauty of SDRs — Triffin’s dilemma is solved, debt problems are inflated away and no one is accountable. That’s the global elite plan in a nutshell.
We never take our eye off the IMF and its plans to expand the use of SDRs. The IMF will include the Chinese yuan in the SDR basket over the next 12 months to make sure the Chinese are “on the bus” when the endgame begins. That’s an important step in the SDR process.
We plan to report on the IMF annual meeting in Lima, Peru, so you have a front-row seat for these developments. This story has longer to run, but the endgame is already in sight. Stay tuned…
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Dollar Will Die with a Whimper, Not a Bang
By James Rickards
May 28, 2015
http://dailyreckoning.com/dollar-will-die-whimper-bang/
The Dollar Will Die with a Whimper, Not a Bang
The same force that made the dollar the world’s reserve currency is working to dethrone it.
July 22, 1944, marked the official conclusion of the Bretton Woods Conference in New Hampshire. There, 730 delegates from 44 nations met at the Mount Washington Hotel in the final days of the Second World War to devise a new international monetary system.
The delegates there were acutely aware that the failures of the international monetary system after the First World War had contributed to the outbreak of the Second World War. They were determined to create a more stable system that would avoid beggar-thy-neighbor currency wars, trade wars and other dysfunctions that could lead to shooting wars.
It was at Bretton Woods that the dollar was officially designated the world’s leading reserve currency — a position that it still holds today. Under the Bretton Woods system, all major currencies were pegged to the dollar at a fixed exchange rate. The dollar itself was pegged to gold at the rate of $35.00 per ounce. Indirectly, the other currencies had a fixed gold value because of their peg to the dollar.
Other currencies could devalue against the dollar, and therefore against gold, if they received permission from the International Monetary Fund (IMF). However, the dollar could not devalue, at least in theory. It was the keystone of the entire system — intended to be permanently anchored to gold.
From 1950–1970 the Bretton Woods system worked fairly well. Trading partners of the U.S. who earned dollars could cash those dollars in to the U.S. Treasury and be paid in gold at the fixed rate.
In 1950, the U.S. had about 20,000 tons of gold. By 1970, that amount had been reduced to about 9,000 tons. The 11,000-ton decline went to U.S. trading partners, primarily Germany, France and Italy, who earned dollars and cashed them in for gold.
The U.K. pound sterling had previously held the dominant reserve currency role starting in 1816, following the end of the Napoleonic Wars and the official adoption of the gold standard by the U.K. Many observers assume the 1944 Bretton Woods conference was the moment the U.S. dollar replaced sterling as the world’s leading reserve currency. In fact, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944.
The real turning point was the period July–November 1914, when a financial panic caused by the start of the First World War led to the closures of the London and New York stock exchanges and a mad scramble around the world to obtain gold to meet financial obligations. At first, the United States was acutely short of gold. The New York Stock Exchange was closed so that Europeans could not sell U.S. stocks and convert the dollar sales proceeds into gold.
But within a few months, massive U.S. exports of cotton and other agricultural produce to the U.K. produced huge trade surpluses. Gold began to flow the other way, from Europe back to the U.S. Wall Street banks began to underwrite massive war loans for the U.K. and France. By the end of the First World War, the U.S. had emerged as a major creditor nation and a major gold power. The dollar’s percentage of total global reserves began to soar.
Scholar Barry Eichengreen has documented how the dollar and sterling seesawed over the 20 years following the First World War, with one taking the lead from the other as the leading reserve currency and in turn giving back the lead. In fact, the period from 1919–1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side.
Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished apart from the U.K.’s special trading zone of Australia, Canada and other Commonwealth nations. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914.
The significance of the process by which the dollar replaced sterling over a 30-year period has huge implications for you today. Slippage in the dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process.
Signs of this are already visible. In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.
It is equally obvious that a major creditor nation is emerging to challenge the U.S. today just as the U.S. emerged to challenge the U.K. in 1914. That power is China. The U.S. had massive gold inflows from 1914-1944. China has massive gold inflows today.
Officially, China reports that it has 1,054 metric tonnes of gold in its reserves. However, these figures were last updated in 2009, and China has acquired thousands of metric tonnes since without reporting these acquisitions to the IMF or World Gold Council.
Based on available data on imports and the output of Chinese mines, it is possible to estimate that actual Chinese government and private gold holdings exceed 8,500 metric tonnes, as shown in the chart below.
Assuming half of this is government owned, with the other half in private hands, then the actual Chinese government gold position exceeds 4,250 metric tonnes, an increase of over 300%. Of course, these figures are only estimates, because China operates through secret channels and does not officially report its gold holdings except at rare intervals.
China’s gold acquisition is not the result of a formal gold standard, but is happening by stealth acquisitions on the market. They’re using intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold is flowing to China today, just as gold flowed to the U.S. before Bretton Woods.
China is not alone in its efforts to achieve creditor status and to acquire gold. Russia has doubled its gold reserves in the past five years and has little external debt. Iran has also imported massive amounts of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian gold imports are a state secret.
Other countries, including BRICS members Brazil, India and South Africa, have joined Russia and China to build institutions that could replace the balance of payments lending of the International Monetary Fund (IMF) and the development lending of the World Bank. All of these countries are clear about their desire to break free of U.S. dollar dominance.
Sterling faced a single rival in 1914, the U.S. dollar. Today, the dollar faces a host of rivals — China, Russia, India, Brazil, South Africa, Iran and many others. In addition, there is the world super-money, the special drawing right (SDR), which I expect will also be used to diminish the role of the dollar. The U.S. is playing into the hands of these rivals by running trade deficits, budget deficits and a huge external debt.
What are the implications for your portfolio? Once again, history is highly instructive.
During the glory years of sterling as a global reserve currency, the exchange value of sterling was remarkably stable. In 2006, the U.K. House of Commons produced a 255-year price index for sterling that covered the period 1750–2005.
REC_05-28-15_Inflation
The index had a value of 5.1 in 1751. There were fluctuations due to the Napoleonic Wars and the First World War, but even as late as 1934, the index was at only 15.8, meaning that prices had only tripled in 185 years.
But once the sterling lost its lead reserve currency role to the dollar, inflation exploded. The index hit 757.3 by 2005. In other words, during the 255 years of the index, prices increased by 200% in the first 185 years while the sterling was the lead reserve currency, but went up 5,000% in the 70 years that followed.
Price stability seems to be the norm for money with reserve currency status, but once that status is lost, inflation is dominant.
The decline of the dollar as a reserve currency started in 2000 with the advent of the euro and accelerated in 2010 with the beginning of a new currency war. That decline is now being amplified by China’s emergence as a major creditor and gold power. Not to mention the actions of a new anti-dollar alliance consisting of the BRICS, Iran and others. If history is a guide, inflation in U.S. dollar prices will come next.
In his 1925 poem The Hollow Men, T. S. Eliot writes: “This is the way the world ends/ Not with a bang but a whimper.” Those waiting for a sudden, spontaneous collapse of the dollar may be missing out on the dollar’s less dramatic, but equally important slow, steady decline. The dollar collapse has already begun. The time to acquire inflation insurance is now.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> A Global Milestone at the G-20 China
By James Rickards
September 6, 2016
http://dailyreckoning.com/global-milestone-g20-china/
A Global Milestone at the G-20 China
Now that the G-20 has emerged as a global economic and political gathering it has evolved into a “committee to run the world.” It is also significantly worth paying attention to.
The G-20 was an ad hoc conference at its inception and has no directly supporting internal institutions. Instead it has institutionalized representatives and other organizations. It pushes forward delegates called “Sherpas” who are experts that accompany delegate representatives at the summit and develop agendas in advance to the actual meetings. This allows heads of state to arrive, sign pivotal documents and release public communications at its gatherings.
The G-20 has also shifted to the International Monetary Fund (IMF) as a “central bank of the world.” The G-20 acts as a psudo “board of governors for the IMF. As an intergovernmental organization the IMF that can utilize its own money, execute debt issuance and issue loans. At the forefront of these actions are the special drawing rights (SDR) which exist as world money for the IMF.
The G-20 – China 2016
With the emergence of BRICS and rise of emerging markets, China can no longer be ignored. It is the second largest economy in the world, but had never fully been included with the G-20 because of its rapid ascension. Until now.
The 20 nation group that met in Hangzhou, China this past weekend is, in many rights, running the world. With China playing host, there is significant symbolism. The G-20 operates with a rotating presidency. They have 20 members and alternate annually who directs its agenda and setting.
G20_2016_leaders
This year, the president of the G-20 is China. The president of China, Xi Jinping, is the presiding head of state at the summit. As a nation, China puts a considerable weight on the symbolic nature behind the meeting. While the west might not place as great of emphasis on such meetings – these gatherings matter for China both domestically and abroad.
Building from this symbolism, last November the IMF made a groundbreaking decision to include the Chinese yuan in the “basket” that determines the price of the SDR. The special drawing right, until later this month, had 4 currencies behind it. The dollar, euro, yen and pound sterling. Beginning at the close of business September 30th, there’s going to be a 5th currency in the basket. The Chinese yuan.
China has now been admitted into the most exclusive club in the world. This exclusive “club” is smaller than the G-20, the G-7 and will be a “G-5.” It also creates support for the SDR on behalf of China.
China and the SDR
With building speculation over the years, the belief existed that China wanted its currency to displace the dollar as the global reserve currency. That was never the case. It is true that China’s yuan is emerging as an important global currency. Where China now has its aim is for the SDR to replace the dollar, not the yuan. If the SDR was going to be “world money,” the yuan had to be on board. It is now.
This unfolding is totally not by coincidence. The Sherpas and people in power including the head of the IMF, Christine Lagarde and president China, Xi Jinping, U.S Secretary of the Treasury, Jack Lew have given these actions considerable thought. It is not coincidental that the yuan is being included in the SDR at the same time as China is the president and host of the G-20. This is a very carefully orchestrated event to announce that China has now arrived on the world stage. They’re no longer the the emerging member on the world scene, they are a full member. They’re now in the club.
What does all of this mean? What it could mean is inflation. While we are not going to wake up one day and the dollar is going to be dead. There is significance in these events. The dollar doesn’t die overnight. It dies in stages. It occurs in a process it has absolutely started and we’re watching them unfold. These are very significant milestones.
We’re going down a path where there’s no turning back. A path where, by the time all these institutional arrangements are put in place, you are going to wake up, look around and realize the dollar is similar to the Mexican peso. If you are going to Mexico you’re going to get some pesos. If you’re going to the United States you’re going to get some dollars.
The major mechanisms around the world, the balance sheets for the multinational corporations, the funds for major multilateral institutions, global capital markets and even the price of oil will all eventually be denominated in SDRs.
Stay tuned.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> A Timetable for the Dollar’s Demise
By James Rickards
September 2, 2016
http://dailyreckoning.com/timetable-dollars-demise/
A Timetable for the Dollar’s Demise
The next five weeks will mark one of the most significant transformations in the international monetary system in over 30 years.
Since the dollar is still the lynchpin of this system, the dollar itself will be affected. Whatever affects the dollar affects you, your portfolio and your personal financial security. It is vital to understand the changes underway in order to protect your net worth, and even prosper in the coming transition.
Such radical transformations of the international monetary system have happened many times before, including the dual “accords” of the 1980s. These were the Plaza Accord in 1985, and the Louvre Accord in 1987 — named respectively after the Plaza Hotel in New York, and the Louvre Museum in Paris where the key meetings took place.
At the Plaza Accord, the top financial officials from the U.S., U.K., West Germany, France and Japan agreed on Sept. 22, 1985, to devalue the dollar. The dollar plunged 30% in the next two years.
The damage was so bad that a second meeting was called at the Louvre on Feb. 22, 1987. That meeting was attended by the top financial officials from the U.S., U.K., West Germany, France, Canada and Japan. Participants at that meeting agreed to halt the dollar’s devaluation. The dollar was relatively stable in the years following.
It’s a mistake to believe the dollar’s value is set by market forces.
That may be true in the short run, but in the longer run, the dollar is worth whatever governments want it to be worth. The more powerful the government, the more they can call the shots.
There’s no doubt that the U.S. was the most powerful country in the world in the 1980–2000 period shown in the chart above. The Soviet Union was in terminal decline by 1987, and collapsed in 1991. China was still emerging and had a major setback with the Tiananmen Square uprising in 1989. Europe did not implement the euro until 1999. The U.S. was king of the hill.
When the U.S. wanted a weaker dollar in 1985, we just dictated that result to the world in the Plaza Accord. When the U.S. wanted to lock in the cheap dollar in 1987, we dictated that result also in the Louvre Accord. Market forces had nothing to do with it. Whatever the U.S. wanted, the U.S. got. Investors were just along for the ride.
Before the Plaza and Louvre Accords, there was the Smithsonian Agreement of December 1971. That was an agreement among the “Group of 10” (actually 11: U.S., U.K., Japan, Canada, France, West Germany, Belgium, Netherlands, Italy, Sweden and Switzerland) to devalue the dollar between 7% and 17% (depending on the currency pair in question).
This happened shortly after President Nixon suspended the conversion of dollars for gold on Aug. 15, 1971. Nixon thought this would be a temporary suspension and that the gold standard could be resumed once the devaluation was agreed.
The devaluation happened but the gold standard never returned. By January 1980, the dollar had devalued 95% when measured in the weight of gold.
Even before the Smithsonian Agreement, there was Harold Wilson’s 14% sterling devaluation (1967), the Bretton Woods Conference (1944), FDR’s gold confiscation and 60% dollar devaluation (1933), U.K. abandoning the gold standard (1931), and the Genoa Conference and the Gold Exchange Standard (1922).
The point is that monetary earthquakes happen from time to time. We just noted nine big ones in the past hundred years, but there were many others, including the sterling crisis of 1992 when George Soros broke the Bank of England, and the Tequila Crisis of 1994 when the Mexican peso devalued 50% in a matter of months.
These monetary earthquakes move in both directions. Sometimes the dollar is a huge winner (1980–85), and sometimes it loses a large part of its value (1971–80 and 1985–87). The key for investors is to be alert to behind-the-scenes plans of the global monetary elite and anticipate the direction of the next big move.
What will happen in the next five weeks is just as significant as any of the monetary earthquakes mentioned above. There are three major events happening in rapid sequence. Here’s the list:
•On Sept. 4, the G20 leaders meet in Hangzhou, China
•On Sept. 30, the yuan officially joins the SDR basket of currencies
•On Oct. 7, the IMF holds its annual meeting in Washington, D.C.
You might be tempted to dismiss this calendar as “business as usual.” G20 leaders’ meetings happen every year. The SDR basket has been changed many times in the past. The IMF has global meetings twice a year (spring and fall). But it’s not business as usual. This time is different.
The hidden agenda involves the formal transition from a dollar standard to an SDR standard in world monetary affairs. It won’t happen overnight, but the elite decisions and seal of approval will take place at these meetings.
The SDR is a source of potentially unlimited global liquidity. That’s why SDRs were invented in 1969 (when the world was seeking alternatives to the dollar), and that’s why they will be used in the imminent future.
SDRs were issued in several tranches during the monetary turmoil between 1971 and 1981 before they were put back on the shelf. In 2009 (also in a time of financial crisis). A new issue of SDRs was distributed to IMF members to provide liquidity after the panic of 2008.
The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. With no issuance of SDRs for 28 years, from 1981–2009, the IMF wanted to rehearse the governance, computational and legal processes for issuing SDRs.
The purpose was partly to alleviate liquidity concerns at the time, but also partly to make sure the system works in case a large new issuance was needed on short notice. The 2009 experience showed the system worked fine.
Since 2009, the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.
On Jan. 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs. This included the creation of an SDR bond market, SDR dealers, and ancillary facilities such as repos, derivatives, settlement and clearance channels, and the entire apparatus of a liquid bond market.
In November 2015, the Executive Committee of the IMF formally voted to admit the Chinese yuan into the basket of currencies into which an SDR is convertible.
In July 2016, the IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called “M-SDRs” (for market SDRs) in contrast to “O-SDRs” (for official SDRs).
In August 2016, the World Bank announced that it would issue SDR-denominated bonds to private purchasers. Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal. Other private SDR bond issues are expected soon.
On Sept. 4, 2016, the G20 leaders will meet in Hangzhou, China, under the leadership of G20 President Xi Jinping, who is also the general secretary of the Communist Party of China. In this meeting, other world leaders will metaphorically kowtow to the new Chinese emperor and recognize China as the co-head of the global monetary system alongside the U.S.
On Sept. 30, 2016, at the close of business, the inclusion of the Chinese yuan in the SDR basket goes live.
On Oct. 7, 2016, the IMF will hold its annual meeting in Washington, D.C., to consider additional steps to expand the role of SDRs and make China an integral part of the new world money order.
Over the next several years, we will see the issuance of SDRs to transnational organizations, such as the U.N. and World Bank, to be spent on climate change infrastructure and other elite pet projects outside the supervision of any democratically elected bodies. (I call this the New Blueprint for Worldwide Inflation.)
Thereafter, the international monetary elite will await the next global liquidity crisis. When that crisis arrives, there will be massive issuances of SDRs to return liquidity to the world and cause global inflation. The result will be the end of the dollar as the leading global reserve currency.
Based on past practice, we can expect that the dollar will be devalued by 50–80% in the coming years.
A devaluation of this magnitude will wipe out the value of your life’s savings. You’ll still have just as many dollars, but they won’t be worth nearly as much.
The time to start preparing is now.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Markets and Black Swans
By James Rickards
July 19, 2016
http://dailyreckoning.com/markets-black-swans/
Markets and Black Swans
I began studying complexity theory as a consequence of my involvement with Long-Term Capital Management, LTCM, the hedge fund that collapsed in 1998 after derivatives trading strategies went catastrophically wrong.
After the collapse and subsequent rescue, I chatted with one of the LTCM partners who ran the firm about what went wrong. I was familiar with markets and trading strategies, but I was not expert in the highly technical applied mathematics that the management committee used to devise its strategies.
The partner I was chatting with was a true quant with advanced degrees in mathematics. I asked him how all of our trading strategies could have lost money at the same time, despite the fact that they had been uncorrelated in the past. He shook his head and said, “What happened was just incredible. It was a seven-standard deviation event.”
In statistics, a standard deviation is symbolized by the Greek letter sigma. Even non-statisticians would understand that a seven-sigma event sounds rare. But, I wanted to know how rare. I consulted some technical sources and discovered that for a daily occurrence, a seven-sigma event would happen less than once every billion years, or less than five times in the history of the planet Earth!
I knew that my quant partner had the math right. But it was obvious to me his model must be wrong. Extreme events had occurred in markets in 1987, 1994 and now 1998. They happened every four years or so.
Any model that tried to explain an event, as something that happened every billion years could not possibly be the right model for understanding the dynamics of something that occurred every four years.
From this encounter, I set out on a ten-year odyssey to discover the proper analytic method for understanding risk in capital markets. I studied, physics, network theory, graph theory, complexity theory, applied mathematics and many other fields that connected in various ways to the actual workings of capital markets.
In time, I saw that capital markets were complex systems and that complexity theory, a branch of physics, was the best way to understand and manage risk and to foresee market collapses. I began to lecture and write on the topic including several papers that were published in technical journals. I built systems with partners that used complexity theory and related disciplines to identify geopolitical events in capital markets before those events were known to the public.
Finally I received invitations to teach and consult at some of the leading universities and laboratories involved in complexity theory including The Johns Hopkins University, Northwestern University, The Los Alamos National Laboratory, and the Applied Physics Laboratory.
In these venues, I continually promoted the idea of inter-disciplinary efforts to solve the deepest mysteries of capital markets. I knew that no one field had all the answers, but a combination of expertise from various fields might produce insights and methods that could advance the art of financial risk management.
I proposed that a team consisting of physicists, computer modelers, applied mathematicians, lawyers, economists, sociologists and others could refine the theoretical models that I and others had developed, and could suggest a program of empirical research and experimentation to validate the theory.
These proposals were greeted warmly by the scientists with whom I worked, but were rejected and ignored by the economists. Invariably top economists took the view that they had nothing to learn from physics and that the standard economic and finance models were a good explanation of securities prices and capital markets dynamics.
Whenever prominent economists were confronted with a “seven-sigma” market event they dismissed it as an “outlier” and tweaked their models slightly without ever recognizing the fact that their models didn’t work at all.
Physicists had a different problem. They wanted to collaborate on economic problems, but were not financial markets experts themselves. They had spent their careers learning theoretical physics and did not necessarily know more about capital markets than the everyday investor worried about her 401(k) plan.
I was an unusual participant in the field. Most of my collaborators were physicists trying to learn capital markets. I was a capital markets expert who had taken the time to learn physics. One of the team leaders at Los Alamos, an MIT-educated computer science engineer named David Izraelevitz, told me in 2009 that I was the only person he knew of with a deep working knowledge of finance and physics combined in a way that might unlock the mysteries of what caused financial markets to collapse.
I took this as a great compliment. I knew that a fully-developed and tested theory of financial complexity would take decades to create with contributions from many researchers, but I was gratified to know that I was making a contribution to the field with one foot in the physics lab and one foot planted firmly on Wall Street. My work on this project, and that of others, continues to this day.
I think it’s important to know that no two crises are ever exactly the same. But we can learn a lot from history, and there are some elements today that do resemble prior crises. Right now today, as we sit here in 2016, the damage of 2008 is still fresh in a lot of people’s minds. It was eight years ago but there’s nothing like the experience of being wiped out and a lot of people saw their 401(k)s erased.
It wasn’t just stock prices but real estate, housing, unemployment and students graduating with loans that were not being able to get jobs. There was a lot of trauma and distress.
That’s still clear in people’s minds, even though it was, as I say, eight years ago. But what’s going on right now, in my view, more closely resembles that 1997–1998 crisis than it does the one in 2007–2008.
Let’s skip over the dotcom bubble in 2000 because that was clearly a bubble with an associated market crash but not a severe recession. We had a mild recession around that time, and then of course that played into the volatility due to 9/11. It was painful if you were in some of those dotcom stocks, but that wasn’t a real global financial crisis of the kind we saw in 1998 and again in 2008.
What was interesting about that time was that the crisis had started over a year earlier — July 1997 in Thailand. It ended up in my lap at LTCM in September 1998 in Greenwich, Connecticut. That was fifteen months later and about halfway around the world.
How did a little problem that started in 1997 in Thailand end up in Greenwich, Connecticut fifteen months later as ground zero?
The answer is because of contagion. Distress in one area of financial markets spread to other seemingly unrelated areas of financial markets.
It’s also a good example of how crises take time to play out. I think that’s very important because with financial news, the Internet, the web, and Twitter, Instagram, Facebook, chat and email, there’s a tendency for people to focus on the instantaneous and ignore trends.
In fact, the mathematics of financial contagion are exactly like the mathematics of disease or virus contagion. That’s why they call it contagion. One resembles the other in terms of how it’s spread.
An equilibrium model like Fed uses in its economic forecasting basically says that the world runs like a clock. Every now and then, according to the model, there’s some perturbation, and the system gets knocked out of equilibrium. Then, all you do is you apply policy and push it back into equilibrium. It’s like winding up the clock again. That’s a shorthand way of describing what an equilibrium model is.
Unfortunately, that is not the way the world works. Complexity theory and complex dynamics tell us that a system can go into a critical state.
I’ve met any number of governors and senior staff at the Federal Reserve. They’re not dopes. A lot of people like to ridicule them and say they’re idiots. They’re not idiots, though. They’ve got the 160 IQs and the PhDs.
Every year, however, the Fed makes a one-year forward forecast. In 2009 they made a forecast for 2010. In 2010 they made a forecast for 2011 and so on. The Fed has been wrong seven years in a row by orders of magnitude.
I just laugh. How many years in a row can you be wrong and still have any credibility?
But they’re not dopes — they are really smart people. I don’t believe they’re evil geniuses trying to destroy the world. I think they’re dealing in good faith. If they’re so smart and they’re dealing in good faith, though, how can they be so wrong for so long?
The answer is they’ve got the wrong model. If you’ve got the wrong model you’re going to get the wrong result every single time. The Federal Reserve, policymakers, finance ministers and professors around the world use equilibrium models. But the world is a complex system.
What are examples of the complexity? Well, there are lots of them.
One of my favorites is what I call the avalanche and the snowflake. It’s a metaphor for the way the science actually works but I should be clear, they’re not just metaphors. The science, the mathematics and the dynamics are actually the same as those that exist in financial markets.
Imagine you’re on a mountainside. You can see a snowpack building up on the ridgeline while it continues snowing. You can tell just by looking at the scene that there’s danger of an avalanche. It’s windswept… it’s unstable… and if you’re an expert, you know it’s going to collapse and kill skiers and wipe out the village below.
You see a snowflake fall from the sky onto the snowpack. It disturbs a few other snowflakes that lay there. Then, the snow starts to spread… then it starts to slide… then it gains momentum until, finally, it comes loose and the whole mountain comes down and buries the village.
Question: Whom do you blame? Do you blame the snowflake, or do you blame the unstable pack of snow?
I say the snowflake’s irrelevant. If it wasn’t one snowflake that caused the avalanche, it could have been the one before or the one after or the one tomorrow.
The instability of the system as a whole was a problem. So when I think about the risks in the financial system, I don’t focus on the “snowflake” that will cause problems. The trigger doesn’t matter.
Once a chain reaction begins it expands exponentially, can “go critical” (as in an atomic bomb) and release enough energy to destroy a city. However, most neutrons do not start nuclear chain reactions just as most snowflakes do not start avalanches.
In the end, it’s not about the snowflakes or neutrons, it’s about the initial critical state conditions that allow the possibility of a chain reaction or avalanche. These can be hypothesized and observed at large scale but the exact moment the chain reaction begins cannot be observed. That’s because it happens at a minute scale relative to the system.
This is why some people refer to these snowflakes as “black swans”, because they are unexpected and come by surprise. But they’re actually not a surprise if you understand the system’s dynamics and can estimate the system scale.
It’s a metaphor but really the mathematics behind it are the same. Financial markets today are huge, unstable mountains of snow waiting to collapse. You see it in the gross notional value derivatives.
There are $700 trillion worth of swaps. These are derivatives off balance sheets, hidden liabilities in the banking system of the world. These numbers are not made up. Just go to the Bank of International Settlements (BIS) annual report and it’s right there in the footnote.
Well, how do you put $700 trillion into perspective? It’s ten times global GDP. Take all the goods and services in the entire world for an entire year. That’s about $70 trillion when you add it all up. Well, take ten times that and that’s how big the snow pile is.
