Wednesday, September 20, 2017

BIS - Central Bank Cryptocurrencies

This BIS has issued a new report on possible uses for cryptocurrencies by central banks. This is really where the focus is at this time in terms of something that could impact the current monetary system. Below are a few excerpts from the BIS report and then some added comments.
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"In less than a decade, bitcoin has gone from being an obscure curiosity to a household name. Its value has risen - with ups and downs - from a few cents per coin to over $4,000. In the meantime, hundreds of other cryptocurrencies - equalling bitcoin in market value - have emerged (Graph 1, left-hand panel). While it seems unlikely that bitcoin or its sisters will displace sovereign currencies, they have demonstrated the viability of the underlying blockchain or distributed ledger technology (DLT). Venture capitalists and financial institutions are investing heavily in DLT projects that seek to provide new financial services as well as deliver old ones more efficiently. Bloggers, central bankers and academics are predicting transformative or disruptive implications for payments, banks and the financial system at large.

Lately, central banks have entered the fray, with several announcing that they are exploring or experimenting with DLT, and the prospect of central bank crypto- or digital currencies is attracting considerable attention. But making sense of all this is difficult. There is confusion over what these new currencies are, and discussions often occur without a common understanding of what is actually being proposed. This feature seeks to provide some clarity by answering a deceptively simple question: what are central bank cryptocurrencies (CBCCs)?

To that end, we present a taxonomy of money that is based on four key properties: issuer (central bank or other); form (electronic or physical); accessibility (universal or limited); and transfer mechanism (centralised or decentralised). The taxonomy defines a CBCC as an electronic form of central bank money that can be exchanged in a decentralised manner known as peer-to-peer, meaning that transactions occur directly between the payer and the payee without the need for a central intermediary.3 This distinguishes CBCCs from other existing forms of electronic central bank money, such as reserves, which are exchanged in a centralised fashion across accounts at the central bank. Moreover, the taxonomy distinguishes between two possible forms of CBCC: a widely available, consumer-facing payment instrument targeted at retail transactions; and a restricted-access, digital settlement token for wholesale payment applications."

. . . . .


Retail central bank cryptocurrencies

"Retail CBCCs do not exist anywhere. However, the concept of a retail CBCC has been widely discussed by bloggers, central bankers and academics. Perhaps the most frequently discussed proposal is Fedcoin (Koning (2014, 2016), Motamedi (2014)).11 As discussed in Box B, the idea is for the Federal Reserve to create a cryptocurrency that is similar to bitcoin. However, unlike with bitcoin, only the Federal Reserve would be able to create Fedcoins and there would be one-for-one convertibility with cash and reserves. Fedcoins would only be created (destroyed) if an equivalent amount of cash or reserves were destroyed (created) at the same time. Like cash, Fedcoin would be decentralised in transaction and centralised in supply. Sveriges Riksbank, with its eKrona project, appears to have gone furthest in thinking about the potential issuance of a retail CBCC (Box C).
A retail CBCC along the lines of