That’s the avalanche that’s waiting to come down.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> IMF Agenda Under Trump Or Clinton
James Rickards
August 29, 2016
http://dailyreckoning.com/imf-agenda-under-trump-clinton/
IMF Agenda Under Trump Or Clinton
U.S elections are only months away and monetary policy is swirling. At the helm of much of the discussion is international policy at the International Monetary Fund (IMF).
The IMF (also known as the Fund) is driven by bureaucrats that are not based around any democratically elected government. In fact, it exists outside of a government. It’s an autonomous part of an emerging scheme of global governance accountable only to a small elite of central bankers, finance ministers and heads of state.
As an institution it seemingly extends outwards and on the surface extends exponentially within the international community. It functions as the central bank of the world, taking deposits, called “borrowings,” from countries around the world and making loans to its members.
The bank prints money like most central banks, but this “world money” has the opaque name of special drawing right (SDR). There’s nothing new about this. SDRs were created in 1969, and hundreds of billions of them have been issued over the years. But the IMF only issues them when in a financial panic. They don’t issue them every day or when times are good.
So What Does The IMF Do In The Face Of A U.S Election?
They hunker down.
When looking into Donald Trump and his positioning on the IMF – it appears he has a limited scope on the Fund. That’s not a direct criticism of Trump.
The IMF is something that very few people know about. They like it that way.
Currently, the U.S maintains the number two guy at the the Fund.
His name, David Lipton.
David Lipton is America’s inside guy at the IMF. Lipton is Harvard trained and serves as First Deputy Managing Director. The current IMF Chairman is Christine Lagarde of France. She is the first female head of the Fund and the fifth from France following Dominique Strauss-Kahn’s disastrous exit. Per customary tradition over the past seventy years, Europe holds the reins at the IMF and the United States keeps leadership at the World Bank.
With brief historical context, I do not anticipate Trump gaining overnight interest in the Fund. He is, most likely, not going to change the U.S approach.
Much of the IMF agenda, from a U.S standpoint, will depend on who is the incoming Secretary of the Treasury is for 2017. The Secretary of the Treasury typically guides the presidential appointment of who will be the eyes and ears at the IMF. They will report directly back to the White House.
The IMF And The 2017 White House.
For a potential incoming Trump administration, expect an overload of appointments to navigate through. With the Trump campaign launching an internal project to purge the bureaucracy you can estimate that the IMF will not be high on the purge list.
As it stands now in government, there are an estimated 4,000 jobs in the federal bureaucracy that are vital positions, not including cabinet appointments. These people are distributed throughout the bureaucracy. They have been carefully selected by the Obama Administration and when the next U.S president comes in it will go two ways.
In a potential Hillary Clinton administration, she won’t be acting with urgency. She will be comfortable working through those who are currently in place. In essence, carrying the baton.
In contrast, Trump is out to make a significant purge. These types of “cleaning house” activities will take years and the IMF is not an immediately task. Expect the IMF and its associated U.S bureaucrats to keep their heads down, make friends and not to pick fights.
When The IMF Really Matters For The Next Administration.
If we have a panic like 2008, that’s when they act. This is called the shock doctrine. The shock doctrine is the idea that I’ve got an agenda and I recognize it’s unpopular. But once a panic hits, those in power are going to be so scared that they’ll do whatever is proposed. That’s what we could see, as is specifically when a big SDR issuance will be executed.
It’s not on a sunny day, but in a panic, the White House will be just as nervous.
For now, we will watch it one step at a time.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> China Enters World Money Machine
By James Rickards
August 31, 2016
http://dailyreckoning.com/china-world-money-machine/
China Enters World Money Machine
Why the political urgency to include the yuan in the special drawing rights (SDR) if China does not meet the usual requirements? The answer is that a new global financial panic comes closer by the day.
These panics happen every five–eight years almost like clockwork. Look at the financial panics in Mexico (1994), Russia/LTCM (1998), Lehman/AIG (2008) and you get the idea. Another panic in 2018, if not sooner, is a near certainty.
The next panic will be bigger than the central banks’ ability to put out the fire. The only source of bailout cash will be the SDR. But a massive issuance of SDRs will require cooperation by China.
This is not because of International Monetary Fund (IMF) voting (China’s vote is not that large). It’s because SDRs are useful only if they can be swapped for other reserve currencies to prop up banks and liquidate panicked sellers of stocks. (The IMF runs a secret trading desk where these SDR swaps are conducted.)
When your neighbors are in full panic mode, they won’t want SDRs from Citibank; they’ll want dollars. But who will swap dollars for the SDRs printed by the IMF?
The answer is China. The PBOC and SAFE would love to dump dollar assets in exchange for SDRs. But there’s a catch. China will only engage in SDR/Dollar swaps if the yuan is included in the SDR. China does not want to pay club dues unless it’s a member of the club.
The rush to include China in the SDR should be seen as global monetary elites getting their ducks in a row before the next panic comes to destroy your portfolio.
In the 1960s, hippies had an expression to describe membership in a small group. They said, “You’re either on the bus or off the bus.”
Well, the IMF wants China on the bus before the next panic hits.
When trillions of SDRs are issued in the next panic, China will dump its dollars for SDRs (with the yuan inside).
The U.S. dollar will be reduced to the status of a local currency.
The dollar will still be used for local transactions inside the U.S. (the same way the Mexican peso is used inside Mexico), but it will no longer be the benchmark for sound reserve management.
The impact on the dollar from the issuance of SDRs will be highly inflationary. After more than 10 years of trying and failing, the Federal Reserve will finally have the inflation it wants.
But they will rue the day. Instead of the 2% annual inflation the Fed is targeting (really slow-motion theft), inflation of 10% or more can be expected. From there, it will spin even further out of control.
With trillions in SDRs and thousands of tonnes of gold, China will call the shots the same way the U.S. called the shots at Bretton Woods in 1944. The slow death of the dollar, which began in 2009 with the issue of over $250 billion in SDRs, will be complete.
How can you hedge your exposure to a dollar collapse and also profit from the rise of the SDR? There’s that old saying: If you can’t beat ’em, join ’em! The solution to the fall of the dollar and rise of SDRs is to invest in SDRs.
That’s a neat solution, but not as easy as it sounds. SDRs are for countries only; they are not walking-around money for you and me. There are almost no bonds denominated in SDRs, and no stocks at all.
The IMF has borrowed billions of SDRs from its members to fund its lending operations, but those SDR notes are held in reserve positions and not freely traded.
Eventually, a deep liquid pool of SDR-denominated assets will be created, but we’re not there yet. In January 2010, the IMF released a paper with a long-term plan to support the rise of the SDR.
It included specific instructions for the issuance of SDR notes by multinational corporations such as IBM and Siemens of Germany.
The paper also outlined the purchase of those notes by multilateral institutions such as the Asian Development Bank. It also suggested the formation of a dealer network led by Goldman Sachs and the creation of clearance and settlement procedures (the so-called “plumbing” of a bond market). All this will take years to develop.
Meanwhile, the largest, most sophisticated investors in the world (such as the $1 trillion sovereign wealth funds of Norway and Abu Dhabi) have found a way to synthesize SDRs. They are building portfolios denominated in currencies that match the official SDR weights.
For example, if you select fundamentally strong European companies in your portfolio, but the euro crashes against the dollar, you will suffer dollar-denominated losses even if your stock picks were strong.
Likewise, a portfolio of U.S. stocks may be strong on fundamentals. But if the dollar suffers a 1970s-style inflationary episode, your purchasing power is eroded relative to European and Asian investors.
This phenomenon of exchange rates dominating fundamental analysis is especially true during currency wars.
The reason the IMF has created a six-month delay between the announcement date and the effective date of the new SDR basket is to give the big guys like Norway time to “rebalance” their portfolios toward the new SDR basket.
When you have $1 trillion to rebalance, you can’t do things overnight without adverse market impact that hurts your own position.
A six-month window lets you move daily in small increments so that you hit the target date without too much disruption. This rebalancing will give a lift to the yuan as mega-investors reach to acquire high-quality yuan-denominated assets to conform to the new SDR basket weights.
It will also put downward pressure on sterling and yen, since their allocations in the SDR basket will be reduced to make room for the yuan. The reason the IMF has created a six-month delay between the announcement date and the effective date of the new SDR basket is to give the big guys like Norway time to “rebalance” their portfolios toward the new SDR basket. (The total basket always adds up to 100%, so if a new currency is introduced, some of the other currencies must be reduced in size.)
Membership in the exclusive SDR currency club has changed only once in the past 30 years. The SDR has been dominated by the “Big Four” (U.S., U.K., Japan and Europe) since the IMF abandoned the gold SDR in 1973. This is why inclusion of the Chinese yuan is so momentous.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Fed Feedback Loop
By James Rickards
September 2, 2016
http://dailyreckoning.com/the-fed-feedback-loop/
The Fed Feedback Loop
In a word, the Fed has failed in its mission to restore robust growth to the U.S. economy. That failure has laid the foundation for the next global monetary crisis.
This failure was inevitable. The reason is that the problems in the economy are structural. They have to do with taxation, regulation, demographics and other factors beyond the Fed’s mandate. The Fed’s solutions are monetary. A policymaker cannot solve structural problems with monetary tools.
Since structural solutions are not on the horizon due to political gridlock, the U.S. economy will remain stuck in a low-growth, Japanese style pattern indefinitely. Without structural change, this pattern will persist for decades as it has in Japan already. This weak growth scenario will be punctuated with occasional technical recessions, and exhibit persistent deflationary tendencies.
That’s the best case, and not the most likely one. The likely outcome is a financial panic and global liquidity crisis caused by the Fed’s failed monetary policies. To understand why, it is necessary to understand the futile feedback loop in which the Fed, and all major central banks now find themselves.
The Federal Open Market Committee (FOMC) has gone down an unprecedented path with its quantitative easing programs, “QE.” The FOMC consists of members from the Feds Washington board and the regional reserve banks. It was established to appropriately determine monetary policy.
Image result for organization of the federal reserve system
The first program, QE1, started in late 2008. It was understood at the time as an appropriate response to the liquidity crisis stemming from the Lehman Brothers and AIG failures that fall. Providing cash during a liquidity crisis is exactly what central banks are supposed to do; it’s why they were created. We’ll give the Fed a pass on that.
QE1 ended in June 2010. It may have saved the economy from a more severe recession in 2009, but it did nothing to stimulate long-term growth. No sooner had QE1 ended than U.S. growth stalled out. By late 2010, the Fed was ready to launch QE2.
QE2 was different. It started in November 2010, at a time when there was no liquidity crisis. QE2 was an experiment dreamed up by Ben Bernanke. The Fed pledged to purchase $600 billion of intermediate-term Treasury securities before June 2011.
The idea was to lower long-term interest rates so that investors would be forced into other assets such as stocks and real estate. The resulting asset price increases would create a wealth effect that would result in higher spending and higher collateral values for borrowing. This new lending and spending would stimulate the economy toward self-sustained trend growth.
In fact, the wealth effect was always a mirage. QE did not create sustained trend growth. What it did create were asset bubbles that are still around and still waiting to pop.
QE2 ended as planned in June 2011. Growth stalled again after the money printing ended. Already the Fed was finding itself trapped by the monster it had created. As long as the Fed was easing with QE, the economy muddled through. As soon as the easing ended, the economy stalled out. These experiments in 2010 and 2011 were the beginning of the “risk on,” “risk off” see-saw mentality that trapped the FED and the markets.
In September 2012, the Fed launched QE3. Unlike QE2, there were no time or quantity limits in QE3. The Fed would print as much money as they wanted for as long as they wanted in order to create the needed stimulus. The problem was that the Fed was now completely trapped with no way out. When they eased, the economy improved but did not boom. When they tightened, the economy stalled, even if it did not collapse. Policy flip-flopped. The Fed was stuck in a feedback loop.
Boom Bust – Discussion with James Rickards on QE and the Fed.
The term “feedback loop” is a popular expression for what physicists and complexity theorists also call recursive functions. In a recursive function, the output of one equation becomes the input for the next iteration of the same equation.
The complex interaction of human behavior (setting policy rates) and the feedback loop (with a fixed point attractor) is a continual flip-flop in policy. First the Fed talks tough, then markets sink, then the Fed eases up, then markets rally, then the Fed talks tough again, and so on. This is the Fed circle game.
Here’s how this has played out since QE3 began in November 2012 under the direction of both Ben Bernanke and later current leader of the Fed, Janet Yellen. The initial state of the system as of April 2013 was one of ease because of QE3 itself:
May 2013 — Bernanke tightens policy with his “taper talk”. The dollar rallies and emerging markets sink.
September 2013 — Bernanke eases policy by delaying a planned start of the taper. Stock markets rally.
December 2013 — Bernanke tightens policy by starting the taper. The dollar grows stronger.
September 2014 — Yellen eases policy through forward guidance by telling markets the Fed will be “patient” when it comes to future rate increases.
March 2015 — Yellen tightens policy by ending forward guidance and indicating that the Fed intends to raise interest rates before the end of 2015.
September 2015 — Yellen eases policy by delaying a planned “liftoff” in interest rates. This delay was caused by the collapse in U.S. stock markets from the shock Chinese yuan devaluation in August. U.S. stocks rally following this ease.
December 2015 — Yellen tightens policy by raising interest rates for the first time in nine years. U.S. markets crash with a more than 10% decline in January and early February 2016.
February 2016 — Yellen eases policy with the secret Shanghai Accord. The accord itself is not revealed at the time, but becomes visible in a series of policy actions by the ECB, Bank of Japan and the Fed over the course of March 2016. U.S. markets rally on the news of a weaker dollar.
May 2016 — The Fed tightens policy through a set of hawkish statements by regional reserve bank presidents including James Bullard, Loretta Mester, and Esther George. U.S. job creation stalls out, the dollar rallies and gold weakens.
June 2016 — Yellen eases policy with a dovish speech in Philadelphia and dovish comments at the FOMC meeting on June 15. The dollar falls sharply and gold begins a strong rally, retracing its May losses and reaching new three-year highs.
That’s ten flip-flops in just over three years.
This reveals that the Fed has no idea what it is doing and is trapped in the feedback loop.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>>> The Coming Gold Super-Spike
By James Rickards
September 1, 2016
http://dailyreckoning.com/coming-gold-super-spike/
The Coming Gold Super-Spike
I consider gold a form of money. That means I investigate price movements in gold the same way I investigate moves in any other global currency — and find the best way for you to play it.
Right now, if you understand physical gold flows, you could stand to make a fortune in the months and years ahead.
Last June, I visited Zurich and was able to meet with some of the most knowledgeable experts and insiders in the physical gold industry. In March, I visited Lugano where I met with the top executive of the world’s largest gold refinery. As a result of these visits to Switzerland, and other points of contact, I have been able to gather extensive information on the major buyers and sellers of gold bullion in the world and the exact flows of physical gold.
Jim Rickards with Gold
Your correspondent inside a secure vault near Zurich, Switzerland, with an array of 400 ounce gold bars. Each bar is individually stamped with the name of the refinery, a serial number, purity, name of the assayer, and the date it was refined. These bars are worth about $535,000 each at current market prices.
This information about gold flows is critical to understanding what will happen next to the price of gold. The reason is that the price of gold is largely determined in “paper gold” markets, such as Comex gold futures and gold ETFs. These paper gold contracts represent 100 times (or more) the amount of physical gold available to settle those contracts.
As long as paper gold contracts are rolled over or settled for paper money, then the system works fine. But, as soon as paper gold contract holders demand physical gold in settlement, they will be shocked to discover there’s not nearly enough physical gold to go around.
At that point, there will be panicked buying of gold. The price of gold will skyrocket by thousands of dollars per ounce. Gold mining stocks will increase in value by ten times or more. Paper gold sellers will move to shut down the futures exchange and terminate paper gold contacts because they cannot possibly honor their promises to deliver gold.
The key to seeing this gold-buying panic in advance is to follow the flows of physical gold. Once the price of physical gold starts to move up on basic supply and demand fundamentals, the stage is set for corresponding increases in paper gold prices. As more and more paper gold holders turn from the paper market to obtain physical gold, which is already in short supply in the physical market, we’ll see the beginning of a price super-spike.
As long as supply and demand for physical gold are in rough equilibrium, there is no catalyst for a sudden spike in gold prices, apart from the usual geopolitical flight to quality demand. But, as soon as demand begins to overwhelm supply, then it’s “game on” for significantly higher physical gold prices followed by the toppling of the inverted pyramid of paper gold contracts.
What information do we have about the flows of physical gold that will help us to understand the supply/demand situation? That’s a mixed bag. Some physical gold players are completely opaque and do not report their purchases or holdings transparently. The Chinese and Saudi Arabians are the least transparent when it comes to reporting their gold market activities.
On the other hand, the Swiss are highly transparent. The Swiss report gold imports and exports by source and destination on a monthly basis.
The Swiss information gives us a window on the world. That’s because Swiss imports and exports are mostly about the Swiss refining business, which is the largest in the world. There are no major gold mines in Switzerland and Swiss citizens are not known as major buyers of gold (unlike, say, Chinese or Indian citizens). The Swiss watch industry does use a lot of gold, but imports are balanced out by exports; Switzerland itself is not a major destination for Swiss watches.
In effect, Switzerland is a conduit for much of the gold in the world. Gold arrives in Switzerland as 400-ounce good delivery bars (the kind I’m holding in the photo above), doré bars (those are 80% pure ingots from gold miners), and “scrap” (that’s the term for jewelry and other recycled gold objects).
This gold is then melted down and refined mostly into 99.99% pure 1-kilo gold bars, worth about $45,000 each at current market prices. These 1-kilo “four nines” quality bars are the new global standard and are the ones most favored by the Chinese.
By examining Swiss imports and exports, we can see where the supply and demand for physical gold is coming from and how close to balance (or imbalance) that supply and demand is. This information can help us to forecast the coming super-spike in gold prices.
Importantly, Switzerland has been a net exporter of gold for the past four months. More gold is going out than is coming in. This means demand remains strong, but supplies are tight.
Switzerland does not produce its own gold. Some refiners may have inventories and there are gold vaults in Switzerland that are a potential source of supply. But the high-net worth individuals who keep their gold in Switzerland are long-term buy-and-hold investors and tend not to sell. On balance, these net outflows are unsustainable. If the outlfows persist, the price of gold is likely to go up because that’s the market’s solution to excess demand.
The “big five” destinations are China, Hong Kong, India, the U.K. and the United States. Those five destinations account for 91% of total Swiss gold exports.
Hong Kong demand is mostly for re-export to China. This is revealed through separate Hong Kong import/export figures, which are also considered reliable by international standards. Using Hong Kong as a conduit for Chinese gold is just one more way China tries to hide its true activities in the physical gold market.
Bear in mind that China is the largest gold producer in the world. There is an additional 450 tons per year of indigenous mining output available to satisfy China’s voracious demand for official gold, held by its central bank and sovereign wealth funds.
Chinese demand has been tempered by the recent strong dollar, which makes gold more expensive when purchased for yuan. That headwind may be about to dissipate if the Fed engineers a weaker dollar (which we expect) to deal with a slowing U.S. economy.
Switzerland has exported 102 tons to the U.K. and U.S., almost all to satisfy demand from ETF investors. Will this strong demand persist? ETF demand runs in a feedback loop relative to gold prices.
When gold is going up, ETF demand goes up also which puts more upward pressure on the price. This also works in reverse as we saw in 2013. When gold is going down, ETFs tend to disgorge gold, which puts further downward pressure on the gold price.
Either way, ETF demand tends to be pro-cyclical and to amplify whatever gold is doing based on other factors. If we have reason to believe that gold prices are going up on their own, ETF demand will tend to drive the price even higher and faster.
Supplies of gold in Switzerland are already tight (I heard this first-hand from my refinery and vault contacts there). If that shortage gets worse, as we expect it will, there’s only one way to adjust the Swiss gold trade imbalance — higher prices. Once the higher prices kick in, the ETF demand will send it into overdrive. From there, it’s just a matter of time before the whole paper gold pyramid comes crashing down.
Gold prices are set to skyrocket based on a combination of supply and demand fundamentals and the ETF pro-cyclical feedback loop. If gold goes up, the prices of gold mining stocks go up even faster. In effect, buying gold mining stocks is a leveraged bet on the price of gold itself.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Elite’s Master Plan for Global Inflation, Part II
By James Rickards
5-17-16
The global monetary elites had a conference in Zurich, Switzerland, last week. Among the speakers were William Dudley, president of the Federal Reserve Bank of New York, and Claudio Borio, chief economist of the Bank for International Settlements.
The topic of the conference was the prospect of multiple reserve currencies in the international monetary system. The speakers generally agreed that a system with more reserve currencies (such as the Australian dollar, Canadian dollar and possibly certain emerging markets’ currencies in addition to the Chinese yuan) would be a desirable one.
There’s only one problem…
It’s a zero-sum game. All of the reserve currencies in the world add up to 100% of the reserve currencies. If new currencies have a larger share, then the U.S. dollar must have a smaller share. It’s just basic math.
That means a long-term process of selling dollars and buying the new reserve currencies. That selling lowers the value of the dollar and imports inflation into the U.S.
It also means a higher dollar price for gold. The elites won’t tell you that, but it’s true.
Case in point: It seems George Soros might be subscribing to Rickards’ Gold Speculator!
According to Bloomberg: “Soros cut his firm’s investments in U.S. stocks by more than a third in the first quarter and bought a $264 million stake in the world’s biggest bullion producer, Barrick Gold Corp….
“Soros also disclosed owning call options on 1.05 million shares in the SPDR Gold Trust, an exchange-traded fund that tracks the price of gold.”
These are all signs of a weaker dollar. But it’s one thing for famous billionaires and analysts like me to expect a weaker dollar. It’s another thing when the guy who prints dollars also says the dollar will weaken. A moment ago, I mentioned William Dudley, head of the New York Fed…
Well, when the Fed wants to print dollars, it’s the New York Fed that buys bonds from Wall Street primary dealers and pays for them with money that comes from thin air.
In a recent interview, Dudley said that “energy prices seem to have stabilized and actually increased a little bit, and the dollar has actually weakened… I am reasonably confident that inflation will get back to our 2% objective over the medium term.”
So if the guy who prints dollars is looking at a weaker dollar and more inflation, maybe you should too.
Yesterday, I explained how the global elite plan to use higher gold prices to unleash inflation. Below, I show you the second part of their plan, which may already be underway. Read on…
Gold’s trading at around $1,280 this morning. So, if you buy gold today and it goes to $5,000 an ounce or $10,000 an ounce, which I do expect, you’d probably be extremely happy.
But that doesn’t tell the whole story. Gold will have increased dramatically in nominal terms. If gold goes from $1,000 an ounce to $5,000 an ounce, most people would say that’s a 400% increase in the price of gold.
But it’s really an 80% devaluation of the dollar. That 80% dollar devaluation leads to a world of $5,000 gold. But it also leads to a world of $400 per barrel and $10.00 gas.
Yes, you need to own gold in that situation because you’ll be protected against inflation. You’ll be in a far better position than those who don’t. They’ll be wiped out. But in many ways you’re just keeping up, since everything you buy will be much higher.
The key takeaway is that a higher dollar price for gold is just a lower value for the dollar. And that’s what the elite’s want.
It’s part of their global inflation plan…
How do you get all the major economies in the world to create inflation without relying on destructive currency wars that merely shuffle money around between winners and losers?
The answer is very interesting. It’s a two-part answer, really. And they’re both coming. You could call it a master plan for global inflation…
I explained yesterday how the monetary elites are looking to engineer higher gold prices to generate inflation since nothing else has worked. That’s the first answer. The evidence is very strong for that hypothesis.
The second part of the answer goes by the name of helicopter money. You’ve probably heard all about it. Helicopter money is different than QE, quantitative easing. It conjures up the image of a helicopter dropping money onto the streets below. Everyone picks up the money, runs down to Walmart and goes on a buying spree. All that extra spending leads to inflation. That’s not literally how the process works, but the idea is the same.
Let me explain technically how helicopter money does work. It’s a combination of monetary policy and fiscal policy. The central bank controls money printing, but it can’t control government spending. That’s up to the Congress.
With helicopter money, the monetary authority and the fiscal authority work together. When Congress wants to spend a lot more money, it produces larger budget deficits. And the Treasury has to cover that deficit by issuing more bonds. The Federal Reserve buys the bonds. And it prints money to buy the bonds.
The answer still comes back to money printing. Quantitative easing, which they’ve been doing for seven years on and off is money printing, but it works differently. With quantitative easing, the Federal Reserve simply buys bonds from a bank. It pays for the bonds with printed money, which goes to the bank. What do the banks do with it? In theory, they’re supposed to lend it to businesses and private citizens.
But people have been reluctant to spend it and banks don’t want to lend it. What do the banks do with that money if there’s no lending and spending? They give it back to the Federal Reserve in the form of excess reserves. After all, the Federal Reserve is a bank. It’s a bankers bank, essentially.
What good does that do anybody? None, really. It just inflates all the balance sheets and props up the banks. It doesn’t do the economy any good.
Helicopter money is different because Congress spends the money. Helicopter money doesn’t give the money directly to people because they might not spend it. But the government will. The government is very good at spending money.
The Democrats prefer benefit programs, welfare programs, social spending, education, healthcare, and the like. The Republicans prefer defense, intelligence, corporate subsidies, and so on.
The way Democrats and Republicans usually compromise on these things is to do both. Everybody gets something. They can build six new aircraft carriers, offer free tuition, free healthcare, free housing, etc.
Then the supposed Keynesian multiplier kicks in to increase consumer spending. The Keynesian multiplier says that if the government spends money to hire people to build a highway, for example, they’ll spend it by going to dinner, the movie theater, buying new cars, vacations, etc. And those on the receiving end of that money spend it on other things, in a virtuous cycle.
But the Keynesian multiplier might not be nearly as effective as elites suspect. With an economy saturated in debt like ours, you reach the point of diminishing returns. (By the way, if helicopter money fails, plan B is to increase the price of gold, as I explained yesterday. That works every time).
The leader on this is House Speaker, Paul Ryan. Last December, Sir Paul Ryan passed Obama’s budget and busted the ceiling caps that have been in place since 2011. The Ryan budget of September 2015 busted the cap. (It also refinanced the IMF, which was buried in a 2012 bill, but that’s a story for another day).
But that budget bill was the tip of the iceberg. The plan now is to have much larger budget deficits. The point is, if people won’t spend, the government will. When the government spends and deficit finances it, it will eventually produce inflation.
That plan is on the table. It’s discussed among the elites. It’s being advanced by all the big brains who work for the big think tanks, run by George Soros and the financial elite. These people don’t walk around with hoods around their heads. We know who they are. You just have to follow them to see what they’re up to.
But these elites are actually beyond the stage of calling for helicopter money. That’s already been decided. They’re now debating what they should spend the helicopter money on. They looking for the best way to reassure the public — meaning lie to the public — about what they’re actually up to.
I wrote recently in these pages about how the recent climate agreement may have really just been a disguised helicopter money scheme. Spending on emission reduction programs and infrastructure could total about $6 trillion per year, which would be carried out by the IMF through the issue of special drawing rights (SDRs).
That’s one way the elites could sell their plans to the public. It’s inflation masquerading as “saving the planet,” “climate justice,” or what have you.
The bottom line is that helicopter money is coming. I think inflation is too, either through helicopter money or increasing the gold price — or a combination of both. It may not happen overnight, but governments will ultimately get it if they’re determined enough.
It’s true, inflation is low right now. The Fed says it wants 2%. But it secretly wants 3%, which is really not so secret. Troy Evans is the president of the Chicago branch of the Federal Reserve. And he told me he wouldn’t mind seeing 3% to 3.5% inflation. His theory is that, if the target is 2% and it’s been running at 1%, you need 3% to average the two. And mathematically that’s right.
But the economy isn’t a fine Swiss watch you can tinker with to produce desired outcomes. Deflation has held the upper hand in many ways since the 2008 crisis. But once inflation takes hold, it can’t easily be put back in the bottle.
Think of the forces of deflation and inflation as two teams battling in a tug of war. Eventually, one side wins.
If the elites win the tug of war with deflation, they will eventually get more inflation than they expect. Maybe a lot more. This is one of the shocks that investors have to look out for.
Now is the time to buy gold.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Elite’s New Case for Gold
By James Rickards
5-16-16
http://dailyreckoning.com/elites-new-case-gold/
As you may know, the “Shanghai Accord” is a secret plan created by the G-4 (China, the U.S., the eurozone and Japan) on the sidelines of the G-20 meeting in Shanghai, China, on Feb. 26.
The plan is to strengthen the euro and the yen and ease the dollar. With the Chinese yuan pegged to the dollar, this combination gives China financial ease and a competitive advantage over its trading partners.
The Shanghai Accord will be an operative reality in global currency markets for the next several years.
The message is that Japan should not even think about market intervention to weaken the yen. But the G-20 is a high-level club with no secretariat or staff of its own. Who does the dirty work when the G-20 wants to send a message? The answer is the IMF.
The International Monetary Fund acts as the eyes and ears of the G-20 and makes sure all of the members stay in line and live up to their commitments. The IMF has already threatened Japan publicly (in polite language, of course).
The IMF essentially said, “Let the exchange rate move however it wants to.” That means the strong yen trade will continue. Japan has been warned.
Where is the world going under the Shanghai Accord?
To answer that question, I recently attended the IMF Spring Meeting in Washington, D.C. This was a larger version of the G-20 meeting in Shanghai. It was the first time that all the “five families” of the global monetary system had gotten together since a smaller meeting in Paris on March 22.
One of the most remarkable events I saw in Washington was Christine Lagarde’s press conference on April 14. This is where Lagarde put on her Godfather hat and threatened Japan. Here’s the exact transcript of the question and answer:
Question: Secondly, central bank stimulus, is it not preparing the world for further asset inflation that we have seen? Arguably, you could say that all the extra debt that we see around the world is evidence of that. If not, should perhaps Japan or others consider direct monetary financing?
Ms. Lagarde: … As far as Japan is concerned, we have fairly robust criteria under which intervention is legitimate, and that clearly can happen in a case and only in a case where very disruptive volatility must be avoided. So we are watching carefully what is happening in the Japanese markets.
The substance and tone here are unmistakable. After the Shanghai Accord, the yen strengthened materially, with clearly negative implications for Japanese growth and Japanese stock markets.
There was enormous pressure on the Bank of Japan from the Japanese government to intervene to weaken the yen (contrary to the Shanghai Accord).
In her press conference remarks quoted above, Lagarde is warning Japan not to intervene in foreign exchange markets to weaken the yen. She says the only time for intervention is “very disruptive volatility,” which is not the case today. (The yen is strengthening, but in an orderly way.) She then goes on to warn Japan, “We are watching very carefully.”
That’s an implied threat that if Japan reneges on the Shanghai Accord, there will be a price to pay. The IMF has leverage because it is the de facto central bank of the world. It has leverage to provide dollars or special drawing rights (SDRs) in the event of a liquidity crunch or market panic in Japan (which may be coming soon).
The IMF has used this kind of muscle on Greece, Cyprus and Ukraine in recent years. Now the Godfather was making Japan an offer they couldn’t refuse — stick to the Shanghai Accord and we’ll be there for you if needed; renege, and you’re on your own.
The elites deny the Shanghai Accord even exists. David Lipton, the first deputy managing director of IMF, for example, said there is no Shanghai Accord. The head of the Bank of Japan also came out denying its existence.
But there’s an old saying from a British journalist: “Never believe anything until it’s officially denied.” I find the fact that the people in the room are denying it is very good proof that it exists.
For further evidence that the Shanghai Accord is an actual effort to weaken the dollar and the yuan at Japan’s expense, I refer you to a Reuters article from last Wednesday. It was titled, “U.S. Wants Japan to Refrain From FX action: PM Abe’s Aide.”
According to one of Abe’s key economic advisers, U.S. officials made it “pretty clear” they don’t want Japan taking any steps to weaken the yen.
“‘For Japan,’” the aide is quoted as saying, “‘it would be a choice of enduring [unwelcome yen rises] a bit longer or intervene in the market,’ knowing that doing so could anger the United States.”
U.S. officials haven’t issued Japan any direct warnings demanding it refrain from weakening the yen. But tellingly, a U.S. Treasury Department report released this month added Japan to a list of countries it was monitoring for currency manipulation. That’s not an accident.
Below, I show you the one way to produce inflation that doesn’t require the Shanghai Accord or destructive currency wars. And the elites are finally starting to talk about it publicly. What’s their next plan? Read on…
The world’s monetary authorities, including the Federal Reserve Policy and the Treasury, will not rest until they produce inflation.
If debt is growing at 3 to 4% a year, while the economy is only growing at 2% a year, you’re not growing out of your debt. Debt is growing faster than the economy. That puts us on the path to Greece. That’s going to lead to a crack-up. That’s why monetary elites are desperate for inflation.
The world has been battling deflation since the 2008 crisis. That deflation is fueled by three trends, and it’s not just the unwinding of the housing bubble. One is demographics, which is a very powerful force. Populations are declining. If you have a declining or flat population and decreasing productivity, growth will suffer.
One of the reasons the U.S. population is still increasing is not because of its birth rate, but because of immigration. Meanwhile, populations are declining in places like Russia and Japan. China’s population has actually leveled out. These are very serious problems for the future growth of these economies.
One of the reasons Angela Merkel is letting a lot of Syrian and Turkish immigrants into Germany is because the German birthrate is low. It’s the same reason why the U.S. essentially opened its borders. It’s a big political debate. But to an economist, immigration can be one of the ways to produce growth.
The second deflationary headwind has been home mortgages and other kinds of debt. There hasn’t seen inflation because velocity isn’t increasing. The economists say people will spend money if you give it to them. But they haven’t actually spent it. They’ve been paying down debt.
The third vector in the deflationary story is technology. This is an old story. In the 1870s and 1880s, there was a sustained period of deflation because of the mechanization of farm equipment, steam ships, railroads, telephone, telegraph, electricity, and many other innovations. These were deflationary because of the great productivity they unleashed. We see it in computer technology today.
But the U.S. government won’t tolerate deflation these days because it’s highly destructive to government interests.
One thing that’s different today is our government debt-to-GDP ratio is at an all time high. It’s higher than ever, even at the end of World War II. That’s just if you count the amount of Treasury debt outstanding. That doesn’t include contingent liabilities like Social Security, Medicare, Medicaid, veterans benefits, guarantees from Federal Home Loan Bank Systems, FDIC insurance, student loans, etc.
How many of those guarantees are going to get called? The answer is a lot, particularly as baby boomers get older and student loan default rate goes up. When you hear a political candidate talking about upwards of $20 trillion of national debt, that’s just Treasury bonds. When you put all this contingent liabilities, multiply that by ten, that’s the true debt.
How are you going to meet all those promises? The easiest way to do it is with inflation. The government actually writes the checks, but they’re not worth very much. It’ll pay with inflated dollars. That’s traditionally the way the U.S. government gets out from under its debt.
Another possible option is outright default, but there’s no reason for the United States to default on its debts. Default is a very unattractive option.
So there are three ways out of debt. One is default, which is not a good option. One is growth, but it’s not happening. The third way is inflation. The government has to have inflation. If it doesn’t, there’s going to be a crack-up in the national debt.
But we’re not getting inflation from monetary policy. There’s another option, however. The idea’s been around for a long time, but now it’s being spoken about publicly by elites. That’s to have central banks, whether the Fed or the emerging markets, bid up the price of gold.
A higher gold price will also drive prices in the overall economy higher.
It’s possible to devalue every currency in the world against gold at the same time. Gold is money, but it’s a different kind of money. It’s not central bank money. Gold is the exception to the currency wars. Gold is the one form of money that every other form of money can devalue against simultaneously without fighting currency wars. Gold doesn’t fight back in the currency wars. That means a much higher dollar price for gold.
The elites are starting to come out and talk about it openly. This has never happened before. Here are two very specific examples…
In PIMCO’s April 2016 monthly commentary, one of their in-house economists named Harley Bassman talked about the Federal Reserve raising the price of gold:
“So in the context of today’s paralyzed political-fiscal landscape and a hyperventilated election process,” Bassman wrote, “how silly is it to suggest the Fed emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce?”
Here’s one of the chief economists of PIMCO, the largest bond fund in the world talking up gold. PIMCO is owned by Allianz Asset Management which is part of Allianz, the biggest insurance companies in the world. When you talk about Allianz and PIMCO, you’re talking about the establishment. This is not some blogger. And they’re talking about $5,000 gold, publicly.
Another example is economist Ken Rogoff. He was chief economist of the International Monetary Fund from 2001 to 2003. He’s a full professor at Harvard University and recipient of the 2011 Deutsche Bank Prize for financial economics. He’s also co-author of a book about the impact of debt on economic recovery.
Rogoff is a full fledged member of the establishment. Some of my inside sources, who must remain confidential, have told me that Ken is on the short list to fill one of the vacancies on the Federal Reserve’s Board of Governors.
And Rogoff wrote a May 3rd article titled, “Emerging Markets Should Go for the Gold.” Here’s what he said:
“I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold into gold. Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60% to 70% of their admittedly smaller official reserves in gold.”
Here’s Ken Rogoff suggesting emerging markets put 10% of their reserves into gold. If that sounds familiar, I don’t know how many times I’ve told people to allocate 10% of their liquid assets to gold. And here’s our Harvard professor saying that emerging markets should put 10% of their assets in gold.
Then he talks about the impact on price. Again, I’m quoting from the article:
“Many countries hold gold at the New York Federal Reserve and over time, the price can go up. It is for this reason that the system as a whole can never run out of monetary gold.”
Just take that last phrase, “The price can go up. It is for this reason that the system as a whole can never run out of monetary gold.”
I’ve also been saying this for years. It’s one thing when I say it in my books and speeches. But it’s another when you see Ken Rogoff — former chief economist of the IMF and potential nominee for a seat in the Federal Reserve Board, saying exactly the same thing. To me that’s highly significant.
Some people might panic if the Federal Reserve engineers higher gold prices, especially since it’s done nothing but disparage gold’s role in monetary affairs. But having the emerging markets drive gold higher provides the Fed some cover. It distances the Fed from the process.
To me, the elites are letting the cat out of the bag. Again, this is the top people in the system. A chief economist at PIMCO and a Harvard professor and former IMF chief economist who may be in the Federal Reserve Board, both argue that higher gold prices can produce the inflation the elites seek.
This is a signal telling you it’s coming.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Is China About to Shock the Market?
By James Rickards
7-25-16
http://dailyreckoning.com/china-shock-market/
Did the U.S. just double-cross China under the Shanghai Accord? If so, China will act on its own to devalue the Chinese yuan. In that case, the Dow Jones Industrial Average could plunge to 16,450, and the S&P 500 could plunge to 1,925 in a matter of weeks, wiping out trillions of dollars of investor wealth.
This is not guesswork. Plunges of over 10% in U.S. stock indices happened twice in the past year. Both times it was because of a combination of a stronger dollar and weaker yuan. It’s happening again. And you need to understand the dynamics both to avoid losses and reap big gains by positioning ahead of the meltdown.
Great Wall of China in 1991
At The Great Wall of China in 1991. This visit was not long after the Tiananmen Square Massacre of June 4, 1989. Few Americans visited China at the time. Trade and investment relations were strained because of U.S. sanctions related to the massacre. I have visited China many times in the twenty-five years since my first visit and developed a network of contacts among government officials, private investors and academics to inform my investment analysis. Readers of Currency Wars Alert are familiar with the background of these currency gyrations and the Shanghai Accord. Here’s a quick synopsis:
•China is struggling under the weight of too much debt, poor demographics, and competition from lower priced suppliers in Vietnam, Indonesia, and the Philippines.
•China needs economic relief. Fiscal stimulus just means more non-sustainable debt. China has too much of that already. The easiest way to give the Chinese economy a boost is to cheapen its currency, the yuan (CNY), to make its exports more competitive.
•When China cheapens CNY, they encourage capital flight. The wealthy and well connected try to get their money out of China as quickly as possible before the next devaluation. This causes the dumping of Chinese stocks, which soon infects U.S. stock markets and causes a global liquidity crisis. The last two times China devalued, U.S. stocks fell over 10%.
•The Shanghai Accord, agreed in Shanghai, China on February 26, 2016 was an effort to give China some relief without having to devalue CNY against the U.S. dollar (USD). The solution was to keep CNY pegged to USD, but weaken USD against the euro and the yen. China has a larger trading relationship with Europe and Japan than it does with the U.S. The Shanghai Accord gave China the currency relief it needed against major trading partners in Europe and Japan without breaking the peg to the dollar and upsetting global capital markets. It was a neat solution. The only losers were the yen and euro, which had to get stronger under this plan.
From early March to mid-May 2016, the Shanghai Accord worked like a charm. The yuan was stable against the dollar, and the dollar got weaker against the yen and euro. U.S. stocks staged a major rally from around 16,000 to almost 18,000 on the Dow Jones Industrial Index. It seemed that all was right with the world.
Unfortunately, the Fed could not leave well enough alone. Instead of celebrating this truce in the currency wars, the Fed reneged on its weak dollar promise in May, and began talking about interest rate hikes possibly in June or July. The hawkish tone was expressed by several regional reserve bank presidents, notably James Bullard, Loretta Mester, and Esther George. The dollar rallied almost 4% in a few weeks. That’s a huge move in currencies where changes are usually registered as small fractions of 1%.
At that point, China felt double-crossed by the U.S. and began its third devaluation against the U.S. dollar. The first devaluation was the “shock” devaluation of August 10, 2015 where the yuan was devalued 3% overnight. The second devaluation was the “stealth” devaluation from December 2015 to January 2016. It was a stealth devaluation because China moved in small increments every day instead of one huge devaluation in a single day. The third devaluation is called the “cheater” devaluation because it reflected China’s view that the U.S. was cheating on the Shanghai Accord. The cheater devaluation started in mid-May and continues today.
The shock devaluation and the stealth devaluation both took place while the dollar was getting stronger in anticipation of U.S. rate hikes. Under the Shanghai Accord, the dollar got weaker, as agreed, and the yuan was relatively stable against the dollar. Finally, the Fed reneged and starting talking about rate hikes. The result was the dollar strengthened and the cheater devaluation began.
What do all of the currency wars moves have to do with U.S. stocks? The answer is the USD/CNY cross-rate may be a more powerful determinant of stock prices than traditional barometers such as earnings, stock multiples or economic growth. This relationship is starkly illustrated in the chart below.
As of mid-July, the Dow Jones Industrial Index (DJIA) hit all-time high of 18,533.05 and the S&P 500 also reached an all-time high of 2,166.89. But, those indices were close to those levels on two previous occasions, August 10, 2015 and December 16, 2015.
Both times China began to devalue and both times U.S. stock markets sank like a stone.
The DJIA dropped 11% (Aug. 10 to Aug. 25, 2015), and 12% (Dec. 16, 2015 to Feb. 11, 2016). If history repeats, DJIA could drop to 16,450 or lower, and the S&P could drop to 1,925 or lower.
As the chart shows, that process of a new crash had already started in early June, but the crash was “saved by Brexit.” The Brexit vote caused an immediate collapse in sterling and the euro and led to a “risk off” flight to quality in dollars, gold and U.S. stocks. Now that the Brexit bounce is over and stocks are at nosebleed levels, the question is will history repeat itself, or will this time be different?
China Chart 2015-2016
At Currency Wars Alert, we use our proprietary IMPACT method to spot the next moves in major currency pairs. IMPACT is a method I learned in my work for the U.S. intelligence community including the CIA, and the Director of National Intelligence. It’s based on what the intelligence community calls “indications and warnings.” Even in the absence of perfect information, you can tell where you’re going by unique signposts along the way. What are the indications and warnings we see on CNY/USD?
Currency pairs don’t move in a vacuum. They move in response to interest rate policy including forward guidance about policy. To a great extent, interest rates and exchange rates are reciprocals. If interest rates are higher, or expected to go higher, the currency will strengthen as capital flows in to take advantage of higher yields.
If interest rates are lower, or expected to go lower, the currency will weaken as capital flows out in search of higher yields elsewhere. The knowledge that currency rates reflect trade deficits and surpluses is mostly obsolete. Capital flows dominate trade flows in the determination of exchange rates.
When China devalued the yuan in August 2015, capital outflows surged. Once the yuan stabilized against the dollar in early 2016, the capital outflows were greatly reduced. Capital outflows from China will be one of the main indications and warnings we’ll be watching in the months ahead to judge the impact of this latest Chinese devaluation.
In the short-run, U.S. stocks are headed for a fall based on renewed tough talk by some Fed officials. The Fed is concerned that U.S. stocks are in bubble territory. They suggest that the easier financial conditions caused by higher stock prices make this a good time to raise interest rates. The rate hike talk then makes the dollar stronger and prompts China to weaken the yuan. The weak yuan triggers capital flight, which causes a spillover liquidity crunch, which in turn leads to a correction in U.S. stocks.
Once the correction takes place, the Fed can rescue the stock market again with more dovish signals. This will weaken the dollar, stabilize the yuan, and reinstate the Shanghai Accord. Until then, the risks are that the Fed has not learned from its past mistakes and will ignore its responsibilities under the Shanghai Accord. August 2016 could be a replay of August 2015.
Fasten your seatbelts.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Crypto-currencies and the Fate of the Dollar
By James Rickards
8-30-16
http://dailyreckoning.com/crypto-currencies-fate-dollar/
At various times in history, feathers have been money, shells have been money, dollars and euros are money. Gold and silver are certainly money. Bitcoin and other crypto-currencies can also be money.
People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.
But that’s not true. They are backed by one thing: confidence. If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and crypto-currencies.
Governments have an edge here because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency. The dollar has a monopoly as legal tender for the payment of U.S. taxes.
According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise we go to jail.
So-called crypto-currencies such as Bitcoin have two main features in common. The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.
Any particular computer server hosting a crypto-currency ledger or register could be destroyed, but the existence of the currency would continue to reside on other servers all over the world and could quickly be replicated. It is impossible to destroy a crypto-currency by attacking any single node or group of nodes.
The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions. But, the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.
This does not mean that crypto-currencies are fail-safe. Large amounts of crypto-currency units have been lost by those who entrusted them to certain unregulated Bitcoin “banks” and “exchanges.” Others have been lost to old-fashioned fraud. Some units have been lost because personal hardware holding encryption keys or “digital wallets” has been destroyed. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.
It’s worth pointing out that the U.S. dollar is also a digital crypto-currency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar denominated transactions, whether in currency or securities form, are conducted digitally.
We pay bills online, pay for purchases via credit card, and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.
The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.
Bitcoin and other crypto-currencies present certain challenges to the existing system. One problem is that the value of a Bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and $1,100 over the past few years. It’s currently around $575.
It’s true that dollars fluctuate in value relative to other currencies such as the euro. But those changes are typically measured in fractions of pennies, not jumps of $100 per day.
This gives rise to tax problems. For example, if you acquire a Bitcoin for $200 and later exchange it for $1000 of good or serveries, you have an $800 gain on the purchase and sale of the Bitcoin itself. From the perspective of the IRS, this gain is no different than if you had purchased a share of stock for $200 and later sold it for $1000. You have to report the $800 as a capital gain.
It seems unlikely that most Bitcoin users have been reporting these gains. Those who do not may be involved in tax evasion. The IRS has broad powers to investigate evasion, and may require counterparties to reveal information, including computer keys, which can lead to discovery of the transacting parties. Given the fact that the IRS has engaged in selective enforcement against Tea Party activists and other political opponents in recent years, this is a serious potential problem for libertarian users of Bitcoin.
One potential solution to the Bitcoin volatility problem I find interesting is to link bitcoin to gold at a fixed rate. This would require consensus in the bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in bitcoin. This kind of gold-backed bitcoin might even give the dollar a run for its money as a reserve currency, especially if it were supported by gold powers such as Russia and China who are looking for ways out of the current system of dollar hegemony.
Another problem is that Bitcoin and the other crypto-currencies have not survived a complete business and credit cycle yet. Bitcoin, the first crypto-currency, was invented in 2009. The global economy has been in a weak expansion since then, but has not experienced a financial panic or technical recession.
Investors have some experience with how stocks, bonds, gold and other asset classes might perform in a downturn, but we have no experience with Bitcoin. Will liquidity dry up and prices plunge? Or will investors consider it a safe harbor, which will lead to price increases? We don’t know the answer.
I believe Bitcoin and its crypto cousins represent an opportunity. It is still too early for investors to hold in their portfolios due to excessive volatility and unresolved tax issues. But the time may come, sooner than later, when some Bitcoin technology companies might warrant investor interest based on their possible role in the future of payments and in other forms of wealth transfer. Companies such as Western Union and PayPal dominate the private payments systems space today. They may have company from crypto-currency start-ups soon.
One of the things I like about gold is it’s not digital, it doesn’t depend on the internet, it doesn’t depend on the power grid. It has intrinsic value independent of those things. Bitcoin does not.
If the power grid goes down, your Bitcoins are worthless. I’m not anti-Bitcoin, but physical gold does not have the disabilities of Bitcoin and digital currencies like the U.S. dollar.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> New World Money
By James Rickards
8-30-16
http://dailyreckoning.com/new-world-money-update/
The construction of the IMF’s special drawing rights (SDRs) valuation basket is reviewed every five years by the IMF Executive Board. But it can be changed more or less frequently at the Executive Board’s discretion.
The new effective date for the revised basket is midnight on Sept. 30, 2016. China is its newest addition.
Membership in the exclusive SDR currency club has changed only once in the past 30 years.
That change took place in 1999, and was purely technical due to the fact that the German mark and French franc were being replaced by the euro.
Leaving aside this technical change, the SDR has been dominated by the “Big Four” (U.S., U.K., Japan and Europe) since the IMF abandoned the gold SDR in 1973. This is why inclusion of the Chinese yuan is so momentous.
Including the yuan is a “seal of approval” by the world’s major financial powers, led by the United States. It means China is a financial superpower and deserves a seat at the table when the international monetary system is reset.
The decision to now include the yuan in the SDR basket is part of a larger power play between China and the U.S. Since 2009, China has been one of the biggest lenders to the IMF.
You can think of this as a four-person poker game where a fifth player just sat down at the table with a large pile of chips. The poker game will now take on a new dynamic.
CurrencyChess
China does not strictly meet all the IMF criteria for inclusion in the SDR club. But use of the Chinese yuan in global trade does satisfy the test.
The yuan’s share of global payments has been steadily rising, from less than 1% in 2013 to about 2% in 2014. Yuan use is currently approaching 3% as shown in the charts below.
Use of Chinese yuan surpassed Australian, Canadian, Singapore and Hong Kong dollars, as well as Swiss francs, by 2014. It also recently passed the Japanese yen. This makes the yuan the fourth most used currency in the world after U.S. dollars, euros and sterling.
Where the Chinese yuan doesn’t meet IMF standards is in having an open capital account. China has also not always been transparent in their reporting of reserve positions.
Market confusion and turmoil have been caused lately by China’s efforts to move in the direction required by the IMF.
For two years prior to August 2015, China informally pegged the yuan to the U.S. dollar at a rate of about 6.2-to-1.
Maintaining the peg requires continuous market intervention by the People’s Bank of China, or PBOC (the central bank). Market forces tried to drive the yuan lower. This forced the PBOC to sell dollars and buy yuan to maintain the peg.
This operation drained about $500 billion from China’s $4 trillion in reserve assets in a matter of months. It is inconsistent with an open capital account in which market forces, not PBOC intervention, determine the value of the yuan.
But suddenly, in August 2015, China devalued the yuan in two steps, to a level of about 6.4-to-1. This was a shot heard round the world.
Epoch Times interview March 2016
The devaluation led directly to meltdowns in U.S. equity markets as the resulting strong dollar threatened to hurt U.S. exports and jobs. A stronger dollar also hurts earnings of U.S. companies with overseas operations. This damage has since become apparent in third-quarter corporate earnings reports.
From China’s perspective, the devaluation was a step in the direction of an open capital account. But from the world’s perspective, it was a continuation of the currency wars. Investors saw more devaluations coming and more damage to U.S. corporate earnings.
For now, China is defending the new peg with more intervention. You should expect further devaluations. You should also expect more market shocks in the near future as China stumbles its way to a freely traded yuan.
China has also improved the transparency of its reserve reporting, especially with regard to gold. From 2009–2015, China reported no increases in its gold reserves. Yet the evidence (from mining statistics and Hong Kong imports) was conclusive that China was, in fact, acquiring thousands of tonnes of gold.
In mid-2015, China suddenly announced that its gold reserves had increased by 604 tonnes. The total rose from 1,054 tonnes to 1,658 tonnes. Since then, China has updated its gold reserve position monthly (in keeping with IMF criteria).
All of these figures are misleading because China keeps several thousand tonnes of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Small amounts are transferred from SAFE to PBOC monthly, and that becomes the basis for the official reserve reports.
The truth about China’s gold is hidden for now. It will be revealed later in the poker game when China needs to increase its pile of chips.
China’s case for admission into the SDR club is a mixed bag. The yuan meets the use criteria and is close on the reserve criteria. China does not meet the criteria for an open capital account and transparent reporting. Still, they are moving in the right direction.
In fact, none of this matters. The IMF’s decision to include the yuan in the SDR is a political decision, not an economic one. The green light to proceed has already been given by the IMF Executive Board.
The story of New World Money continues.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Double Digit Inflation And The Rise of Gold
By James Rickards
August 26, 2016
http://dailyreckoning.com/double-digit-inflation-and-the-rise-of-gold/
Double Digit Inflation And The Rise of Gold
Double-digit inflation is a non-linear development. What I mean by that is, inflation doesn’t go simply from two percent, three percent, four, five, six. What happens is it’s really hard to get it from two to three, which is ultimately what the fed wants.
It’s proving extremely difficult just to get up to two. Personal consumption expenditures (PCE) is the core price deflator, which is what the fed looks at. Currently, it is at about 1.6, 1.7 percent, but it’s stuck there. It’s not going anywhere. The fed continues to try everything possible to get it to two with hopes to hit three. Where the problem arises is once you get to three, the next stop isn’t four, it’s eight, and then it goes to ten. In other words, there is a big jump.
The reason is that it’s not purely a function of monetary policy, it’s a partial function of monetary policy.
It’s also a partial function of behavioral psychology. It’s very difficult to get people to change their expectations, but if you do, it’s hard to get them to change back again.
Inflation can really spin out of control very quickly. So is double-digit inflation rate within the next five years in the future? It’s possible. Though I am not forecasting it. If it happens, it would happen very quickly. We would see a struggle from two to three, and then jump to six, and then jump to nine or ten. This is another reason why having a gold allocation now is of value. Because if and when these types of development begin happening, gold will be inaccessible.
To this point, I am often approached on, “How can you say gold prices will rise to $10,000 without knowing developments in the world economy, or even what actions will be taken by the federal reserve?”
Here Is Where The $10,000 Per Ounce Number Comes From.
It’s not made up. I don’t throw it out there to get headlines, et cetera. It’s the implied non-deflationary price of gold. Everyone says you can’t have a gold standard, because there’s not enough gold. There’s always enough gold, you just have to get the price right.
That was the mistake made by Churchill in 1925. The world is not going to repeat that mistake. I’m not saying that we will have a gold standard. I’m saying if you have anything like a gold standard, it will be critical to get the price right. To this regard, Paul Volcker said the same thing.
The analytical question is, you can have a gold standard if you get the price right; what is the non-deflationary price? What price would gold have to be in order to support global trade and commerce, and bank balance sheets, without reducing the money supply? The answer is, $10,000 an ounce.
The math is where I use M1, based on my judgment. You can pick another measure if you choose (there are different measures of money supply). I use 40 percent backing. A lot of people don’t agree with that. The Austrians say it’s got to be 100 percent.
Historically, it’s been as low as 20 percent, so 40 percent is my number. If you take the global M1 of the major economies, times 40 percent, and divide that by the amount of official gold in the world, the answer is approximately $10,000 an ounce.
Now, if you go to 100 percent, you’re going to get, using M1, you’re going to get $25,000 an ounce. If you use M2 at 100 percent, you’re going to get $50,000 an ounce. If you use 20 percent backing with M1, you’re going to get $5,000 an ounce. All those numbers are going to be different based on the inputs, but just to state my inputs, I’m using global major economy M1, 40 percent backing, and official gold supply of about 35,000 tons.
Change the input, you’ll change the output, but there’s no mystery. It’s not a made-up number. The math is eighth grade math, it’s not calculus.
That’s where I get the $10,000 figure. It is also worth noting that you don’t have to have a gold standard, but if you do, this will be the price.
The now impending question is, are we going to have a gold standard? That’s a function of collapse of confidence in central bank money, which is already being seen. It’s happened three times before, in 1914, 1939 and 1971. Let us not forget that in 1977, the United States issued treasury bonds denominated in Swiss francs, because no other country wanted dollars. The United States treasury then borrowed in Swiss francs, because people didn’t want dollars, at least at an interest rate that the treasury was willing to pay.
That’s how bad things were, and this type of crisis happens every 30 or 40 years. Again, we can look to history and see what happened in 1998. Wall Street bailed out a hedge fund to save the world. What happened in 2008? The central banks bailed out Wall Street to save the world. What’s going to happen in 2018?
Each bailout gets bigger than the one before. Yes, they do the bailouts, building upon “truncation.” Yes, governments don’t go down without a fight. Policy-makers will truncate a global financial crisis, but then take the analysis a step further. How do you do it? Central bank “bullets.”
The Central Banks Are Out Of Bullets.
The Governor of the Bank of England, Mark Carney, is talking about cutting interest rates in the U.K. He spent two years teasing the markets about raising rates, and now he’s going to cut them. That shows you that there’s something bigger than a pill. There’s something bigger than the central banks going on here that you have to analyze.
If the next crisis is bigger than the last one, which I expect, and the central banks are tapped out, where is the money coming from? How will you re-liquify the world? The answer is, the IMF is going to print a massive amount of dollars of SDRs. Is that inflationary? Of course it is.
If you flood the market in dollars of SDRs, one of two things is going to happen. Either that’s going to work, and will be highly inflationary, which is going to take gold to $10,000 an ounce, or it’s not going to work, in which case you’re going to have to go back to a gold standard, in which case it’s going to be $10,000 an ounce.
You can have multiple paths, and timing has to be watched, but this number is very well grounded analytically.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> U.S-Russia Relations: Entering a New Thaw
James Rickards
August 25, 2016
http://dailyreckoning.com/us-russia-relations-a-new-thaw/
U.S-Russia Relations: Entering a New Thaw
U.S. relations with Russia have run hot and cold for the past ten years. New intelligence shows that relations are coming out of the deep-freeze and entering a new thaw.
In March 2009, shortly after the Obama administration first came into office, Hillary Clinton met with Russian Foreign Minister Sergei Lavrov in Geneva. It was her first meeting with Lavrov since Clinton had become secretary of state.
Relations between Russia and the United States had been under stress because of Russia’s invasion of Georgia in 2008 during the George W. Bush administration. Obama and Clinton wanted to reset the relationship and move into a less adversarial posture.
As a goodwill gesture, Clinton asked her aides to create a large red reset button (similar to the “easy” buttons used in the old Staples advertising campaign) with the word “reset” in Russian. The button was put in a case and presented to Lavrov as a gift at the Geneva summit.
There was only one problem. State Department experts used the Russian word “??????????” on the button for the English “reset.” Lavrov looked at the gift and politely informed Secretary Clinton that?????????? actually means, “overcharge.” Oops.
Clinton and Lavrov pushed the button anyway for the cameras. Russian-U.S. relations have been downhill ever since.
When Obama and Clinton came into office, the President of Russia was Dmitry Medvedev. At the time, Vladimir Putin was Prime Minister. Putin had been president from May 2000 to May 2008, but was subject to term limits. Medvedev and Putin simply switched roles with Medvedev becoming president and Putin becoming prime minister.
Technically this made Medvedev the chief executive and commander-in-chief in Russia. Yet, few doubted that Putin still controlled Russia from his slightly subordinate position.
This de facto relationship was confirmed in May 2012 when Putin again assumed the role of president. Medvedev stepped aside and assumed his former role as prime minister. It was a complicated game of musical chairs, which gave Putin the presidency until at least 2020.
Nevertheless, Obama and Clinton found Medvedev (who was president in 2009) to be more to their liking than Putin. Medvedev is more diplomatic and has a more global outlook than Putin, who is a staunch Russian nationalist. From 2009 to 2011, Russian – U.S. relations warmed slightly, notwithstanding the red button gaffe.
In 2012, Russian-U.S. relations were again strained due to U.S. plans to put an anti-missile shield in Poland. During the 2012 U.S. election cycle, Obama distanced himself further from Russia because he was appealing for ethnic votes from anti-Russian Poles, and other Eastern Europeans living in the U.S.
Still, Obama wanted to keep lines of communication open and looked forward to diplomatic deals with Russia. On March 26, 2012, just seven months before the U.S. election, Obama was caught on camera at a summit conference whispering to Medvedev that he would have “more flexibility” after the election. Medvedev promised to pass that message to Putin who was about to replace Medvedev as president.
Russian-U.S. relations had another thaw early in 2013 after Obama’s reelection, but it was short-lived. On the night of November 21, 2013, demonstrations broke out in Independence Square (Maidan Nezalezhosti) in Kiev against the Russian-backed government of Viktor Yanukovych. The protests peaked in February 2014. Yanukovych and his cronies fled the Ukraine.
Putin suspected that the Maidan protests were secretly funded by the British intelligence agency MI6, and the CIA. In order to secure Russian interests in Ukraine, Putin invaded Crimea, and began supporting anti-Kiev ethnic Russians in eastern Ukraine. In response, the U.S. and its NATO allies imposed harsh economic sanctions on Russia.
The sanctions included a ban on major Russian companies (such as Gazprom and Rosneft) refinancing their euro-denominated debt in western capital markets. Since Russian companies could not refinance their debts, they began to draw on central bank hard currency reserves to retire the debt. In turn, this began to deplete Russia’s reserves and force higher interest rates and a devaluation of the ruble.
The ruble sank like a stone beginning in March 2014. It fell from about 28 rubles to the dollar to 70 rubles to the dollar by early 2015 when relations were at their worst. (On an inverted RUB/USD scale, this fall would be from $0.035 to $0.014).
The ruble regained some strength to the 50:1 level ($0.020) when it became clear that the Russian economy, although weakened, was more resilient than U.S. financial warriors had expected.
Then Russia got whacked a second time with the collapse in oil prices. This collapse began in mid-2014 around the time of the Ukraine crisis. It reached its most intense phase in mid-2015 when oil fell below $40 per barrel on its way to $29.00 per barrel by early 2016.
Russia is the world’s third largest oil producer (after the U.S. and Saudi Arabia), and second largest oil exporter (after Saudi Arabia). The damage to the Russian fiscal situation was immediate and led to a recession in the world’s ninth largest economy.
This second blow to the Russia economy pushed the ruble to 81:1 ($.012) by January 2016. The Russian economy was in crisis.
Impact of Geopolitics and Oil on RUB/USD
Then a confluence of factors emerged to cause a rally in the ruble and a turnaround in the Russian economy. These factors fit smoothly into the analytic methodology.
I use a centuries-old applied mathematical technique called causal inference (also known as Bayes’ Theorem, after a formula first discovered by Thomas Bayes). The formula looks like this in its mathematical form:
Bayes’ Theorem
In plain English, the formula says that by updating our initial understanding through unbiased new information, we improve our understanding.
I learned this method in the CIA, and have seen it used at top-secret weapons laboratories to solve some of the most difficult problems imaginable. (I can’t say more about these exercises because the discussions were classified).
The left side of the equation is our estimate of the probability of an event occurring. New information goes into right hand side of the equation. If it confirms our estimate, it goes into the numerator (which increases the odds of our expected outcome).
If it contradicts our estimate, it goes into the denominator (which lowers the odds of our expected outcome). The odds are continually updated as new information arrives.
In my premium research service, Rickards’ Intelligence Triggers, we use the same method to find actionable trading recommendations.
Current indications are that Russian-U.S. relations are entering a new period of thaw after two years in the deep-freeze. This new era of cooperation between the U.S. and Russia centers mainly on joint efforts by President Obama and President Putin to bring an end to hostilities in Syria, and remove Syrian President Bashar al-Assad from office.
Obama and Putin
President Obama and President Vladimir Putin of Russia have discovered they can do business despite some strong disagreements, and damaged relations on issues such as Crimea and eastern Ukraine. Their main area of cooperation today involves Syria and efforts to remove Syrian President Bashar al-Assad from office.
What are the other factors that enter the equation and allow us to estimate the direction of the Russia economy and the ruble with a high degree of confidence?
There is an extensive list of material factors that grows longer by the day:
Oil prices are staging a rebound. From a low of $29.00 per barrel, they are now over $40.00 per barrel. This is a major lifeline for Russia.
•Iran is now open for business after concluding a nuclear deal with the U.S. Many U.S. and European companies are reluctant to reenter the Iranian market because there is still ambiguity about the scope of sanctions relief. Russia has no such reluctance. They are moving ahead with deals in nuclear power, weapons, refineries, and other infrastructure.
•The cheap ruble actually helped Russian companies keep expenses under control, and convert dollar earnings into more rubles to pay local operating costs. This has bolstered the earnings of major Russian companies.
•The Central Bank of Russia has been aggressively buying gold with its dollar reserves. This was a brilliant strategy. They bought gold when the dollar was strong and gold prices were near seven-year lows. Now that the dollar is weakening and gold is surging, Russian gold reserves (priced in dollars or SDRs) are going up.
•Because of the weaker dollar, other commodity prices are rising. Russia is a major exporter of nickel, palladium, iron and timber.
•U.S. allies, especially Germany and France, are growing tired of the sanctions regime, and are looking for opportunities to get back to business as usual with Russia.
In short, all of the factors that were working against Russia from 2014 to 2016 (cheap oil, strong dollar, sanctions, and low commodity prices) are now working in Russia’s favor.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> How Governments Can Kill Cash
By James Rickards
August 2, 2016
http://dailyreckoning.com/governments-can-kill-cash/
How Governments Can Kill Cash
The global elites are using negative interest rates to do the same thing as inflation — make your money disappear. One way to avoid negative interest rates is to go to physical cash. In order to prevent that option, the elites have launched a war on cash.
The war on cash has two main thrusts. The first is to make it difficult to obtain cash in the first place. U.S. banks will report anyone taking more than $3,000 in cash as engaging in a “suspicious activity” using Treasury Form SAR (Suspicious Activity Report).
The second thrust is to eliminate large-denomination banknotes. The U.S. got rid of its $500 note in 1969, and the $100 note has lost 85% of its purchasing power since then. With a little more inflation, the $100 bill will be reduced to chump change.
The war on cash is old news, but there are new developments. This May, the European Central Bank announced that they were discontinuing the production of new 500 euro notes (worth about $575 at current exchange rates). Existing 500 euro notes will still be legal tender, but new ones will not be produced.
This means that over time, the notes will be in short supply and individuals in need of large denominations may actually bid up the price above face value paying, say, 502 euros in smaller bills for a 500 euro note. The 2 euro premium in this example is like a negative interest rate on cash.
Why are central banks like the ECB imposing negative interest rates? What is the point of this policy?
The whole idea of the war on cash is to force savers into digital bank accounts so their money can be taken from them in the form of negative interest rates. An easy solution to this is to go to physical cash.
Yet if physical cash becomes scarce (or nearly worthless due to inflation), savers may pay a slight premium for large-denomination notes. Your premium disappears because the note pays no interest. The elites have actually figured out a way to have negative interest rates follow you from digital accounts to paper money.
Negative interest rates are a thinly disguised tax on savers. The traditional way of stealing money from savers is with inflation. You may get a positive interest rate of 2% on your money, but if inflation is 3%, then your real return is negative 1%.
If we take the same €100,000 bank deposit in the example above and apply a 2% positive interest rate, you would earn €2,000 in interest, leaving an account balance of €102,000 after one year. But after adjusting for 3% inflation, the purchasing power of the €102,000 balance is only €98,940. This leaves the saver worse off than in the negative interest rate example above (assuming no inflation in that case).
In the first case, the banks extracted €500 through negative interest rates. In the second case, they extracted €1,060 in lost purchasing power. Any way you look at it, you lose.
That’s the reality. The second answer is the academic theory behind negative interest rates. In theory, savers will be dissatisfied with NIRP and react by spending their money. Likewise, entrepreneurs will find negative interest rates attractive because they can borrow money and pay back less to the bank.
This combination of lending and spending by consumers and entrepreneurs alike will lead to consumption and investment that will stimulate the economy, especially after the famous Keynesian “multipliers” are piled on top.
This theory is junk science. The reality is the opposite of what the elite academics project. The reason savers are saving in the first place is to achieve some future goal. It could be for retirement, children’s education or medical expenses. When negative rates are imposed, savers don’t save less; they save more in order to make up the difference and still meet their goals.
The other unintended consequence of NIRP is the signal it sends. Savers rightly conclude that if central banks are using NIRP, they must be worried about deflation. In deflation, prices drop. Consumers defer spending in order to get lower prices in the future.
Instead of inducing savers to save less and spend more, NIRP causes savers to save more and spend less. It’s a perfect example of the law of unintended consequences. When abstract academic theories are applied in the real world by central bankers with no real-world experience, you get the opposite result of what’s intended.
These unintended consequences have already appeared in Japan and Europe. Serious doubt has been cast on the ability of central bankers to extend NIRP beyond current levels. Banning cash would make those plans much easier to implement.
One solution to negative interest rates is to buy physical gold.
But governments always use money laundering, drug dealing and terrorism as an excuse to keep tabs on honest citizens and deprive them of the ability to use money alternatives such as physical cash and gold. When you start to see news articles about criminals using gold instead of cash, that’s a stalking horse for government regulation of gold.
Guess what? An article on the topic or criminals using gold appeared this spring, in Bloomberg. This is one more reason to get your physical gold now, while you still can.
As if inflation, confiscation, and negative rates weren’t enough, the global elites are coordinating a new plan for global taxation. As usual, there’s a technical name for global taxation so non-elites won’t understand the plan. It’s called base erosion and profit shifting, or “BEPS.”
The BEPS project is being handled by the OECD and the G-20, with the IMF contributing technical support. If you’re interested in BEPS, there’s an entire website devoted to the global taxation plans and timetables.
The website is worth a look. To paraphrase that famous line attributed to Trotsky, “You may not be interested in BEPS, but BEPS is interested in you.”
The global elite plan doesn’t stop there. There’s also the climate change agenda led by the United Nations. This agenda goes by the name United Nations Framework Convention on Climate Change (UNFCCC).
The science of climate change is a sticky topic, but we don’t have to dive into it for our purposes. It’s enough to know that climate change is a convenient platform for world money and world taxation.
That’s because climate change does not respect national borders. If you have a global problem, then you can justify global solutions. A global tax plan to pay for global climate change infrastructure with world money is the end game.
Don’t think that climate change is unrelated to the international monetary system. Christine Lagarde almost never gives a speech on finance without mentioning climate change. The same is true for other monetary elites. They know that climate change is their path to global financial control.
That’s the global elite plan. World money, world inflation and world taxation, with the IMF as the central bank of the world, and the G-20 Leaders as the Board of Directors. None of this is secret. It’s all hiding in plain sight. The papers, articles and links above give you the resources you need to learn more.
This will be playing out in the next few years.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Behind Closed Doors at the IMF
By James Rickards
August 3, 2016
http://dailyreckoning.com/behind-closed-doors-imf/
Behind Closed Doors at the IMF
The Washington, D.C., area is thick with secret agencies with“three-letter names,” such as CIA, FBI, NSA and less well-known outfits such as the Defense Intelligence Agency (DIA) and the Director of National Intelligence (DNI).
One of the most powerful, and also most secretive, of these agencies is an institution that is not even part of the U.S. government. It’s an autonomous part of an emerging scheme of global governance accountable only to a small elite of central bankers, finance ministers and heads of state. That institution is the International Monetary Fund, or the IMF.
Everything about the IMF is designed to deceive you—beginning with the name. The IMF is not really a “fund” in the sense of an endowment or mutual fund; it functions as the central bank of the world, taking deposits, called “borrowings,” from countries around the world and making loans to its members.
It prints money like most central banks, but this world money has the opaque name of special drawing right, or SDR.
Now, when I say world money, it sounds kind of spooky or scary, but it actually has a funny name. It’s called the special drawing right, or SDR. The global financial elites pick strange
names for what they’re doing so people don’t understand what it is. The International Monetary Fund (IMF) can print these SDRs.
They have in the past— there’s nothing new about it. SDRs were created in 1969, and hundreds of billions of them have been issued over the years. But the IMF only issues them when there’s a financial panic. They don’t issue them every day or when times are good.
You will not be able to use them, touch them or feel them. You will not be able to spend them. You will not have them. SDRs are not going to be walking-around money. You’ll still have dollars, but the dollars will be a local currency, not a global reserve currency.
So for example, when I go to Turkey, I cash in some dollars and get some Turkish lira. I use the lira to pay for taxis in Turkey. Then when I leave, I cash them out again. That will be how the dollar is used. You’ll use the dollar when you come to the United States, but it’ll be like Mexican pesos: something you use when you go there.
The dollar won’t be the important global reserve currency. The SDR will be used for the settlement of the balance of payments between countries, the price of oil and perhaps the financial statements of the 100 largest global corporations. The impact on everyday investors will be inflationary.
The difference, however, is that, right now if we have inflation, everyone blames the Fed. In the future, however, you’ll have inflation coming from SDRs. That means when people try to blame the Fed, the Fed will say it’s not us; it’s those guys over there on G Street in Northwest Washington. Go blame them. No one even knows where the IMF is. So the SDR is just a way to get inflation through the back door.
The IMF has a convoluted governance structure in which the highest decision-making body, the Board of Governors, has little power because the votes are weighted in favor of the largest economies, such as the U.S. Actual power rests with the blandly named International Monetary and Financial Committee, the IMFC. Everything about the IMF is designed to make it difficult
for outsiders like you to have any idea what is going on. The insiders like that arrangement just fine.
Given this culture and history, it was surprising to see the publication a few years back of a book by Liaquat Ahamed, Money and Tough Love—On Tour With the IMF. The book is the most detailed account yet from behind the scenes at IMF headquarters.
The author also reports on an IMF annual meeting in Tokyo and goes on the road with IMF “missions” as they monitor large and small governments around the world. These missions are the key to forcing governments to conform to the “rules of the game” as established by the global monetary elites.
Ahamed had difficulty getting the cooperation of the IMF and access to IMF meetings and missions he needed to write the book. In the opening section, he writes, he soon discovers that gaining access to the world behind its doors will not be easy. The fund is the repository of many secrets, which it guards ferociously. It does its work behind the scenes, out of the public eye, and has a history of being wary of the press… The fund benefits from a certain mystique that could be lost by too much openness.
In the end, Ahamed was granted access by IMF Managing Director Christine Lagarde. What follows is a revealing account that is part history, part economics and part James Bond as Ahamed travels from Washington to Tokyo; Dublin; and Maputo, Mozambique. He describes IMF interactions with other members of the global power elite as well as the IMF’s member
countries in both the developed world and among the poorest.
Importantly, the book is highly accessible. Ahamed avoids the arcane jargon that fills most accounts of the IMF as well as the IMF’s official publications and reports. Anyone with the
slightest interest in the workings of the international monetary system will find this book an excellent guide to how the IMF goes about its business on a day-to-day basis, and how the IMF
has the power to make or break sovereign governments by deciding whether or not to make loans when those governments are in financial distress.
One of the book’s main takeaways is the demonstration that the IMF is just as powerful as the military and CIA when it comes to forcing regime change in governments that do not follow U.S. orders. Of course, the IMF does this without firing a shot. They use money as a weapon just as effectively as the military uses special operations or the CIA uses drones.
Second, if Western nations lose votes in the IMF and those votes are given to communist China, then the IMF money weapons may be aimed at the U.S. in the future.
In recent decades, the emerging markets and southern Europe have needed IMF bailouts. In the future, the U.S. may be the one that needs to be bailed out, and we may have to accept conditions imposed by China using the IMF as its monetary agent.
The book is also timely. While the IMF has always been opaque, its importance to global finance has waxed and waned over the decades. Now the IMF is about to enter its most powerful stage yet. Central banks bailed out the world in 2008. The next financial panic will be bigger than the ability of central banks to put out the fire. At that point, the only source of global liquidity will be the IMF itself.
The issuance of 5 trillion of SDRs, equal to $7.5 trillion, to paper over the next financial panic will be highly inflationary. The difference between this coming inflation and those in the past is that few investors will know where the inflation is coming from. Politically, it will not be easy to hold the U.S. Treasury or the Federal Reserve accountable, because they will just point a finger at the IMF.
The one true advantage of SDRs is that very few people understand them, and there’s no political accountability.
This book will make you better acquainted than most with this hidden source of inflation. Ahamed’s book is a good chance to meet the financial world’s fire department before the next great fire.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Janet Yellen: 21st-Century Houdini
By James Rickards
August 5, 2016
http://dailyreckoning.com/janet-yellen-21st-century-houdini/
Janet Yellen: 21st-Century Houdini
Harry Houdini was the greatest escape artist of the 20th century. He escaped from specially made handcuffs, underwater trunks and once escaped from being buried alive. Now Janet Yellen will try to become the greatest escape artist of the 21st century.
Yellen is handcuffed by weak growth, persistent deflationary trends, political gridlock and eight years of market manipulation from which there appears to be no escape. Yet there is one way for Yellen and the Fed to break free of their economic handcuffs, at least in the short run. Yellen’s only escape is to trash the dollar. Investors who see this coming stand to make spectacular gains.
Yellen and the Fed face as many constraints as Harry Houdini in trying to escape a potential collapse of confidence in the U.S. dollar and a possible sovereign debt crisis for the United States. Let’s look at some of the constraints on Yellen — and the possible “tricks” she might use to escape.
The first and most important constraint on Fed policy is that the U.S. economy is dead in the water. Quarterly GDP figures have been volatile over the past three years, with annualized real growth as high as 5% in the third quarter of 2014 and as low as minus 1.2% in the first quarter of 2014. We have not seen persistent growth or a definite trend — until now. Finally, there is a trend, and it’s not a good one.
Annualized real growth for the past four quarters has been 2.0%, 0.9%, 0.8% and 1.2%, for average growth of 1.23%. That’s a trend that will drive the U.S. into a sovereign debt crisis. Deficits are still running over 3% per year and set to skyrocket as baby boomers retire and claim Social Security and Medicare benefits. In effect, the U.S. economy has flat-lined at a level that cannot sustain our deficit spending. Take a look at the chart below…
The U.S. Economy has Officially Flatlined
The second constraint on the Fed is a persistent deflationary tendency. The U.S. economy is not yet in outright deflation. But there are powerful deflationary forces arising from demographics, debt, deleveraging and technology. That’s important because the Fed’s government debt problems could be solved with some inflation. (Inflation is not a good deal for you, but the Fed doesn’t care about you. They care about the banks.)
Inflation would help to solve the U.S. debt problem because it would lower the real cost of the debt. Making the debt burden sustainable is not about real growth; it’s about nominal growth. Nominal growth is what you get when you add inflation to real growth. For example, if real growth is 2% and inflation is 2%, then nominal growth is 4%. Since debt is repaid with nominal, not real, dollars, then 4% nominal growth is enough to make debt sustainable even if deficits are 3% per year.
The problem is that inflation is not 2% (what the Fed wants). Right now, inflation is closer to 1.5%. With 1.5% inflation and 1.23% real growth, nominal growth is still only 2.73%. That’s not enough to sustain deficits of over 3%.
The third constraint on the Fed is political gridlock. The Fed might be able to cause some inflation if they could employ “helicopter money.” The use of helicopter money requires cooperation among the White House, Congress and the Fed.
Basically, the White House and Congress would agree on massive spending programs and larger deficits. The Treasury would finance the deficits by issuing more bonds. Then the Fed would buy the bonds with printed money and promise never to sell the bonds. The debt would stay buried on the Fed’s balance sheet possibly forever if “perpetual” bonds were used.
Unfortunately for the Fed, there’s almost no possibility of helicopter money this year. The U.S. has to get past the presidential election. They need to see which parties control the House and Senate and then try to achieve some consensus on a new spending program. That won’t happen until February 2017 at the earliest. That’s too late to get the U.S. out of its flat-line growth trend this year.
The fourth constraint on the Fed is their desperate race against time. The Fed needs to raise interest rates so they can cut them when recession hits. The problem is that U.S. economy may be in recession before the Fed can normalize interest rates. If the Fed cannot cut rates enough to get the economy out of recession, it could become a permanent depression, as happened in Japan.
My own view is that the U.S. has been in a depression since 2007 (defined as persistent below-trend growth). Japan has been in depression for over 25 years; the U.S. has been in depression for nine years. The entire world seems headed in the same direction.
Here’s the math. Economists estimate that the Fed has to cut interest rates about 350 basis points (3.5%) to offset the effects of a recession and stimulate a return to growth. Today, the Fed funds rate is 0.25%. The Fed would have to raise rates 3.25% before the next recession in order to cut them 3.5% to fight that recession.
The problem is that the average U.S. economic expansion since 1980 lasted 79 months. The current expansion has already lasted 85 months. In other words, the next recession is already overdue.
If the Fed rushes to raise rates now, they will cause the recession they are trying to avoid. The Fed’s actual policy has been to do nothing and hope for the best, but that strategy is running out of time.
Those are the Fed’s handcuffs — weak growth, persistent deflation, no helicopter money and no ability to cut rates to avoid recession. How can the Fed escape these constraints? How can the Fed get the inflation it needs both to sustain the debt and facilitate rate hikes?
At Currency Wars Alert we use the IMPACT system to forecast changes in exchange rates based on inflation, deflation, interest rates and other central bank policies. The IMPACT system uses intelligence techniques I learned at the CIA for predicting terrorist attacks and other geopolitical shocks.
The IMPACT system looks for what intelligence analysts call “indications and warnings” that are unique to a particular course of events. Once these indications and warnings are spotted, the analyst has a good idea of what path is being taken and what the final destination will be.
The Fed’s final destination is inflation — the Fed needs inflation to escape its handcuffs. What are the indications and warnings of inflation from a policy perspective?
There are four ways to get inflation when rate cuts are off the table. These four ways are helicopter money, world money, higher gold prices and currency wars.
As mentioned, we may see helicopter money in 2017 if there’s political will in Congress and the White House. But helicopter money does not guarantee inflation. People and companies on the receiving end of government deficit spending may just save the money or pay down debt instead of spending more themselves. This behavior negates the “multiplier effect.” But that doesn’t mean it won’t be used anyway. The Fed never lets reality get in the way of trying out a bad idea.
The second way to get inflation is for the IMF to issue world money in the form of special drawing rights, SDRs. This may happen in the next global financial crisis, but it won’t happen in the short run. The IMF moves even more slowly than the Fed. SDRs may be issued in sufficient size to cause inflation in 2018. But it’s unlikely to happen before then.
The third way to get inflation is for governments to dictate a higher price for gold, perhaps $3,000 per ounce or higher. The idea is not to reward gold investors. The idea is to devalue the dollar relative to gold so the dollar price of everything else goes up. The U.S. government did this with some success in 1933 when it raised the price of gold by 70% in the middle of the Great Depression.
However, this method is so extreme from a central banker’s perspective that I don’t expect it except in the most desperate circumstances. We may see this in 2019, but it’s unlikely to happen sooner. That doesn’t mean gold won’t go up on its own — it will. It’s just that investors should not expect the government to force the price higher by official action anytime soon.
If we can potentially expect helicopter money in 2017, SDRs in 2018 and a high official gold price in 2019, what can we expect here and now? How can the Fed cause inflation in 2016?
There’s only one way to escape the room right now — currency wars. The Fed can trash the dollar and import inflation in the form of higher import prices. You can bet a cheap dollar will be on the agenda Sept. 4, 2016, when the G-20 Leaders meet in Hangzhou, China.
A cheaper dollar is a complicated play, because it involves other currencies. If the dollar goes down, something else has to go up. It won’t be the Chinese yuan or pounds sterling. China and the U.K. have serious growth problems of their own and need a cheap currency too.
If the dollar goes down, then the three forms of money that have to go up are the yen, the euro and gold.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> No, This Won't Cause a Gold Shock (Something Else I've Just Exposed Will)
http://dailyreckoning.com/no-wont-cause-gold-shock-something-else-ive-just-exposed-will/
The market has the technical setup for the greatest gold shock in history. When it rocks markets, gold will soar — ultimately to $10,000 if my full thesis plays out. But most gold investors won’t be happy when it does. In fact, most gold investors will face big losses when gold reaches that price. And most of the people who want to get hold of the physical metal won’t be able to.
I was recently in Switzerland, where I met with my secret gold contact. I call him “Goldfinger” to protect his identity. He’s one of the most plugged-in men in the gold industry. He meets with the heads of the world’s largest refineries… some of the highest-level bankers… finance ministers… gold dealers… and central bankers. He also controls tens of millions of dollars in physical gold.
“Goldfinger” knows why this gold shock is coming better than anyone else because of his first-hand knowledge of the gold market. He sees it playing out in front of his eyes.
What will trigger this gold shock? First, let me tell you what it won’t be…
Most people believe the gold shock could start if a large institution with a paper claim for a lot of physical gold, demanded delivery of that gold. The story goes: There’s not enough physical gold to back up all of the paper gold. So therefore, if a large player demands enough physical gold, that order won’t be filled. And a gold panic would ensue.
But the gold shock that’s coming will almost certainly not come from any of the large gold market participants. This surprises many people when I tell them that. But consider a hedge fund that’s long gold futures. Why would that hedge fund start a buying panic in the physical gold market by taking delivery of physical metal?
And if a large hedge funds is thinking of taking a large enough delivery of physical gold to cause a panic, they’ll probably hear from their lawyers. And those lawyers are going to advise against it because it would put the hedge fund in the crosshairs of the Justice Department or a Commodities Future Trading Commission (CFTC) investigation.
Smaller market participants can ask for delivery of physical metal if they own gold futures without causing a problem. But if too many request delivery, the powers that be can change the rules very quickly. They could work to make it illegal.
The U.S. government can decide they’re not a normal gold trader, but a manipulator. Manipulation is illegal. The feds can paint them as a mini-version of the Hunt brothers, who tried to corner the silver market in 1980.
That may sound far-fetched because there have been tons of manipulation on the short side of gold. If manipulation is illegal, why doesn’t the Justice Department simply go after the gold shorts?
The likely answer: Because the biggest gold short is China, and they’re beyond our jurisdiction. Nobody thinks the FBI is going to investigate Chinese gold manipulation. China is the second largest economy in the world and a sovereign nation. (And maybe the Fed doesn’t mind if the price of gold has a lid on it anyway). So we won’t see anti-manipulation enforcement against the gold shorts.
Or take another example of a large player in the gold market. A large “local” broker on the floor at major futures exchanges or commodity exchanges makes money every time a gold contract expires. They sell the current month’s gold contract, while buying the next month’s gold contract. That’s called “contango” — which is just a fancy way of saying that the price of gold delivery in the future is higher than the price of gold now. If gold is in contango, a trader can keep executing the same type of trade and profiting over and over again.
Now, that broker can use those gains to fund other trading activities. So why on Earth would it want to blow up the gold market by causing a panic? The broker’s making money on the gold trade and has every incentive to keep the game going.
The paper gold market is comprised banks, local traders at the exchanges, and hedge funds. All three of them are disincentivized to cause a panic in the gold market. The locals are making steady profits, so are the banks, and the hedge funds are being told by the lawyers that they could go to jail if they demand a large gold delivery. No large player in this market is looking to produce chaos.
So, if the large players aren’t going to cause the coming shock, what will? What will be the snowflake that triggers the avalanche? It could be many things…
It could be the bankruptcy of a medium-size commodities broker like MF Global, that went bankrupt in 2011. That type of medium-sized firm could suddenly go bankrupt and fail to make a delivery. (It’s one thing if J.P. Morgan and Goldman Sachs want to call a halt to the whole game. But it’s another thing if some medium-sized dealer that no one’s heard of suddenly can’t make a delivery.)
Then that firm’s customers will all rush at once into the physical market with a massive order. They need to cover the firm’s failure to deliver. And that sets off the panic.
The trigger could also be a geopolitical shock. It could also be an assassination, a suicide of an important player, or a natural disaster.
But aside from these possibilities, I’m eyeing one particular trigger that I believe is most likely to start the avalanche…
It’s coming very soon. When this trigger is pulled and the gold panic starts, it’ll run out of control very quickly. Gold prices will soar to heights no one thought possible just a short time ago. The dollar will plummet against gold. And very few people will be able to get their hands on gold when they need it most.
That’s why you need to understand what’s about to happen so you can prepare.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> SAIS and Your Inside Connection to the IMF
http://dailyreckoning.com/sais-inside-connection-imf-2/
The International Monetary Fund (IMF) is one of the most powerful institutions in the world. It acts as the de facto central bank of the world. The IMF makes loans to countries in distress, raises funds from its member nations and issues its own world money called the special drawing right (SDR).
It also acts as the regulatory and policy arm of the Group of Twenty, or G-20. The G-20 is a multilateral club that includes both the richest nations in the world (the U.S., Japan, the U.K., Germany, etc.) and the most populous emerging economies (China, India, Brazil) among others.
The G-20 has no permanent staff or bureaucracy, so it outsources policy tasks to the IMF. These combined roles as the world’s central bank and the G-20’s eyes and ears make the IMF the center of gravity for policy in the international monetary system.
Yet for such a powerful institution, the IMF is incredibly opaque and unaccountable. My favorite way to describe the IMF is “transparently nontransparent.” What I mean by that is the IMF is transparent in terms of making resources available for interested parties to learn about what it is doing.
The IMF website is loaded with links to position papers, financial statements and facts and figures about its missions and personnel. The IMF publishes a value for the SDR every business day. Even the IMF’s plan to replace the dollar with SDRs as the global reserve currency is available.
The problem is that all of this material is written in highly technical jargon that requires specialized training to interpret. That’s where the “nontransparent” part comes in.
Reading the IMF website is like picking up an advanced textbook on quantum physics. You may be able to read the words in a row, but unless you have specialized training, it might not make much sense.
Where is such specialized training available, and who has it?
There are a number of fine schools teaching international economics, but the leading center of learning for working at the IMF is undoubtedly the School of Advanced International Studies, SAIS, part of the Johns Hopkins University located in Washington, D.C.
SAIS offers graduate programs in international economics as well as American foreign policy, area studies, languages and other courses in diplomacy, intelligence and strategy. It has many distinguished graduates, including former secretary of state Madeleine Albright and CNN anchor Wolf Blitzer.
In addition to its graduates, SAIS has an outstanding faculty, including many visiting scholars drawn from the Washington, D.C., policy community. Former secretary of the Treasury Hank Paulson was in residence at SAIS after leaving the Bush administration.
For purposes of understanding the international monetary system today, the two most important SAIS connections are former secretary of the Treasury Timothy Geithner and former head of the IMF John Lipsky.
Geithner is a SAIS graduate, and Lipsky is a visiting scholar at SAIS today. Geithner (who worked at the IMF before joining the Treasury) presided over the aftermath of the Panic of 2008 and was one of the architects of the IMF/G-20 process that started the currency wars in 2010.
Lipsky ran the IMF in the dangerous period after the abrupt resignation of IMF head Dominique Strauss-Kahn amidst a sexual-assault scandal in May 2011.
Lipsky performed a crucial role in organizing the first bailout of Greece after the sovereign debt crisis erupted in 2010. When it comes to global bailouts and their aftermath, the imprint of SAIS through players such as Paulson, Geithner and Lipsky is everywhere.
SAIS
Former U.S. Treasury secretary Timothy Geithner (left) is a graduate of the School of Advanced International Studies (SAIS) in Washington, D.C. Former head of the International Monetary Fund John Lipsky (right) is currently a distinguished visiting scholar at SAIS.
Fortunately, as a Daily Reckoning reader, you have your own SAIS connection. I graduated from SAIS in 1974, just after Wolf Blitzer and a decade ahead of Tim Geithner.
For all intents and purposes, SAIS is the intellectual boot camp for the IMF. Many SAIS graduates go directly into the IMF. Other leading career choices are banking, the foreign service and the national security community.
My class marked a turning point. Many observers believe the gold standard of Bretton Woods ended on Aug. 15, 1971, when President Nixon gave his surprise speech shutting the gold window.
That is not quite correct. Nixon ordered the conversion of dollars into gold to be “temporarily” suspended. It was expected that the world might be able to return to some kind of gold standard once new parities of paper money to gold were established. Of course, that never happened.
In 1975, the IMF declared that gold was dead as a form of money. Yet from 1971-74, the world of international finance still considered gold to be money. That’s when I received my technical graduate training. Mine was the last class to study gold as a form of money in international finance.
Jim Rickards' College ID
Your correspondent as a 23-year-old graduate student in international economics at the School of Advanced International Studies, class of 1974. This was the last class to study gold as a monetary asset in international reserve positions.
Today, for the first time in decades, gold is once again being discussed as an international reserve asset. This is because Russia, China, Iran and other nations have been acquiring thousands of tons of gold to add to their reserves.
Equally important, other central banks that already have gold, such as Germany, France, Italy and the U.S., have completely stopped selling. The scramble for gold is back after decades of official dumping by the central banks.
Another topic that is in the news is the role of the SDR. Financial blogs and newsletters are filled with dire prognostications about how the SDR is poised to replace the dollar as the global reserve currency.
Even more digital ink has been spilled on the topic of including the Chinese yuan in the so-called “basket” of currencies that make up the SDR.
The technical nature of SDRs has led to ill-informed speculation, hysteria and dire forecasts that have no basis in reality.
This is not surprising. Most of the people who are expert on SDRs actually work at the IMF or finance ministries of IMF member nations.
They have no interest in commenting publicly about what is really going on. Most of those who are commenting lack the expertise to know what they are talking about. This is why the blogs are filled with misinformation and hyperbole that only serves to alarm and confuse investors.
There are almost no sources readers can turn to for expert opinion willing to discuss these matters publicly. Fortunately, at Rickards’ Strategic Intelligence, we specialize in these topics and report on them in a way that’s accessible. We provide the most timely and accurate information on the IMF and SDRs.
SDRs are the coming reserve currency of the world. Massive issuance of SDRs in a future liquidity panic will be highly inflationary. These outcomes have enormous implications for investors with assets in U.S. dollars. Yet the process will be gradual and proceed in ways that markets barely notice, at least at first.
Commentators who “cry wolf” about SDRs are doing a disservice to investors because markets may be complacent by the time the wolf actually arrives.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Day The Dollar Died, Part II
http://dailyreckoning.com/day-dollar-died-part-ii/
There is a concept, advanced by a philosopher named Karl Popper. Karl Popper decades ago called piecemeal engineering. What he meant by this is if you’re one of the power elites in the world — a political leader, finance minister or head of a globalist institution who wants to run the world or tell other people how to live their lives — you can’t do it all at once.
Many have tried. Caesar, Napoleon, Hitler, the great dictators in history have tried to do everything at once. But they were all defeated because they invite retaliation and pushback of various kinds.
Popper said that if you want to change the world, you must do it slowly, one piece at a time, in ways that people don’t notice. An analogy is something called the ratchet. A ratchet tool is a tool that only turns one way. You can turn it one way… but you can’t turn it back. It’s an irreversible process.
Now let’s take that concept of piecemeal engineering and apply it to the elimination of the U.S. dollar and the rise of the special drawing right (SDR), because that’s what we are looking at in the future.
The SDR was invented in 1969 and there were a number of issues of SDRs in the 1970s. During the ‘70s we had massive liquidity crisis, borderline hyperinflation, a quadrupling of oil prices, and a stock market crash. The dollar almost collapsed between 1977 and in 1981. The situation was so bad that in 1977, the United States Treasury borrowed money in Swiss francs. Nobody wanted U.S. dollars, at least not at an interest rate the U.S. was willing to pay.
That was when the IMF issued SDRs to provide liquidity to the world at a time when the dollar was collapsing. That was the last time prior to 2009 when the IMF issued SDRs.
But it moved the ratchet forward.
Then there was a 30-year period from roughly 1980 to 2010 which has been described as the age of King Dollar. They didn’t need SDRs because the banking system was doing its job.
But in 2009-2010 two things happened. First, in 2009 the IMF issued SDRs for the first time in almost 30 years. That was in response to the global liquidity crisis when it looked like the world’s central banks couldn’t act fast enough. So the IMF issued over $100 billion of SDRs. Few people are even aware it happened.
But it moved the ratchet forward once again.
At the time, I went on CNBC and said, “What they’re doing is testing the plumbing.” The SDR hadn’t been used since 1980. The IMF needed to make sure the system still functioned, like an air-conditioning or plumbing system that hasn’t been used in years.
It did, and the system worked perfectly. Now they know the system works.
And we won’t be seeing anymore 30-year gaps of the kind we had between 1980 and 2009. In January 2010, the IMF issued another paper really speculating on the rise of the SDR as world money or a global currency. It was really a blueprint for the permanent establishment of the SDR. In other words, not a special, temporary SDR issue in case of emergency — but making the SDR a permanent global reserve currency.
But there’s a problem. In order to be a global reserve currency, the IMF can’t just print money to hand out. To create a reserve currency it needs to create an SDR-denominated bond market.
The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is, there’s a deep, liquid dollar-denominated bond market to invest in that creates a lock-in effect. There is currently no equivalent bond market in SDRs. It will need to create one before SDRs can be considered a global reserve currency.
Well, last July, the IMF published a technical paper introducing the concept of a private SDR market…
In the IMF’s vision, private companies and corporations can issue bonds denominated in SDRs. Who are the logical issuers of the bonds?
Probably multinational or multilateral organizations like the Asian Development Bank and maybe big corporations like IBM and General Electric.
Who would buy these SDR-denominated bonds? Mostly sovereign wealth funds. China will be substantial buyers. The point is, these issues are coming.
Now the deployment of the SDR is coming closer to fruition…
The SDR has been composed of four currencies — the U.S. dollar, British pound sterling, the euro and the Japanese yen. But that’s about to change…
At midnight on September 30, the IMF will include the Chinese yuan in its basket of currencies. That will be a major event in monetary history. The IMF is welcoming China to the club.
For many people in the West, Americans in particular, this is just some technical IMF procedure. But that’s not how the Chinese look at the world. The Chinese are all about saving face and gaining face. One way to gain face in the Chinese concept is by gaining prestige. Being included in the IMF’s exclusive club of currencies affords them that prestige, even though westerners tend to think of it as a mere technical readjustment.
Yesterday I said September 4, 2016 could well go down as the day the dollar died. Why did I pick that date instead of September 30, the official date when the yuan is included in the IMF’s basket of currencies?
Because September 4 is when the leaders of the world’s larger economies will gather in Hangzhou, China for the G20 annual summit. This will be China’s coming-out party. This is China saying, “We are an equal partner, maybe more than the equal partner of the United States of America and Europe. They will no longer dictate the world’s financial system.”
The symbolism and the visuals at the upcoming meeting will be spectacular.
The IMF is essentially told what to do by the G20. If you think of the IMF as the central bank of the world, think of the G20 as the Board of Directors of the central bank of the world. It’s the committee that runs the world. This is not a conspiracy theory. It’s a fact.
And it’s important to realize that one G20 memo calls for “expanding the role of the IMF’s SDR (Special Drawing Rights).”
The pace is really picking up. The SDR bond issues I mentioned above are probably going to happen within the next couple of weeks. Between now and Labor Day we’ll see announcements about multibillion SDR bond issuance coming from the Asian Development Bank, some major Chinese commercial banks, the Asian Infrastructure Investment Bank, etc.
The point is, so these issues are coming. And over time, the SDR market will grow. It will not compete with the dollar-denominated bond market anytime soon, but the groundwork is being laid. Every time an institution invests in SDRs, they’ll be indirectly supporting the yuan. And it’ll help move the world that much further away from the dollar. This will have vast implications for anyone who holds their wealth in dollars.
The mechanics are too far along, the piecemeal social engineering was too well thought out, the ratchet is locked in place. It won’t be reversed. The next time there is a financial crisis, which I expect sooner than later, it’s not going to be the Fed that bails us out. It’s going to the IMF and the SDRs.
Then the ratchet effect will be completed.
In 10 years many people are going to look back and point at September 2016 as the point in time the dollar era ended. They can’t see it now.
But we do.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Jim Rickards – The Day The Dollar Died Part I
August 16, 2016
by Jim Rickards
http://thedailycoin.org/2016/08/16/jim-rickards-the-day-the-dollar-died-part-i/
Will history record September 4th, 2016 as the day the dollar died? Before continuing, let me make it clear that you aren’t going to wake up on September 5th to find anything noticeably different…
The dollar won’t lose its reserve currency status overnight. It won’t be instantaneously inflated into worthless piece of currency, and we aren’t going to see immediate 90% hyperinflation. None of these things are going to happen.
What I mean is that in the not-too-distant future, maybe five years, maybe three years, maybe less, we’ll look back and say, “That was the date when everything changed. That was the turning point for the dollar and we didn’t see it at the time.” But those who know what to look for will understand the significance of that date.
It all has to do with the International Monetary Fund (IMF) and something called the Special Drawing Right, or SDR for short. World money is another term for it. The SDR is a kind of world money issued by the IMF, based in Washington. The U.S. Federal Reserve has a printing press to can print dollars. The Bank of England has a printing press to can print Sterling. The European Central Bank (ECB) can print euros. That said, the IMF can print SDRs.
When I say print, of course, the money is digital and you won’t be using it to buy groceries or gasoline. SDRs will be digitally created and handed out to member states to serve as a new form of world money. I simply use the word “printing” and “paper money” as shorthand.
On September 4th, does the dollar disappear, replaced overnight by SDRs? No. We are not there yet. But it will be a significant turning point. Before getting to the significance of September 4th, let’s look back in history a bit to frame the context…
Let’s say, pound sterling, if you were sitting around the government ministries in London in June of 1914, you would’ve looked around the world and said, “All is fine with the world.” It was the height of the British Empire.
Pound sterling was backed by gold issued by the Bank of England. It was the world money at the time. You could use a British gold sovereign, a one-ounce British gold coin, virtually anywhere in the world. And everything looked like it would maybe stay that way for the next hundred years.
Then in a very quick sequence of events from the end of June to the end of July, the Archduke of the Austro-Hungarian Empire was assassinated by a Serbian terrorist backed by Russia. That event set in motion the events that led to World War I and the ultimate decline of the British Empire.
When the war started, markets around the world crashed because the belligerents were liquidating their assets to raise money. The U.S. started shipping a lot of gold to the U.K. and Europe because Europeans were selling U.S. stocks to raise cash, convert it to gold to ship it back to Europe. It’s a fascinating story in and of itself. The point is, within a few months, gold was flowing out of New York to the U.K. because England initially sold U.S. securities to get gold.
Today the gold has primarily been going from London to China. But in the summer and fall of 1914 it was going from New York to London and other parts of Europe who needed the gold to finance the war effort. Gold was flowing out of the United States at enormous rate. But by November 1914 it turned around because now the U.K. was desperate for war material. It needed to buy agricultural produce, cotton, steel, weapons, whatever the U.S. could produce. In those days of the classical gold standard, nations had to pay for it with gold, or with paper that could be redeemed for gold.
Suddenly the gold started flowing back to the United States. By the late 1920s, the U.S. was the leading gold power in the world. Britain lost its world standing, unthinkable in June 1914. By the time of Bretton Woods in 1944, the U.S. had about two-thirds of all the official gold in the world because it had been a major manufacturing powerhouse and a major export powerhouse while the rest the world was fighting.
The U.S. eventually entered both World Wars I and II. But World War II started almost three years before the U.S. got involved, World War I started nearly three years before the U.S. got involved. We had a long period of time as a neutral power in both wars to ship war material to allies for gold, which we did.
At Bretton Woods in 1944, the U.S. dollar was enshrined for the next 30 years as not only the number one reserve currency in the world, but the only currency that was convertible to gold. All the other currencies were pegged to the dollar and the dollar was pegged to gold. The dollar became from then on the dominant reserve currency of the world up until today. Now that role is in doubt.
Now here is the point: many people look at Bretton Woods and say, “That was the day the dollar replaced the sterling. From then on the dollar was the leading reserve currency, the U.S. had all the gold. Sterling went into a long decline.”
That’s not what happened…
The actual turning point was 1914, was 30 years earlier. You can look at the entire 30-year period from 1914 to 1944 as a long, slow displacement of sterling by the dollar. At the end of the process, the dollar was King and sterling was a very weak currency that couldn’t backup its obligations. It had been given to Commonwealth Trading Partners, but they didn’t want it. By 1944 the U.K. economy was flat on its back because of the war. But the process started in 1914 when the gold started flowing to the U.S.
Nothing that happens on September 4th, 2016, will produce an overnight calamity for the dollar. But it’ll be a key turning point, not unlike November 1914 when the gold flow reversed out of England to New York. Then the dollar began its long ascent and sterling lost its dominance. If you had been a large investor in the U.K. and had seen that turning point, you would have gotten out of sterling assets and converted to dollar assets. You would’ve made a fortune and avoided enormous losses.
The point I’m making about September 4th is that it could be one of those dates in history that people will point to as a similar turning point. Except this process probably isn’t going to take 30 years. It could take 10 years or less. No one knows exactly what’s going to happen. We do know enough to say this will be one of those times when a very small number of astute individuals will know it at the time.
They’ll be able to look at September 4th and see it for what it is, the end of the dollar. 10 years from now it will become apparent that this was the time to get into gold, energy, silver, hard assets, land, fine art, and other assets that will preserve value. It won’t be apparent to most people until years into the future.
Another good example of a turning point that not many recognize at the time is Pearl Harbor. The U.S. suffered thousands of casualties and a good percentage of its Pacific fleet was destroyed or badly managed. It was enormous setback for the United States. But an astute observer would have concluded that, given our vast resources and manufacturing capability, it was just a matter of time before we would overwhelm the Japanese Empire.
A sharp analyst could have said, “No, this is a turning point in world history. This is the end of the Japanese Empire, this is the rise of the American Empire.” It would have been the perfect time to bet on America and against Japan. But few people were thinking in those terms when the U.S. Pacific fleet was in ruins on December 8th, 1941. It’s important to see these historic turning points for what they are.
Tomorrow, I’ll look specifically at September 4th and why I think it’ll be one of those historical dates few will recognize for what it is. But I want to give you the chance to understand exactly what’s going on. The dollar replaced sterling over a 30-year process. Now we’re looking at the process of replacing the dollar with SDRs. And it could start September 4th.
Tune in tomorrow for part II.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Gold, Oil, Africa and Why the West Wants Gadhafi Dead
By Brian E. Muhammad
Jun 7, 2011
http://www.finalcall.com/artman/publish/World_News_3/article_7886.shtml
Muammar Gadhafi's decision to pursue gold standard and reject dollars for oil payments may have sealed his fate
Attacking Col. Gadhafi can be understood in the context of America and Europe fighting for their survival, which an independent Africa jeopardizes.
(FinalCall.com) - The war raging in Libya since February is getting progressively worse as NATO forces engage in regime change and worse, an objective to kill Muammar Gadhafi to eradicate his vision of a United Africa with a single currency backed by gold.
Observers say implementing that vision would change the world power equation and threaten Western hegemony. In response, the United States and its NATO partners have determined “Gadhafi must go,” and assumed the role of judge, jury and executioner.
“If they kill Brother Gadhafi, I submit to you that American interests in Africa will come under severe strain,” warned the Honorable Minister Louis Farrakhan on WPFW-FM's "Spectrum Today” program with Askia Muhammad.
“That man has invested in Africa more than any other leader in the recent history of Africa's coming into political independence,” he continued. The Muslim leader said America needs access to the mineral resources in Africa to be a viable power in the 21st century.
Minister Farrakhan further pointed out in the April 1 radio interview that the current plot to kill Col. Gadhafi comes at a time of great distress and decline for America. The fall of the dollar is a manifest loss of America's prestige and influence among the nations of the earth and an indicator of her end.
“How's America's wealth today? How is she doing financially? What is the deficit? Some say it's about $56 trillion counting Social Security and Medicare. That's a big number. She's printing money, but there's nothing backing it,” said Min. Farrakhan.
In the book, “The Fall of America,” the Most Honorable Elijah Muhammad wrote, “One of the greatest powers of America was her dollar. The loss of such power will bring any nation to weakness, for this is the media of exchange between nations.”
“The English pound and the American dollar have been the power and beckoning light of these two great powers. But when the world went off the gold and silver standard, the financial doom of England and America was sealed,” he explained. Mr. Muhammad said further that “the Fall of America is now visible and understandable.
“Long has Allah (God) been gradually removing the power of the great and mighty America while few have noticed it. This has been done by degrees, and they do not perceive it.”
Mr. Muhammad warned America's fall serves as a sign of fate for her European counterparts.
Analysts say introducing the gold dinar as the new medium of exchange would destroy dependence on the U.S. dollar, the French franc and the British pound and threaten the Western world. It would “finally swing the global economic pendulum” that would break Western domination over Africa and other developing economies.
Attacking Col. Gadhafi can be understood in the context of America and Europe fighting for their survival, which an independent Africa jeopardizes.
“Gadhafi's creation of the African Investment Bank in Sirte (Libya) and the African Monetary Fund to be based in Cameroon will supplant the IMF and undermine Western economic hegemony in Africa.”
—Gerald Pereira, an executive board member of the former Tripoli-based World Mathaba
“Gadhafi's creation of the African Investment Bank in Sirte (Libya) and the African Monetary Fund to be based in Cameroon will supplant the IMF and undermine Western economic hegemony in Africa,” said Gerald Pereira, an executive board member of the former Tripoli-based World Mathaba.
The moves are also bad for France because when the African Monetary Fund and the African Central Bank in Nigeria starts printing gold-backed currency, it would “ring the death knell" for the CFA franc through which Paris was able to maintain its neocolonial grip on 14 former African colonies for the last 50 years.
“It is easy to understand the French wrath against Gaddafi,” said Prof. Jean-Paul Pougala of the Geneva School of Diplomacy.
“The idea, according to Gaddafi, was that African and Muslim nations would join together to create this new currency and would use it to purchase oil and other resources in exclusion of the dollar and other currencies,” said political analyst Anthony Wile in an editorial for The Daily Bell online.
According to the International Monetary Fund, Libya's Central Bank is 100 percent state-owned and estimates that the bank has nearly 144 tons of gold in its vaults. If Col. Gadhafi changed the purchasing terms of his oil and other Libyan commodities sold on the world market and only accepted gold as payment; a policy like that wouldn't be welcomed by the power elites who control the world's central banks.
“That would certainly be something that would cause his immediate dismissal,” said Mr.Wile.
Furthermore, pricing oil in something other than the dollar would undercut the pedestal of U.S.. power in the world. Although in trouble, the dollar is the reserve currency based on a deal made with Saudi Arabia in 1971 in which the Saudis, as the world's largest oil producer, agreed to accept only dollars for oil, Mr. Wile observed.
The Libyan affair has sparked a divide in the world community with the African Union and nations like Venezuela, China and Cuba—and until recently Russia—on one side as voices of reason, caution and respect for international law and honoring the UN mandate which set the parameters for engagement in Libya.
On the other side are war hawkish America, France, Britain and Italy pursuing regime change and actively trying to assassinate Col. Gadhafi, though they deny that aim.
“Why all of a sudden, this rush to destroy Gadhafi?” asked Min. Farrakhan during his March 31 press conference on America's Middle East and Libya policy. “I know why you are angry with him; because he never agreed with your policies when it came to sucking the resources of Third World peoples, and putting in place dictators that would be amenable to America's policies.”
Other analysts concur that the control of Africa is front and center as the prize in the scramble to kill Col. Gadhafi and preserve Western domination on the world stage, making the African Union critical at this time.
The AU stood with Libya since NATO forces began their missile bombardment. The AU has also accused Western nations of marginalizing an African solution to an “African problem.”
The AU criticized NATO for bombing Tripoli, targeting Gadhafi family compounds and violating the stated UN mandate to uphold a no fly-zone and protect civilians.
AU negotiations to end the conflict were brokered by South African President Jacob Zuma, which the Libyan government accepted, but were discarded by the rebels who set preconditions—in conjunction with NATO—that demanded Col. Gadhafi's removal.
The AU is the framework the Libyan leader was using to establish African self determination and economic self-sufficiency. Col. Gadhafi financed the restructuring of the former Organization of African Unity—formed by African leaders Dr. Kwame Nkrumah of Ghana, Sekou Toure of Guinea, Gamal Abdel Nasser of Egypt and others—into the AU and revived the concept of a United States of Africa with one continental army and a single currency backed by gold.
However critics of U.S. foreign policy objectives in Africa say efforts toward the continent becoming a unified bloc have been consistently weakened for fear that Africa will leverage more equity and control in the arena of global economics.
But the plan for an independent African currency backed by gold appears to be the real reason behind the frenzied attack on Col. Gadhafi.
“The US, the other G-8 countries, the World Bank, IMF, BIS (Bank for International Settlements), and multinational corporations do not look kindly on leaders who threaten their dominance over world currency markets.”
—John Perkins, author of “Confessions of an Economic Hit Man"
Whenever a government and leader arose that desired to use the resources of that nation for its people, America—through the CIA—would plan insurrections, coups, terrorist activities and even assassination of good leaders, observed Min. Farrakhan.
Despite the ire of Western foes, Muammar Gadhafi gained the clout to lead creation of a single currency because of strong oil profits versus a small population.
“The US, the other G-8 countries, the World Bank, IMF, BIS (Bank for International Settlements), and multinational corporations do not look kindly on leaders who threaten their dominance over world currency markets,” wrote John Perkins, author of “Confessions of an Economic Hit Man,” on Johnperkins.com. It is redolent of Saddam Hussein advocating similar policies shortly before the U.S. invaded Iraq, he said.
“Gadhafi knew how to play the West at their own game. He dared to wield real economic power in the name of Africa and anyone who dares to do so will feel the full wrath of Empire,” remarked. Perrier.
With the hopes of breaking Col. Gadhafi, foreign governments froze nearly $70 billion of Libyan assets belonging to the Libyan Investment Authority, the 13th largest international investment fund in the world. Although designed to hurt Col. Gadhafi, it injures Africa, because Libya assists with development projects throughout Africa.
An example of such projects was installing independent satellite communications across Africa, cutting off an expensive dependency on Europe for the same services. Col. Gadhafi infused $300 million into the project after the IMF, America and Europe broke repeated promises of finance.
In the 1990s forty-five African governments started RASCOM—Regional African Satellite Communication Organization—so Africa would have its own satellite and control communication costs on the continent.
Before RASCOM, costs for telephone calls to and from Africa were the highest worldwide and the continent was burdened with an annual $500 million fee paid to Europe for satellite usage. African satellites cost a onetime payment of $400 million and no annual fee—a move for self determination led by Col. Gadhafi that agitated Europe.
The rebels and collaborators
Since the beginning of the hostilities, the 69-year-old Gadhafi has consistently called for ceasefires and a political solution only to be rebuffed and have NATO missiles aimed at him and his family. However, with the stakes so high, what kind of Libya will emerge if Col. Gadhafi is killed?
“It will not be the rebels and the transitional council who will take power in Libya—it will be the imperialist powers who take over and the implications for Libya will be a complete re-colonization,” said Mr. Pereira.
Some nations officially recognized the NTC as the new legitimate government; however the NTC will face severe challenges as a government post Gadhafi. The NTC and other rebel groups lack cohesive unity, strengthening possibilities for ongoing civil strife.
Furthermore, the insurgency has become a nightmare wrought with hard financial and military questions. Xinhua News-English reported the group is cash poor and has difficulty raising money; while the only commodity available to them is oil, which still belongs the Gadhafi government and is embroiled in UN sanctions.
“I don't have any resources. Not a single dinar came in to the treasury,” lamented NTC oil and finance head Ali Tarhouni during a May 29 press conference. “We only exported one shipment (of oil) and got $150 million for that. So far we've spent $408 million on fuel. It's not a good number.”
The Benghazi-based rebels include remnants of the monarchy deposed by the 1969 Al-Fateh revolution. Several times over the years, the royalists attempted assassination of Col. Gadhafi and destabilization of the revolution, but lacked military ability and popular support.
On May 24, U.S. assistant secretary of state Jeffery Feltman announced the NTC will establish an office in Washington at the invitation of President Barrack Obama. Comparable arrangements exist with France and Britain.
For now, after several months of military intervention, betrayal by former comrades of the revolution and continued assassination attempts by NATO, Muammar Gadhafi is still standing. For the imperialists however, his elimination means the future of their power in Africa.
“Make no mistake, if NATO succeeds in Libya it will be a massive setback for the entire continent,” said Mr. Pereira.
<<<
>>> The Global De-dollarization and the US Policies
http://journal-neo.org/2015/02/02/rus-dedollarizatsiya-i-ssha/
In its quest for world domination, which the White House has been pursuing for more than a century, it relied on two primary tools: the US dollar and military might. In order to prevent Washington from establishing complete global hegemony, certain countries have recently been revising their positions towards these two elements by developing alternative military alliances and by breaking with their dependence on the US dollar.
Until the mid-twentieth century, the gold standard was the dominant monetary system, based on a fixed quantity of gold reserves stocked in national banks, which limited lending. At that time, the United States managed to become the owner of 70% of world’s gold reserves (excluding the USSR), therefore it pushed its weakened competitor, the UK, aside resulting to the creation of the Bretton Woods financial system in 1944. That’s how the US dollar became the predominant currency for international payments.
But a quarter century later this system had proven ineffective due to its inability to contain the economic growth of Germany and Japan, along with the reluctance of the US to adjust its economic policies to maintain the dollar-gold balance. At that time, the dollar experienced a dramatic decline but it was saved by the support of rich oil exporters, especially once Saudi Arabia began to exchange its black gold for US weapons and support in talks with Richard Nixon. As a result, President Richard Nixon in 1971 unilaterally ordered the cancellation of the direct convertibility of the United States dollar to gold, and instead he established the Jamaican currency system in which oil has become the foundation of the US dollar system. Therefore, it’s no coincidence that from that moment on the control over oil trade has become the number one priority of Washington’s foreign policy. In the aftermath of the so-called Nixon Shock the number of US military engagements in the Middle East and other oil producing regions saw a sharp increase. Once this system was supported by OPEC members, the global demand for US petrodollars hit an all time high. Petrodollars became the basis for America domination over the global financial system which resulted in countries being forced to buy dollars in order to get oil on the international market.
Analysts believe that the share of the United States in today’s world gross domestic product shouldn’t exceed 22%. However, 80% of international payments are made with US dollars. As a result, the value of the US dollar is exceedingly high in comparison with other currencies, that’s why consumers in the United States receive imported goods at extremely low prices. It provides the United States with significant financial profit, while high demand for dollars in the world allows the US government to refinance its debt at very low interest rates.
Under these circumstances, those heding against the dollar are considered a direct threat to US economic hegemony and the high living standards of its citizens, and therefore political and business circles in Washington attempt by all means to resist this process.This resistance manifested itself in the overthrow and the brutal murder of Libyan leader Muammar Gaddafi, who decided to switch to Euros for oil payments, before introducing a gold dinar to replace the European currency.
However, in recent years, despite Washington’s desire to use whatever means to sustain its position within the international arena, US policies are increasingly faced with opposition. As a result, a growing number of countries are trying to move from the US dollar along with its dependence on the United States, by pursuing a policy of de-dollarization. Three states that are particularly active in this domain are China, Russia and Iran. These countries are trying to achieve de-dollarization at a record pace, along with some European banks and energy companies that are operating within their borders.
The Russian government held a meeting on de-dollarization in spring of 2014, where the Ministry of Finance announced the plan to increase the share of ruble-denominated contracts and the consequent abandonment of dollar exchange. Last May at the Shanghai summit, the Russian delegation manged to sign the so-called “deal of the century” which implies that over the next 30 years China will buy $ 400 billion worth of Russia’s natural gas, while paying in rubles and yuans. In addition, in August 2014 a subsidiary company of Gazprom announced its readiness to accept payment for 80,000 tons of oil from Arctic deposits in rubles that were to be shipped to Europe, while the payment for the supply of oil through the “Eastern Siberia – Pacific Ocean” pipeline can be transferred in yuans. Last August while visiting the Crimea, Russia’s President Vladimir Putin announced that “the petrodollar system should become history” while “Russia is discussing the use of national currencies in mutual settlements with a number of countries.” These steps recently taken by Russia are the real reasons behind the West’s sanction policy.
In recent months, China has also become an active member of this “anti-dollar” campaign, since it has signed agreements with Canada and Qatar on national currencies exchange, which resulted in Canada becoming the first offshore hub for the yuan in North America. This fact alone can potentially double or even triple the volume of trade between the two countries since the volume of the swap agreement signed between China and Canada is estimated to be a total of 200 billion yuans.
China’s agreement with Qatar on direct currency swaps between the two countries are the equivalent of $ 5.7 billion and has cast a heavy blow to the petrodollar becoming the basis for the usage of the yuan in Middle East markets. It is no secret that the oil-producing countries of the Middle Eastern region have little trust in the US dollar due to the export of inflation, so one should expect other OPEC countries to sign agreements with China.
As for the Southeast Asia region, the establishment of a clearing center in Kuala Lumpur, which will promote greater use of the yuan locally, has become yet another major step that was made by China in the region. This event occurred in less than a month after the leading financial center of Asia – Singapore – became a center of the yuan exchange in Southeast Asia after establishing direct dialogue regarding the Singapore dollar and the yuan.
The Islamic Republic of Iran has recently announced its reluctance to use US dollars in its foreign trade. Additionally, the President of Kazakhstan Nursultan Nazarbayev has recently tasked the National Bank with the de-dollarization of the national economy.
All across the world, the calls for the creation of a new international monetary system are getting louder with each passing day. In this context it should be noted that the UK government plans to release debts denominated in yuans while the European Central Bank is discussing the possibility of including the yuan in its official reserves.
Those trends are to be seen everywhere, but in the midst of anti-Russian propaganda, Western newsmakers prefer to keep quiet about these facts, in particular, when inflation is skyrocketing in the United States. In recent months, the proportion of US Treasury bonds in the Russian foreign exchange reserves has been shrinking rapidly, being sold at a record pace, while this same tactic has been used by a number of different states.
To make matters worse for the US, many countries seek to export their gold reserves from the United States, which are deposited in vaults at the Federal Reserve Bank. After a scandal of 2013, when the US Federal Reserve refused to return German gold reserves to its respective owner, the Netherlands have joined the list of countries that are trying to retrieve their gold from the US. Should it be successful the list of countries seeking the return of gold reserves will double which may result in a major crisis for Washington.
The above stated facts indicate that the world does not want to rely on US dollars anymore. In these circumstances, Washington relies on the policy of deepening regional destabilization, which, according to the White House strategy, must lead to a considerable weakening of any potential US rivals. But there’s little to no hope for the United States to survive its own wave of chaos it has unleashed across the world.
<<<
Brexit - 'Hitch the UK wagon to China’s rising star' -
Note - UK Chancellor of the Exchequer George Osborne represents the dominant faction in the Bank of England, and was key in supporting Brexit. The Queen was reportedly also a supporter. As Tarpley has discussed, Brexit is part of a high stakes plan by an aggressive faction in the UK to create a comprehensive strategic partnership with China. He said this will likely involve a UK/Chinese attack on the hegemony of the US dollar. So just one more example of 'Perfide Albion', or British treachery toward its so-called allies -
>>> Beware the Fatal Flaws of Britain's China Strategy
The UK’s approach to Beijing, while hardly surprising, suffers from several fatal flaws.
The Diplomat
By John Hemmings
October 30, 2015
http://thediplomat.com/2015/10/the-trouble-with-britains-china-strategy/
Chinese President Xi Jinping received the reddest of red-carpet treatments in London last week, with Xi being treated to a 21-gun salute, a royal carriage ride down the Mall, an address to both Houses of Parliament, followed by a State Banquet at Buckingham Palace and a visit to the Prime Minister’s official residence Chequers.
The fact that British Prime Minister David Cameron used the full powers of the British state to welcome the Chinese leader has many wondering about the future of UK-China ties as the two proclaim a new “golden era” of bilateral relations, and agree to create a “global comprehensive strategic partnership.”
While many in London question the timing – this year Beijing mismanaged a stock market slump while simultaneously tightening control over dissidents – the Treasury attitude is simply to bulldoze the new China approach through other departments of government, including a skeptical Foreign Office. The visit and the assumptions it’s based on raise questions about Britain’s tactical understanding of China. After all, as Evan Medeiros, former senior staffer on Asia on President Obama’s National Security Staff, told the Financial Times, “if you give in to Chinese pressure, it will inevitably lead to more Chinese pressure.”
The seemingly ‘new’ mercantilist approach of Chancellor George Osborne is deeply embedded in historical traditions of British foreign policy-making, and has run parallel and sometimes counter to Britain’s values-oriented foreign policy. Long before Henry Kissinger said it, Lord Palmerston claimed that Britain had no “permanent friends or allies, only permanent interests.” Britain has always viewed trade as one of these permanent interests, since power is derived from economic standing. This is evident throughout the last century: the UK was the largest source of long-term foreign direct investment in the United States, played a pivotal role in Japanese industrialization, and was one of Germany’s main trade partners prior to both the first and second world wars. If the new China policy is a mistake, Britain has made it before.
The Soviet Union was the exception to the rule: blame Russian communist views of trade. Therefore, it is unremarkable that Osborne wishes to hitch the UK wagon to China’s rising star. Seen from Whitehall, this approach marries traditional notions of liberal trade internationalism with the promise of profit for City of London financiers. The Downing Street website puts this financial promise at the front of its webpage describing Xi’s visit, claiming it will “unlock” more than $48 billion of commercial deals across energy, finance, technology, and education. The question is whether all this promise will be delivered and at what cost to Britain’s security and freedom of maneuver.
Unlike Britain, China does not prize the bilateral relationship for short-term economic gains, but rather seeks to use British financial acumen to lift itself into ascendancy. The internationalization of the RMB, using London as a trading hub, and a scheme to link the London and Shanghai stock markets – both announced during Xi’s visit – are to build the foundation of a new Chinese order. Xi was not in London just to meet the Queen. He was there to make deals, buying the experience and know-how of the British financial world and he has the cash to close the deal. The $48 billion that he’s put on the table could be just a start: despite the slowing of its economy and huge public debt, China has more than $1.53 trillion in sovereign wealth funds. Furthermore, London would profit immensely from becoming the primary RMB trade hub, which is a very real possibility says Yang Du, head of Thomson Reuters China business desk. Currently, Britain is the eighth largest destination for Chinese investment: when Prime Minister Cameron and Chancellor Osborne said at the Buckingham Palace Banquet that they want Britain to be China’s “best partner in the West,” this is what they mean.
Caution is in order, however. The Osborne Doctrine suffers from several fatal flaws. First, it is hype built on hype. Several economists view Britain’s strategy toward China as over-relying on foreign investment to sustain growth. Rather than passing the costs of building British infrastructure – such as three planned nuclear power plants – on to China, why not borrow at 3 percent and maintain control over processes, control over quality, and most important, maintain the capacity of local industry? This off-shoring is rich in irony: Britain – home to the industrial revolution – is paying China – one of the most recent adherents of the industrial revolution – to finance and make British products in Britain. As if to drive home the point, Xi’s visit was preceded by the bankruptcy of a leading company in the British steel industry, a result of Chinese steel dumping this year.
The second flaw is that China does not seem serious about upholding either the rules-based order that Britain helped build after World War II or the liberal economic and political values implicit in that order. Prime Minister Cameron’s silence over human rights issues for the sake of finance was widely criticized in the British media with Chinese dissident artist Ai Weiwei claiming that it was in the name of profit. The Chinese ambassador had even warned that Xi would be “offended” if human rights were raised during the visit. The main problem with this approach is that it is simply out of step with the British public, which expects an ethical foreign policy from Whitehall. Power and finance are not enough.
This misplaced faith in Chinese investment promises and the willingness to downplay human rights issues have not gone down well in Washington, where London’s embrace of authoritarian China looks increasingly out-of-step with its regional concerns. This is the third flaw of Osborne’s strategy: Britain is out of touch with other liberal democracies like Germany and France and how they balance economic policies with principles. London’s willingness to join the AIIB without consulting or even alerting the G-7 was a major blow to the group, but it also damaged British prestige.
Britain is increasingly out of step with Washington, which sees its trade relationship with China rapidly eclipsed by issues such as cyber security and maritime security in the Asia Pacific. Osborne’s willingness to throw open certain sectors of the economy critical to national security to Chinese investment strikes many as naïve if not dangerous: a 2013 British Parliamentary committee issued a scathing report of the government’s willingness to award large contracts in the telecommunications sector to Huawei, a Chinese company with purported links to the People’s Liberation Army. Though Cameron did receive a joint statement from Xi over cyber security during the visit, it is no stronger than the one Xi gave in Washington, and probably has less meaning.
Finally, there is the flaw of unintended consequences: Beijing’s belief that Britain – a major player in the current liberal rules-based order – is bandwagoning for profit may encourage China to attempt to dismantle the system in favor of one that favors Beijing’s autocratic preferences. No one believes that Britain could play a pivotal role if a conflict broke out in the Asia Pacific, but it may help deter Chinese adventurism. This regional aspect highlights the shortsightedness of the Osborne Doctrine because it assumes that as long as China’s misbehavior occurs in the Asia-Pacific region, it does not impinge on British interests. This belies Britain’s dependence on trade routes that transit the contested South China Sea and East China Sea waters.
President Xi’s carriage ride down the Mall to Buckingham Palace was rich in symbolism; the image of Prime Minister Cameron kowtowing to the Chinese president evokes Britain’s first diplomatic mission to China in 1793, when Lord Macartney traveled to meet the Qianlong Emperor in Peking. His attempt to open trade between the two empires ended in failure as the two held incompatible worldviews and practiced incompatible diplomatic cultures. Seeing President Xi and his wife dressed in Western clothes, in front of a trade delegation to Britain would seem to indicate that two states understand each much better now. However, Cameron’s willingness to trade British principles for investment and significant concessions and market access show that London is no closer to understanding Beijing than it was 250 years ago.
John Hemmings, an adjunct fellow at Pacific Forum CSIS, is a doctoral candidate at the London School of Economics.
<<<
>>> Takng The 'Petro' Out Of The Dollar
Submitted by Alasdair Macleod via GoldMoney.com,
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=122311533
Saudi Arabia has been in the news recently for several interconnected reasons. Underlying it all is a spendthrift country that is rapidly becoming insolvent.
While the House of Saud remains strongly resistant to change, a mixture of reality and power-play is likely to dominate domestic politics in the coming years, following the ascendency of King Salman to the Saudi throne. This has important implications for the dollar, given its historic role in the region.
Last year’s collapse in the oil price has forced financial reality upon the House of Saud. The young deputy crown prince, Mohammed bin Salman, possibly inspired by a McKinsey report, aims to diversify the state rapidly from oil dependency into a mixture of industries, healthcare and tourism. The McKinsey report looks like a wish-list, rather than reality, particularly when it comes to tourism. The religious police are unlikely to take kindly to bikinis on the Red Sea’s beeches, or to foreign women in mini-shorts wandering around Jeddah.
It is hard to imagine Saudi Arabia, culturally stuck in the middle ages, embracing the changes recommended by McKinsey, without fundamentally reforming the House of Saud, or even without a full-scale revolution. Nearly all properties and businesses are personally owned or controlled by members of the extended royal family, not the state, nor by lesser mortals. The principal exception is Aramco, estimated to be worth $2 trillion.
The state is subservient to the House of Saud. It is therefore hard to see how, as McKinsey recommends, the country can “shift from its current government-led economic model to a more market-based approach”. The country is barely government led: a puppet of the Saudis is more like it. But the state’s lack of funds is making it increasingly desperate.
It was for this reason the Kingdom recently placed a $10bn five-year syndicated loan, the first time it has entered capital markets since Saddam Hussein invaded Kuwait. It proposes to raise a further $100bn by selling a 5% stake in Aramco. The financial plan appears to be a combination of this short-term money-raising, contributions from oil revenue, and sales of US Treasuries (thought to total as much as $750bn). The government has, according to informed sources, been secretly selling gold, mainly to Asian central banks and sovereign wealth funds. Will it see the Kingdom through this sticky patch?
Maybe. Much more likely, buying time is a substitute for ducking fundamental reform. But one can see how stories coming out of Washington, implicating Saudi interests in the 9/11 twin-towers tragedy, could easily have pulled the trigger on all those Treasuries.
Whatever else was discussed, it seems likely that this topic will have been addressed at the two special FOMC meetings “under expedited measures” at the Fed earlier this month, and then at Janet Yellen’s meeting with the President at the White House. This week’s holding pattern on interest rates would lend support to this theory.
The White House’s involvement certainly points towards a matter involving foreign affairs, rather than just interest rates. If the Saudis had decided to dump their Treasuries on the market, it would risk collapsing US bond markets and the dollar. Through financial transmission, euro-denominated sovereign bonds and Japanese government bonds, all of which are wildly overpriced, would also enter into free-fall, setting off the global financial crisis that central banks have been trying to avoid.
Perhaps this is reading too much into Saudi Arabia’s financial difficulties, but the possibility of the sale of Treasuries certainly got wide media coverage. These reports generally omitted to mention the Saudi’s underlying financial difficulties, which could equally have contributed to their desire to sell.
While the Arab countries floated themselves on oceans of petro-dollars forty years ago, they have little need for them now. So we must now turn our attention to China, which is well positioned to act as white knight to Saudi Arabia. China’s SAFE sovereign wealth fund could easily swallow the Aramco stake, and there are good strategic reasons why it should. A quick deal would help stabilise a desperate financial and political situation on the edges of China’s rapidly growing Asian interests, and keep Saudi Arabia onside as an energy supplier. China has dollars to dispose, and a mutual arrangement would herald a new era of tangible cooperation. The US can only stand and stare as China teases Saudi Arabia away from America’s sphere of influence.
In truth, trade matters much more than just talk, which is why a highly-indebted America finds herself on the back foot all the time in every financial skirmish with China. Saudi Arabia has little option but to kow-tow to China, and her commercial interests are moving her into China’s camp anyway. It seems logical that the Saudi riyal will eventually be de-pegged from the US dollar and managed in line with a basket of her oil customers’ currencies, dominated by the yuan.
Future currency policies pursued by both China and Saudi Arabia and their interaction will affect the dollar. China wants to use her own currency for trade deals, but must not flood the markets with yuan, lest she loses control over her currency. The internationalisation of the yuan must therefore be a gradual process, supply only being expanded when permanent demand for yuan requires it. Meanwhile, western analysts expect the riyal to be devalued against the dollar, unless there is a significant and lasting increase in the price of oil, which is not generally expected. But a devaluation requires a deliberate act by the state, which is not in the personal interests of the individual members of the House of Saud, so is a last resort.
It is clear that both Saudi Arabia and China have enormous quantities of surplus dollars to dispose in the next few years. As already stated, China could easily use $100bn of her stockpile to buy the 5% Aramco stake, dollars which the Saudis would simply sell in the foreign exchange markets as they are spent domestically. China could make further dollar loans to Saudi Arabia, secured against future oil sales and repayable in yuan, perhaps at a predetermined exchange rate. The Saudis would get dollars to spend, and China could balance future supply and demand for yuan.
It would therefore appear that a large part of the petro-dollar mountain is going to be unwound over time. There is now no point in the Saudis also hanging onto their US Treasury bonds, so we can expect them to be liquidated, but not as a fire-sale. On this point, it has been suggested that the US Government could simply block sales by China and Saudi Arabia, but there would be no quicker way of undermining the dollar’s international credibility. More likely, the Americans would have to accept an orderly unwinding of foreign holdings.
The US has exploited the dollar’s reserve currency status to the full since WW2, leading to massive quantities of dollars in foreign ownership. The pressure for dollars to return to America, when the Vietnam war was wound down, was behind the first dollar crisis, leading to the failure of the London gold pool in the late sixties. After the Nixon Shock in 1971, the cycle of printing money and credit for export resumed.
In the seventies, higher oil prices were paid for by printing dollars and by expanding dollar bank credit, in turn kept offshore by lending these exported dollars to Latin American dictators. That culminated in the Latin American debt crisis. From the eighties onwards, the internationalisation of business was all done on the back of yet more exported dollars, and wars in Iraq and Afghanistan echoed the earlier wars of Korea and Vietnam.
Many of these factors have now either disappeared or diminished. For the last eighteen months, the dollar had a last-gasp rally, as commodity and oil prices collapsed. The contraction in global trade since mid-2014 had signalled a swing in preferences from commodities and energy towards the money they are priced in, which is dollars. The concomitant liquidation of malinvestments in the commodity-exporting countries has been contained for now by aggressive monetary policies from China, Japan and the Eurozone. The tide is now swinging the other way: preferences are swinging out of the dollar towards oversold commodities again, exposing the dollar to a second version of the gold pool crisis. This time, China, Saudi Arabia and the BRICS will be returning their dollars from whence they came.
In essence, this is the market argument in favour of gold. Over time, the price of commodities and their manufactured derivatives measured in grams of gold is relatively stable. It is the price measured in fiat currencies that is volatile, with an upward bias. The price of a barrel of oil in 1966, fifty years ago, was 2.75 grams of gold. Today it is 1.0 gram of gold, so the purchasing power of gold measured in barrels of oil has risen nearly three-fold. In dollars, the prices were $3.10 and $40 respectively, so the purchasing power of the dollar measured in barrels of oil has fallen by 92%. Expect these trends to resume.
This is also the difference between sound money and dollars, which has worked to the detriment of nearly all energy and commodity-producing countries. With a track-record like that, who needs dollars?
It is hard to see how the purchasing power of dollars will not fall over the rest of the year. The liquidation of malinvestments denominated in external dollars has passed. Instead, the liquidation of financial investments carry-traded out of euros and yen is strengthening those currencies. That too will pass, but it won’t rescue the dollar.
<<<
>>> China Goes After Russian Oil Giant Rosneft, Deals Fly
Forbes
4-21-16
Kenneth Rapoza
http://www.forbes.com/sites/kenrapoza/2016/04/21/china-goes-after-russian-oil-giant-rosneft-deals-fly/?utm_campaign=yahootix&partner=yahootix#191b77be2093
Anyday now we will here that all that metal China is mining isn’t really designed for job creation and dumping steel into the world, it’s for building oil storage tanks. With a world awash in crude, China’s state owned oil giant CNPC is looking to become a major shareholder in Rosneft to have access to more of it. For those who don’t know, Rosneft is Russia’s biggest oil producer. The company had a joint venture with ExxonMobil a while back in the Kara Sea, but Washington put a stop to it because of sanctions in retaliation for Russian involvement in Ukrainian politics.
Meanwhile, the Chinese are hoping to bankroll the Russian company as it opens more of its shares to the market. Ironically, Rosneft will go from being a majority Russian state owned enterprise to a majority Russia and Chinese owned one.
Russia’s First Deputy Energy Minister Alexei Teksler said China’s National Petroleum Corporation (CNPC) was interested in Russia’s privatization plan.
China said the same. “Yes, we are considering this,” CNPC’s Wang Zhongcai reportedly said, adding that the company is conducting their due diligence on the deal.
Under the state privatization plan, Rosneft is expected to privatize 19.5% of its state shares this year. The Russian government currently owns 69.5% of Rosneft, with the rest of the shares free-floating in the market.
Vladimir Putin has stated numerous times that he was continuing with privatization plans of beloved state assets, a process that has largely stalled since he took over the government nearly a decade ago. He warned in 2014 and again in 2015 that selling oil assets when prices were depressed wouldn’t be prudent. Oil prices remain in the low $40s per barrel, but Rosneft shares are doing well. The Micex traded shares are up 27% year-to-date, beating the forex which has the dollar down nearly 10%.
It is strange that Russia is considering moving ahead with the sale, though the country has been cozying up to the Chinese ever since Europe slapped it with sanctions in 2014 on account of its support of separatists in eastern Ukraine. Rosneft is be part of other billion dollar energy deals flying between the two countries, which include a Gazprom natural gas line into China. There’s also a proposed agricultural joint venture on the Mongolian border, and ongoing moves to connect the Moscow exchange with Shanghai to facilitate local currency hedging and forex settlement as a means to diversify commerce from the dollar. It is unclear where those projects stand at this time.
Russia’s government, meanwhile, is not all that bullish on oil.
The Russian Ministry of Economic Development’s base case scenario for crude is $40, while a worst case scenario has it priced at $25.
<<<
>>> China's Silk Road revival steams ahead as cargo train arrives in Iran
Goods travel 6,462 miles in 14 days as part of efforts to resurrect ancient trade route connecting east with Europe
Saeed Kamali Dehghan
15 February 2016
http://www.theguardian.com/business/2016/feb/15/chinas-silk-road-revival-steams-ahead-as-cargo-train-arrives-in-iran
A long-distance cargo train has travelled from China to Iran as part of an attempted revival of the ancient Silk Road, a trans-Asian trade route connecting the east to Europe and the Mediterranean Sea.
The 32-container train, which arrived in Tehran on Monday, took 14 days to complete the 6,462 mile (10,399km) journey from China’s eastern Zhejiang province through Kazakhstan and Turkmenistan – one month less than the sea route from Shanghai to the Iranian port of Bandar Abbas.
Iranian officials have indicated that the ultimate aim is to extend the rail route to Europe, positioning Iran on a key stretch to the continent. The train, which departed from Zhejiang’s trading hub Yiwu, travelled an average of more than 700km a day.
“Countries along the Silk Road are striving to revive the ancient network of trade routes,” said Mohsen Pour Seyed Aghaei, president of the Islamic Republic of Iran Railways company, according to Iran’s semi-official Mehr news agency. “The arrival in Tehran of the train in less than a fortnight has been an unprecedented achievement.”
He said the train had outstripped “truck and road transport” and demonstrated the great advantage of the route.
China is Iran’s biggest trading partner. Commercial ties continued despite decade-long international sanctions over Tehran’s nuclear programme, which were lifted in January after last year’s landmark nuclear deal.
Last month, Chinese president Xi Jinping became the first global leader to visit Tehran since the sanctions were lifted. The two nations signed an agreement on boosting trade to $600bn (£420bn) over the next decade.
The revived Silk Road is envisioned as a rail and sea route, part of China’s “One Belt, One Road” economic development strategy. An Iranian container ship, the Perarin, arrived in Guangxi in southern China last month, delivering 978 containers from a number of countries along the maritime route.
“Iran is strategically located in the Middle East, sharing land borders with 15 nations and sea channels on its northern and southwestern coasts,” said Iran’s state-owned Press TV. “China sees Iran as a country that can play a crucial role in China’s New Silk Road initiative, given its access to extensive delivery routes connecting to the Middle East and Eurasia.”
In October 2014, a long-distance luxury train, operating in the style of the Orient Express, arrived in the Iranian city of Zanjan from Budapest – the first time a European private train had been permitted to enter Iranian territory. Prices for the two-week tour on the Golden Eagle Danube Express ranged from £8,695 to £13,995 per person.
<<<
>>> Saudi Arabia To Drop Dollar Peg? Amid Slumping Oil Prices, Kingdom Could Reduce Budget Deficit
By Michael Kaplan
12/29/15
http://www.ibtimes.com/saudi-arabia-drop-dollar-peg-amid-slumping-oil-prices-kingdom-could-reduce-budget-2242687
Saudi Arabia could be considering abandoning its currency peg against the dollar, analysts have said, according to CNBC Tuesday. The speculation comes following an announcement of plans to reduce Saudi Arabia’s state budget amid a major budget deficit due to slumping oil prices.
The Saudi government in recent days has announced significant spending cuts, as well as plans to diversify the economy and generate revenue from sources other than oil. The kingdom ran a deficit of nearly $98 billion in 2015, according to the Council of Economic and Development Affairs, Reuters reported Monday.
"Something needs to happen [in Saudi Arabia], and it's not clear what is going to happen — whether the budget's going to be corrected or if there needs to be something on the monetary policy side, and here I'm specifically talking about the currency peg," Michael Cirami, a vice president of Eaton Vance Management, told CNBC.
The sharp drop in oil prices against a strengthening dollar has made Saudi Arabia’s peg to the dollar inconvenient, but as the oil market tends to be dominated by the dollar, it was in the past a suitable peg for the oil-reliant nation. Dropping the dollar peg could cause prices to shoot up, however, as Saudi imports a number of goods. On the other hand, it could make exports more attractive due to a weaker currency.
"It's not something for now or possibly 2016, but when you look out a bit further the pressures are going to be there," Cirami said.
A 2016 Saudi budget unveiled Monday plans for $224 billion in spending on $137 billion in revenue. The budget assumes the average price of crude will rise to $45 per barrel next year. It now sits at around $37 per barrel. Nearly three-fourths of Saudi Arabia’s revenue comes from oil, despite yearslong efforts to diversify the economy.
<<<
>>> 7 Countries Considering Abandoning the US Dollar (and What It Means)
By Jessica Merritt
Nov 2007
http://www.currencytrading.net/features/7-countries-considering-abandoning-the-us-dollar-and-what-it-means/
It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.
1.Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking "appropriate measures" to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with "recessionary conditions" in the US. Hans Redeker of BNP Paribas believes this creates a "very dangerous situation for the dollar," as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a "stampede" from the dollar in the Middle East, a region that manages $3,500 billion.
2.South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
3.China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a "nuclear option" of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China "doesn’t want any undesirable phenomenon in the global financial order," their large sum of US dollars does serve as a "bargaining chip." As we’ve noted in the past, China has the power to take the wind out of the dollar.
4.Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they "take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers," or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
5.Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are "not feasible." Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
6.Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
7.Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow "oil, gas, and other goods to be paid for in Roubles." Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, "Most of our reserves are in dollars, and that’s a cause for concern." He went on to explain that, after considering the dollar’s rate against the euro, Russia is "discussing the possibility of changing the reserve structure." Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
What does this all mean?
Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.
Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.
<<<
>>> Germany looking to join the BRICS
?
July 25, 2014
http://www.hangthebankers.com/germany-looking-to-join-the-brics/
Financial analyst Jim Willie sensationally claims that Germany is preparing to ditch the unipolar system backed by NATO and the U.S. in favour of joining the BRICS nations, and that this is why the NSA was caught spying on Angela Merkel and other German leaders.
In an interview with USA Watchdog’s Greg Hunter, Willie, a statistical analyst who holds a PhD in statistics, asserted that the real reason behind the recent NSA surveillance scandal targeting Germany was centered around the United States’ fear that Europe’s financial powerhouse is looking to escape from an inevitable dollar collapse.
“I think they are looking for details on assisting Russia on dumping the dollar. I think they are looking for details for a secret movement for Germany to get away from the dollar and join the BRICS (Brazil, Russia, India, China and South Africa.) This is exactly what I think they are going to do,” said Willie.
Earlier this month, the BRICS nations (Brazil, Russia, India, China and South Africa), announced the creation of a new $100 billion dollar anti-dollar alternative IMF bank to be based in Shanghai and chaired by Moscow.
Putin launched the new system by saying it was designed to, “help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies,” a clear signal that Russia and other BRICS countries are moving to create a new economic system which is adversarial to the IMF and the World Bank.
Merkel and Putin
Offering an insight into the attitude of the western elite towards Russia, comments made by the likes of former US ambassador to Iraq Christopher R. Hill suggest that Moscow is increasingly being viewed as a rogue state. Back in April, Hill said that Russia’s response to the Ukraine crisis meant that Moscow had betrayed the “new world order” it has been a part of for the last 25 years.
In another sign that BRICS nations are moving to create an entirely new multi-polar model adversarial to the west, the five countries are also constructing an alternative Internet backbone which will circumvent the United States in order to avoid NSA spying.
Willie also ties the Germany’s move into last week’s shoot down of Malaysia Airlines Flight 17, which has been exploited by the U.S. and Britain to push for more stringent sanctions on Russia despite the fact that they have had little effect so far and only appear to be harming the trade interests of countries in mainland Europe.
“Here’s the big, big consequence. The U.S. is basically telling Europe you have two choices here. Join us with the war against Russia. Join us with the sanctions against Russia. Join us in constant war and conflicts, isolation and destruction to your economy and denial of your energy supply and removal of contracts. Join us with this war and sanctions because we’d really like you to keep the dollar regime going. They are going to say were tired of the dollar. . . . We are pushing Germany. Don’t worry about France, don’t worry about England, worry about Germany. Germany has 3,000 companies doing active business right now. They are not going to join the sanctions—period.”
<<<
>>> UK snubs US to join China-led Asian bank
March 13, 2015
http://thebricspost.com/uk-snubs-us-to-join-china-led-asian-bank/#.Vppe_pX2bht
Overlooking US censure, the UK has announced its decision to join China’s Asian Infrastructure Investment Bank, becoming the first “major western country” to apply for membership.
“I am delighted to announce today that the UK will be the first major Western country to become a prospective founder member of the Asian Infrastructure Investment Bank, which has already received significant support in the region,” said UK Finance Minister George Osborne on Thursday.
“Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together,” he added.
In a landmark achievement, 21 Asian nations including China and India in October last year signed on the creation of a new infrastructure investment bank which would rival the World Bank. The new Bank has a capital target of more than $100 billion.
The governments of Bangladesh, Brunei Darussalam, Cambodia, China, India, Kazakhstan, Kuwait, Lao PDR, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, Philippines, Uzbekistan, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan, Vietnam signed on as founding members of the new Asia Infrastructure Investment Bank (AIIB) in Beijing.
“The UK will join discussions later this month with other founding members,” said a UK government statement on Thursday.
Washington reacted to UK’s announcement by saying it is circumspect about whether the AIIB would have sufficiently high standards on governance and environmental and social safeguards.
“We hope and expect that the U.K. will use its voice to push for adoption of high standards,” said Patrick Ventrell, spokesman for President Barack Obama’s National Security Council
The authorized capital of AIIB is $100 billion and the initial subscribed capital is expected to be around $50 billion. The paid-in ratio will be 20 per cent.
AIIB will be an inter-governmental regional development institution in Asia and Beijing will be the host city for AIIB’s headquarters.
The AIIB will extend China’s financial reach and compete not only with the World Bank, but also with the Asian Development Bank, which is heavily dominated by Japan.
China and other emerging economies, including BRICS, have long protested against their limited voice at other multilateral development banks, including the World Bank, International Monetary Fund and Asian Development Bank (ADB).
China is grouped in the ‘Category II’ voting bloc at the World Bank while at the Asian Development Bank, China with a 5.5 per cent share is far outdone by America’s 15.7 per cent and Japan’s 15.6 per cent share.
The ADB has estimated that in the next decade Asian countries will need $8 trillion in infrastructure investments to maintain the current economic growth rate.
China scholar Asit Biswas at the Lee Kuan Yew School of Public Policy, Singapore, says Washington’s criticism towards the China-led Bank is “childish”.
“Some critics argue that the AIIB will reduce the environmental, social and procurement standards in a race to the bottom. This is a childish criticism, especially because China has invited other governments to help with funding and governance,” he says.
“Reports indicate that the US is pressuring Australia and South Korea not to join the AIIB. But as Hedley Bull, eminent late Oxford professor, once said, “people have friends but countries have only interests”, he adds.
<<<
>>> IMF admits China's yuan to elite currency club
By Sophia Yan
http://money.cnn.com/2015/11/30/investing/imf-yuan-reserve-currency/index.html
China's yuan has just won promotion to the premier league of global currencies.
The International Monetary Fund on Monday approved the yuan for inclusion in its elite basket of reserve currencies in what amounts to a major vote of confidence in Beijing's economic reforms.
IMF Managing Director Christine Lagarde said the decision represented "an important milestone" in China's integration into the global financial system.
"It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," she said in a statement.
Known as the Special Drawing Rights basket, the group of currencies is used to value assets held by central banks to help countries defend against exchange rate fluctuations. The IMF reviews the basket every five years, and it includes the dollar, euro, British pound and Japanese yen.
Inclusion is largely symbolic but it should give the yuan a boost on the world stage, and could give countries more confidence to hold the currency.
The yuan, also called the renminbi, will take its place alongside the other major world currencies on October 1. 2016. It was trading at about 6.40 to the U.S. dollar on Monday.
Premier status for the yuan is a triumph for China, which has campaigned for years to have its currency recognized internationally.
In 2010, it failed a previous review to join the IMF's basket because it didn't meet the organization's criteria for currencies to be freely tradeable and convertible.
Beijing has historically kept tight control of its currency -- a cheap yuan has helped boost exports and manufacturing -- drawing criticism from the U.S. government for keeping its value artificially low.
China's central bank still sets its daily exchange rate, allowing the yuan to fluctuate within a fixed range. But Beijing has begun to loosen its grip -- last year, the central bank doubled the permitted trading range for the yuan.
And in August, the People's Bank of China surprised markets by announcing that the midpoint would be based on the previous day's closing price.
That prompted a devaluation of the yuan, which is down nearly 3% against the dollar this year. Concerns that the yuan may continue to lose value has prompted plenty of people to take money out of China -- around $500 billion as of October.
While the IMF has long taken a skeptical view of the yuan, its approach has been shifting recently.
Earlier this month, IMF staff recommended that the yuan be included in the SDR basket, determining that it was now "freely usable."
While Monday's move is a stamp of approval, Beijing still needs to do more "to open up China's capital accounts and convince global reserve managers to invest meaningfully in Chinese reserve-related assets," wrote Koon How Heng, a foreign exchange analyst at Credit Suisse in a research note.
<<<
>>> US adds muscle, seeks friends in South China Sea standoff
USA Today
Kirk Spitzer
http://www.msn.com/en-us/news/world/%e2%80%8bus-adds-muscle-seeks-friends-in-south-china-sea-standoff/ar-BBlZCjN
Aug 22, 2015
South Korea and North Korea agreed Saturday to hold their first high-level talks in nearly a year at a border village to defuse mounting tensions that have pushed the rivals to the brink of a possible military confrontation. (The South Korean Unification Ministry via AP)
Rival Koreas restart talks, pull back from brink - for now
ABOARD USS FORT WORTH IN THE JAVA SEA – Cmdr. Chris Brown looked at the line of warships behind him and didn’t like what he saw.
An Indonesian ship, KRI John Lie, had crept too close in an attempt to spot an “enemy” submarine lurking nearby. But when Brown relayed directions for the John Lie to ease back, the ship cut speed too quickly and forced others in line to veer off in all directions.
“Well, that’s why we practice these things,” Brown said, assessing the ragged formation.
The drill was part of a recent four-day exercise in which American and Indonesian forces stormed beaches, boarded ships, hunted submarines and practiced the wide range of skills they’d need if called upon to fight together in wartime.
While no one mentioned China by name, the increasing number and complexity of joint exercises with friendly countries in the region forms a key part of the U.S. response to China’s growing military strength and assertiveness.
"(The) exercises help to build skills among Southeast Asian navies, and importantly build relationships between the U.S. and Southeast Asian countries. They help participating Southeast Asian navies exercise and prepare for real-world scenarios,” said Bonnie Glaser, senior adviser for Asia at the Center for Strategic and International Studies.
So far this year, the U.S. has conducted joint exercises with naval forces in Singapore, Vietnam, the Philippines, Malaysia and Indonesia. All those countries have territory that borders the disputed South China Sea. Other joint exercises are planned later this year.
China has asserted ownership of nearly all of the South China Sea and is building at least seven artificial islands in the key waterway. Parts of the region are also claimed by five other countries, including three of this year’s training partners.
“These exercises allow the U.S. to show its flag and maintain access to the South China Sea, building capacity for regional partners. It sends a political signal to China, but more importantly, to the region as a whole,” said Tetsuo Kotani, senior fellow and maritime security specialist at the Japan Institute of International Affairs in Tokyo.
U.S. officials say they do not take sides in territorial disputes. But they worry that China could use the new islands — at least one of which includes a military-grade runway and deepwater harbor — to assert control over air and sea navigation and have called on China to halt construction.
Not only are U.S. forces training with more countries in the region than in past years, but the exercises — most of which fall under a program known as Cooperation Afloat and Readiness Training, or CARAT — are more ambitious.
A CARAT exercise with Indonesia last year, for example, included just two warships and was limited largely to basic sailing skills. This year’s exercise included seven warships, along with reconnaissance planes, helicopters, patrol boats and hundreds of U.S. Marines.
“CARAT is becoming increasingly complex each year, and the U.S. Navy is bringing the latest and most advanced assets,” said Navy Lt. Lauryn Dempsey, a spokesperson for the CARAT program.
The U.S. military's new emphasis on Asia has been criticized as more rhetoric than reality. Although the Navy has announced plans to shift 60% of its ships and planes to the Asia-Pacific region, relatively few additional troops or equipment have been dispatched to the region since China began flexing its muscles in 2010.
Nonetheless, the U.S. has been quietly modernizing and building up its forces in the region. The USS Fort Worth, for example, is among the first of a new class of fast, high-tech warship designed to operate in shallow waters like those in the South China Sea. It began a 16-month deployment to Singapore in December. The U.S. plans to have at least four of the new Littoral Combat Ships (LCS) operating from Singapore by 2018.
The U.S. 7th Fleet, based in Yokosuka, Japan, is swapping out many of its most powerful warships for brand-new or modernized versions, and adding new ships and planes, as well. Early next month, the aircraft carrier USS George Washington, commissioned in 1992, will be replaced by the USS Ronald Reagan, a newer model whose engines and other systems were recently upgraded.
The fleet also has swapped two amphibious assault ships, a cruiser, two destroyers and two minesweepers with new or modernized vessels of the same type. The new cruiser and destroyers are equipped with the latest ballistic missile defense systems, and two new missile defense destroyers will be added to the fleet by the end of 2017.
The Navy also has begun exchanging older P-3C patrol planes for state-of-the-art P-8s, which can cruise the length of the South China Sea from bases in Okinawa.
“Having more LCS’s out here, having more and more of the most capable weapons systems and platforms in 7th Fleet — that demonstrates that we are committed” in the region, said Navy Capt. H.B. Le, who commanded U.S. forces in the Indonesia exercise.
<<<
>>> Is Saudi Arabia Leaving The U.S. Behind For Russia?
By Robert Berke
01 July 2015
http://oilprice.com/Energy/Crude-Oil/Is-Saudi-Arabia-Leaving-The-US-Behind-For-Russia.html
The news from the recent St. Petersburg Economic Forum, which took place from June 18 to 20, inspired a torrent of speculation on the future direction of energy prices.
But the real buzz at the conference was the unexpected but much publicized visit of the Saudi Deputy Crown Prince, as an emissary of the King. The Prince, who is also his country’s Defense Minister, carried the royal message of a direct invitation to President Putin to visit the King, which was immediately accepted and reciprocated, with the Prince accepting on behalf of his father.
It would be news enough that the unusually high level delegation from a long-time ally and protectorate of the U.S., like Saudi Arabia, was visiting a Russian sponsored economic conference, in a country sanctioned by the U.S.
Some saw this well publicized meeting as the first sign of an emerging partnership between the two greatest global oil producers. If the warmth of the meeting was any evidence, it seems likely that Russia, a non-OPEC producer, might come a lot closer to the fold.
That could mean that, at the very least, Russia would have a voice in the cartel’s policy decisions on production. And if so, it would be a voice on the side of stable but rising prices.
The great Indian journalist, M.K. Bhadrakumar (MKB), may have been the first to point out that there was plenty of reasons for the Saudis and Russians to come closer together. Among these are the U.S.’ diminishing dependence on Middle Eastern energy, due to the momentous development of shale resources. There’s also the over-riding goal of the U.S. to pivot toward the East, where a huge economic transformation is unfolding, while reducing the U.S. role in the Middle East. It’s clear that the Saudis are going to have to make new friends.
MKB also makes the point that although the Saudis are wildly opposed to any form of U.S. entente with Iran, the clear-eyed Kremlin understands that there are many temptations for its erstwhile ally, Iran, to move much closer to the west.
Pepe Escobar of Asia Times saw the Prince’s visit as harboring the first glimmer of light in ending the current global oil trade war, in which the Saudi’s might turn down the spigot and lower production, enabling prices to rise:
“Facts on the ground included Russia and Saudi Arabia’s oil ministers discussing a broad cooperation agreement; the signing of six nuclear technology agreements; and the Supreme Imponderable; Putin and the deputy crown prince discussing oil prices. Could this be the end of the Saudi-led oil price war?”
Bullish oil traders thought they found some hope in the words of Ali al-Naimi, the famous and longtime President and CEO of the Saudi National Oil Company, Aramco, and current oil minister. Naimi publicly stated: “I am optimistic about the future of the market in the coming months in terms of the continuing improvement and increasing global demand for oil as well as the low level of commercial inventories.” This, the minister said, should lead to higher oil prices by year's end.
Ali al-Naimi publicly praised the enhanced bilateral cooperation between Riyadh and Moscow, stating that, “[t]his, in turn, will lead to creating a petroleum alliance between the two countries for the benefit of the international oil market…"
This could be music to the ears of oil price bulls. But more skeptical minds were quick to clamp down excessive optimism. “Of course, we shouldn’t read into any new developments outside political frameworks, because I can hardly imagine that Saudi Arabia has decided to turn against its alliances—but it probably wants to get out of the narrow US corner and expand its options,” Abdulrahman Al-Rashed, the General Manager of Al Arabiya News Channel, wrote in a column after the summit.
At the meeting, the Saudis and Russians signed several memoranda of understanding including the development of nuclear power plants in the Kingdom, with the Saudis planning some 16+ plants
The two sides also plan on setting up working groups to study other possible energy joint ventures in Russia. Russia also agreed to the construction of railways and metro subways for the Saudis. Russia is also believed to have agreed to supply advanced military defense equipment to the Kingdom, despite the Saudis being long time arms customers of both the UK and U.S.
However there is quite a bit of doubt that the U.S. is ready to just step aside and be replaced by Russia as the Saudis’ main ally. Saudi Arabia and Russia are on opposite sides on a range of geopolitical issues, including Iran, Syria, and Yemen. These conflicts will likely put a limit on any potential entente.
Also, there is serious doubt as to whether it is so simple for the Saudis to raise oil prices. Flooding the markets with oil to crash prices only requires the Saudis to over-produce by some one and a half million barrels of oil per day, easily within their grasp, and something the Saudis can do on their own.
Bringing prices up is a different story, requiring global oil producers to comply in oil cutbacks.
At the same time, rising prices are a clear signal to global producers to increase production, worsening the current glut, so that any price increase may prove to be temporary.
And yet, the fact is prices have been rising since the first of the year, and many are convinced there is more to go. C. DeHaemmer, a well-known energy newsletter writer, is now predicting a price rise by WTI to a range of $73-$78, and a Brent range of $82-85, by years end. Not impossible, but long term, the issue becomes cloudier.
On a different matter, there was another surprise announcement at the forum, with India, a longtime U.S. ally, confirming that it will sign a free trade agreement with the Eurasian Economic Union (EEU), a Russian-led trade bloc including Belarus and Kazakhstan.
Russia and China have agreed on making the EEU a central part of the Chinese sponsored Silk Road, so by default, it would appear that India is moving towards joining the grand Chinese project.
As has become standard at the St. Petersburg Forum, a number of energy deals were signed, including a BP deal to buy a major stake in a Siberian oil field owned by Rosneft, a company suffering under international sanctions. BP, as a twenty percent stakeholder in Rosneft, says it is seeking to expand on its joint ventures with the Russian company
Another deal was signed with Gazprom to build a second pipeline under the Baltic, following the path of Nordstream to Germany, in partnership with Royal Dutch Shell, Germany's E.ON, and Austria's OMV. Apparently, Western Europe's oil giants find Russian sanctions to be no hindrance in dealing with Russian energy companies.
After his onstage TV interview with Putin, Charlie Rose, the well-known TV celebrity, was asked why he had decided to become a moderator at the Forum. He said, “I believe it’s important to talk to people.”
In the meantime, the U.S. reporter, with camera man in tow, found nothing of interest to report at the conference.
By Robert Berke for Oilprice.com
<<<
Wow, surprise move by China.
My first thought was that it's an 'FU' response by China to the recent IMF decision not to include the Yuan in the SDR/Special Drawing Rights basket (decision was due in Oct). The IMF have indicated that inclusion of the Yuan won't happen until Fall of 2016 at the earliest, thus dashing China's hopes to gain clout within the IMF. Also, the US has been trying to get China to raise the value of the Yuan for years, so now China responds with an abrupt devaluation instead, out of the blue, a week after the IMF's negative decision on the SDR.
The West also screwed China in June when the promise to include the Shanghai Exchange's 'A' shares in the widely followed MSCI index was reversed, sending the Shanghai stock index into its 30% plunge. Inclusion in the MSCI would have meant trillions in new investment coming into China, and anticipation of this inclusion was a big factor behind the Shanghai index's huge runup since last Fall.
So.. it appears the US/West's war against the BRICS is heating up. Russia has been attacked by sanctions and the huge orchestrated drop in oil prices, and now China is being attacked by the West. Brazil is also in disarray. So the war to derail the BRICS juggernaut is accelerating. Bare knuckle time approaches?
>>> China Devalues Its Currency as Worries Rise About Economic Slowdown
By NEIL GOUGH and KEITH BRADSHER
AUG. 10, 2015
http://www.nytimes.com/2015/08/11/business/international/china-lowers-value-of-its-currency-as-economic-slowdown-raises-concerns.html?_r=0
HONG KONG — As China contends with an economic slowdown and a stock market slump, the authorities on Tuesday sharply devalued the country’s currency, the renminbi, a move that could raise geopolitical tensions and weigh on growth elsewhere.
The central bank set the official value of the renminbi nearly 2 percent weaker against the dollar. The devaluation is the largest since China’s modern exchange-rate system was introduced at the start of 1994.
China’s abrupt devaluation is the clearest sign yet of mounting concern in Beijing that the country could fall short of its goal of roughly 7 percent economic growth this year. Growth is faltering despite heavy pressure on state-owned banks to lend money readily to companies willing to invest in new factories and equipment, and despite a stepped-up tempo of government spending on high-speed rail lines and other infrastructure projects.
A steep drop in the Shanghai and Shenzhen stock markets in late June and early July, only halted by aggressive government actions, appears to have dented consumer demand within China. The China Association of Automobile Manufacturers announced on Tuesday that nationwide car sales fell 7 percent last month compared with a year ago. Excluding months distorted by the timing of Chinese New Year, it was the steepest drop in sales since December 2008, at the depths of the global financial crisis.
What’s the Latest China’s central bank devalued the currency, the renminbi, by 2 percent against the dollar on Tuesday.
The move is the biggest one-day depreciation since the country's modern exchange rate system came into place in 1994.
It reflects the weakness in the Chinese economy.
A weaker currency would make goods more affordable for overseas buyers, but it risks tensions with trading partners like the United States.
China will give the market a bigger role in exchange rates as it tries to have the renminbi included as a global reserve currency like the dollar.
Weakening the currency raises the risk money will flow out of the country, but the central bank has trillions of dollars in reserves as a safety net.
China’s devaluation represents a difficult dilemma for the Obama administration. The United States Treasury has tried to use quiet diplomacy in recent years to encourage China to free up its currency policies, while blocking efforts in Congress to punish China for major intervention in currency markets over the past decade to slow the rise of the renminbi. Many in Congress have long accused China of unfairly building up its manufacturing sector at the expense of American jobs by undervaluing the renminbi, and the Chinese devaluation could fan those criticisms.
In a seeming nod to such concerns, the central bank said that it would begin to use the market closing, not the previous morning’s official setting, to calculate the renminbi’s official daily fixing against the dollar. But China’s economic weakness now means that further opening up of the currency to market forces could mean a weaker renminbi, not a stronger one. That, in turn, would make Chinese goods even more competitive in the United States and Europe.
China’s central bank “has finally thrown in the towel on supporting the renminbi,” said Eswar S. Prasad, a professor of economics at Cornell University. At the same time, he added, easing its grip on the currency’s value “has blunted criticism by combining the currency devaluation with a more market-determined exchange rate.” The United States and institutions such as the International Monetary Fund have called on China to be more hands-off in managing the renminbi.
The Chinese currency has been a global point of contention for nearly a decade. China officially ended the renminbi’s fixed peg to the dollar in 2005. Since then, it has risen in two long, slow climbs. The first was from July 2005 to August 2008, when it was interrupted by the global financial crisis. The renminbi then resumed its rise from June 2010 to early last year, when it dipped slightly, then stabilized.
The overall increase since 2005 has been more than 25 percent against the dollar. It has strengthened even more against other major currencies, like the euro and the yen.
But the Chinese currency is not freely tradable, and its movements are tightly controlled by the government.
Each morning in Shanghai, China’s central bank sets a midpoint for the renminbi’s value against the dollar and other major currencies. This can be as much as 2 percent higher or lower than the previous day’s value, although the change is almost always a tiny fraction of 1 percent.
But on Tuesday, the central bank fixed the value of the renminbi at 6.2298 per dollar, down 1.9 percent from Monday’s official fixing. In a statement on its website, the central bank said it was seeking “to perfect” the renminbi’s exchange rate against the dollar.
The bank, the People’s Bank of China, said it was reacting to trends in the market, where traders in recent months had been betting on a weaker renminbi. In trading in mainland China on Tuesday, the renminbi weakened further to close at 6.3231 per dollar, a drop of 1.8 percent from the close on Monday. By the end of the Asian business day, it had fallen even further in offshore trading to around 6.36 renminbi per dollar, a drop of about 2.7 percent, signaling overseas investors expected further weakening.
The move also jolted the currencies of countries that depend heavily on China as a market for exports. The Australian dollar fell 1.1 percent against the United States dollar on Tuesday, and the South Korean won declined 1.4 percent.
“While China’s policy makers have long suggested that foreign exchange reforms would happen, the abrupt nature of today’s announcement has injected considerable volatility into the renminbi and other Asian currencies,” analysts at HSBC wrote Tuesday in a research note.
The central bank also said it would seek to prevent what it described as “abnormal” capital flows. Weaker economic growth has prompted sizable outflows from China in recent months, which have most likely been exacerbated by the country’s stock market volatility. A falling renminbi generally increases the risk of more outflows.
While China grew at a 7 percent rate in the first half of the year, that was made possible mainly because of a boost from the financial services industry, which benefited from the country’s stock market boom. With the downturn in the nation’s markets over the past two months, growth is slowing more evidently.
This is despite an all-out effort by the government to prop up share prices. The measures included extraordinary support from state-run banks, which in July made new loans worth 1.5 trillion renminbi, or about $240 billion at the time, according to data released Tuesday. The last time Chinese banks approached that amount of lending was 2009, when Beijing was deploying 4 trillion renminbi in stimulus to stem the damage from the global financial crisis.
A depreciating renminbi also has implications for China’s pledges to open its economy and financial markets wider, including efforts in recent years to lift the currency’s global prominence.
The central bank has been lobbying the International Monetary Fund to include the renminbi among freely traded benchmarks like the dollar, euro and yen, so that other countries can include it as an official reserve currency.
While acknowledging these efforts, the fund issued a report last week saying that “significant work remains outstanding” before it could decide whether to include the renminbi as a global benchmark, adding that no changes were likely to be made before September of next year.
The fund also singled out China’s official daily fixing of the renminbi’s exchange rate, saying this “is not based on actual market trades.”
Tuesday’s devaluation “is likely intended to improve the ‘market-driven’ quality” of the exchange rate to appeal to the I.M.F., Wang Tao, the chief China economist at UBS, wrote Tuesday in a research note.
“However, we think it unlikely that the Chinese government will let only market momentum drive the renminbi exchange rate from now on,” Ms. Wang added, “as that can be quite destabilizing.”
<<<
>>> Brazil’s real plummets as recession looms
August 5, 2015
http://thebricspost.com/brazils-real-plummets-as-recession-looms/#.Vcajj5XbLht
Brazilians have for years dealt with inflation, but recent data indicates it has increased beyond analyst predictions [Xinhua]
Brazilians have for years dealt with inflation, but recent data indicates it has increased beyond analyst predictions [Xinhua]
Brazil’s real continued to suffer against the dollar on Wednesday, falling even further than its 12-year record low a day earlier.
On Wednesday, fears that Brazil is in danger of losing its investment rating sent the real spiraling to 3.49 (10:40am EDT) against the greenback.
A day earlier, it fell to a 12-year-low of 3.4684.
Year-on-year, the real has devalued by more than 52 per cent.
But the Brazilian real is also suffering from domestic fiscal policies which saw the primary surplus target drop from 1.2 per cent of GDP to just 0.15 per cent.
Brazilian markets fear that this could signal that the country will now receive a lower investment rating.
The real’s plunge, coupled with rampant inflation, the Odebrecht/Petrobras corruption scandal, and slowing global commodities demand has pummeled the Brazilian economy.
Despite the Central Bank’s recent increase of interest rates to 14.25 per cent, inflation has surpassed analyst expectations and reached 8.9 per cent in June.
Government data to be released Friday is expected to show that inflation reached 9.25 per cent for July 2015.
In July 2014, inflation stood at 6.5.
The Central Bank says a 4.5 per cent inflation rate is ideal and signals a healthy economy.
Last week, two of the country’s biggest banks both predicted that Brazil would be in recession by the end of 2015 and 2016 with a contracted GDP as high as 2.2 per cent.
Public confidence in the economy has significantly fallen.
According to UK-based market researcher Ipsos-Mori’s global poll, only 12 per cent of Brazilians believe their economy is in “good health”. Ipsos Mori data indicates that in 2012, 57 per cent of Brazilians believed their economy was doing well.
<<<
>>> Make Way for the RMB
If the IMF wants to keep Beijing in the tent, it's time to reward China's progress on making its currency more free market-friendly.
By Paola Subacchi
June 16, 2015
https://foreignpolicy.com/2015/06/16/make-way-for-the-rmb-china-reserve-currency-imf-sdr-dollar/
Will the renminbi (RMB) join the elite basket of currencies that determines the value of the International Monetary Fund’s Special Drawing Rights (SDR)? The decision whether or not to include China’s currency rests mainly with the members of the G-7 economies that have a strong hold on the IMF. If they know what’s good for them, they’ll say yes.
This is a technical decision with deep political implications. It will pave the way for the RMB to be a key international reserve currency, alongside the dollar, the euro, the pound, and the yen. As IMF chief Christine Lagarde said in March, this a not a matter of if but when: this year — or in 2020, when the IMF will again review the composition of the SDR’s basket.
At this point, there’s no reason to wait. Including the RMB this year or, at the latest, in 2016 would send the positive message that China is a welcomed and trustworthy member of the international monetary and financial community — a message that would benefit everyone.
When G-7 finance ministers met earlier this month in Dresden, they indicated that a technical assessment of the RMB was paramount for the final decision, regardless of how desirable the inclusion of the RMB in the SDR basket might be for political reasons. But if the assessment is mainly based on technical criteria such as “free usability” — IMF jargon for a currency that can be used and exchanged everywhere in the world — the RMB may well be excluded. Unlike the dollar, the Chinese currency is not yet fully convertible — you can’t simply exchange as much as you want for other currencies in China’s banking system — and thus not the easiest to use in international markets.
A more fruitful approach might be to assess “its potential for a broader role in the international monetary system,” to quote the IMF, and consider future developments as well as recent achievements. Since 2010, when the IMF undertook its last SDR review, China has promoted the internationalization of its currency through several policy measures, such as the establishment of RMB-clearing banks in Hong Kong, London, and Singapore.
As a result, more than 20 percent of China’s trade is now settled in RMB, up from zero five years ago. Furthermore, the RMB is now the world’s fifth-most used currency in international payments after the dollar, the euro, the yen, and the British pound. The number of central banks and official institutions that hold RMB in their reserves has also expanded, and investment banks estimate that 0.5 to 1 percent of official global reserves are now held in RMB. The issuance of non-Chinese RMB-denominated bonds has also increased to an estimated $120 billion between 2010 and 2014, even if it remains behind in the offshore issuance of the other key currencies.
More measures to promote the international use of the RMB are in the pipeline, as the governor of the People’s Bank of China, Zhou Xiaochuan, announced in April during a visit to Washington. And while greater exchange rate flexibility has already been achieved, more will come as Chinese authorities rebalance the economy to focus on domestic demand. As a result, the exchange rate will gradually move from a managed system to a market-determined one.
In May, the IMF announced that the RMB was no longer undervalued, confirming that China’s monetary authorities are intervening less to control the exchange rate. By contrast, at the time of the 2010 review the Chinese currency was deemed to be undervalued, and the U.S. Congress was particularly concerned about China’s currency manipulation.
If the IMF considers these broader indicators of progress, then the case for the RMB’s exclusion from the SDR basket is not so clear-cut. The only controversial area remaining is capital account convertibility. Here, Chinese authorities maintain that capital flows should be facilitated but also closely monitored, in order to curb undesired and excessive activity. This is capital account liberalization Chinese-style or, as Zhou termed it, “managed convertibility.” This may be a stumbling block if the IMF’s Executive Board decides that “managed convertibility” is still a way to constrain the “full usability” of the currency.
Still, even if the issue of convertibility appears poised to hold the RMB back, the final decision may well rest on politics. Beijing expects that this recognition of the RMB — and its inclusion in the SDR basket — will provide a seal of approval for the Chinese currency. What is at stake here is power and influence in international finance. This seal of approval for the RMB will be an important step in China’s economic and political trajectory, and a recognition of Beijing’s commitment to being an active member of the multilateral monetary and financial system. If, to quote Nobel laureate Robert Mundell, “great nations have great currencies,” then China’s rise remains incomplete without an international currency.
Fortunately for China and its backers, exceptions have been made in the past. For instance, at the time of its inclusion in the SDR basket in 1981, the Japanese yen was a “fully usable” but not a fully convertible currency. To do the same for the RMB would be good politics and smart economics. The best way to test China’s commitment to opening its financial sector, implementing financial reforms, and having a market-determined exchange rate is by supporting the Chinese effort to turn the RMB into a “grown-up” currency.
The issue, therefore, is not to obsessively demand evidence that China fully appreciates the obligations that come with the status of reserve currency. It is rather a matter of whether the rest of the world is prepared to give credit for — and encourage the continuation of — China’s efforts to be a good global citizen.
<<<
>>> 4 Trillion Reasons China’s Currency Isn’t Ready for Prime Time
China isn’t ready to supply the rest of the world with RMB. So why does it matter if the currency gets the IMF's stamp of approval?
By Patrick Chovanec
June 16, 2015
http://foreignpolicy.com/2015/06/16/yuan-renminbi-world-reserve-currency-special-drawing-rights-imf/
A lot of hyperventilation has lately been devoted to the future international role of China’s currency, the renminbi (RMB). The latest flurry of excitement centers on China’s bid to have the RMB included in the basket of currencies represented in the Special Drawing Rights issued by the International Monetary Fund. According to accepted wisdom, the RMB’s inclusion in the SDR basket would be a landmark step, formal recognition of its coming-of-age as a global reserve currency. SDR status, many say, would give central banks the green light to add RMB to their reserves and encourage investors to pour money into Chinese stocks and bonds.
But SDR status is a red herring. What really matters is not whether the IMF uses the RMB, but who else does.
If anything, inclusion in the SDR basket would be a political gesture, not a financial or economic game-changer. That may seem a strange thing to say, given the obvious stock Chinese officials place in winning SDR status. Surely, they wouldn’t devote so much effort and make it such a high priority, if it wasn’t really important. But China wouldn’t be the first country to mistake the form of reserve currency status for the substance.
There are two keys to any nation’s currency functioning as a global reserve currency: It must be desirable (as both a means of exchange and store of value), and it must be accessible (people can accumulate bank balances in it abroad). Official recognition can acknowledge these realities, but does not fulfill them, as the United States found out in the wake of World War II.
In 1944, the Bretton Woods Conference designated the U.S. dollar as the world’s reserve currency, linked to gold (which the United States owned virtually all of). Washington also made sure that exchange rates to the dollar were fixed to ensure its continued dominance as an exporter. But after the war, the problem quickly became apparent: Europe had no dollars, and no way to earn them. Unless the United States was willing to supply dollars via trade, aid, or investment — in other words, by running a balance of payments deficit — a global economy depending on the dollar as its reserve currency would collapse.
The solution to this dollar shortage was the Marshall Plan, followed by a series of currency devaluations that put its trading partners on a more competitive footing with the United States. Eventually, Washington essentially exported dollars by running large and persistent trade deficits — a state of affairs that continues to this day and would be unsustainable if the United States did not remain a profitable place to invest.
SDR status may fall far short of Bretton Woods, but the principle still operates.
Any country that wants its currency to actually function as an international reserve must supply the rest of the world with claims in that currency, either by running trade deficits or by providing large amounts of aid or investment capital. Until now, at least, China’s development model has been based on precisely the opposite: running trade surpluses and attracting foreign investment. In the process, rather than exporting its own currency, it has imported an astonishing $4 trillion in other countries’ currencies, which it holds as central bank reserves. (In the past few years, China has seen some capital flow outward, drawing down on those huge foreign currency balances by a few billion dollars.)
So where do SDRs fit in? SDRs are a unit of account, assigned a value (based on a basket of widely used and traded currencies), and allocated to countries by the IMF. Think of them as vouchers, which can — in theory, at least — be exchanged for actual currencies. If the RMB were added to the SDR basket — along with the dollar, euro, pound, and yen — it could be argued that countries holding SDRs would be holding some sort of claim on RMB as part of their reserves. The official imprimatur of the IMF might also encourage central banks to hold RMB directly, on their own.
It’s possible — but where would the RMB come from? Any RMB sent abroad, in excess of China’s (currently modest) balance of payments deficit, would result in China accumulating that much more foreign exchange reserves of its own. In effect, it would be a kind of swap, which could be done (as long as both central banks are willing) with any two currencies. Even using RMB to settle China’s payments deficit would leave it stuck holding the excessive quantities of foreign currency reserves it has already stockpiled. Far from eclipsing the U.S. dollar as the lead global currency, sending RMB abroad — absent a significant shift in China’s balance of payments — would only perpetuate, and perhaps even exacerbate, China’s own reliance on (and exposure to) the dollar and other foreign reserve currencies.
Others, including the authors of a recent report by Barclays, argue that SDR status would establish the RMB as a “safe asset,” which would encourage investors to buy Chinese stocks and bonds, thereby paving the way for it to serve as a reserve currency. It is certainly true that more liquid, better-developed capital markets in China would make it a great deal more attractive to hold RMB.
But the question, again, is where does the money come from? If foreigners are buying Chinese bonds (or even non-Chinese bonds) with RMB they earned selling (net) exports to China, or if they are buying Chinese goods (or even non-Chinese goods) with RMB they borrowed from Chinese lenders, then the RMB has truly gone global, supplied by (initial) Chinese balance of payments outflows.
But if foreign investors are simply changing their own currency into RMB in order to buy RMB assets in China, that’s a capital inflow. From a flow of currency perspective, it’s no different from a tourist changing U.S. dollars into RMB at the Beijing airport, or the foreign direct investment that’s been flowing into China for years. Each of these transactions involves China importing foreign currency in exchange for goods and assets, not exporting RMB. To the extent that SDR status makes China a more attractive magnet for foreign investors, it actually raises the hurdle that much higher for China to supply the world with RMB reserves.
Many observers seem to believe that anything that raises the RMB’s profile puts it on track to becoming an international reserve currency. This is far from the truth.
Adding the RMB to the IMF’s SDR basket would certainly raise its profile, but would do nothing to help — and could even complicate — the ability of other countries to acquire meaningful reserve holdings of RMB. Just as was true for the U.S. dollar, the key to the RMB’s future role depends not on official designations from above, but on the balance of payments. For the RMB to function as a reserve currency, China would have to develop a profoundly different relationship with the rest of the world economy from the one it has now — a change it is far from clear the Chinese are willing to embrace.
<<<
Volume | |
Day Range: | |
Bid Price | |
Ask Price | |
Last Trade Time: |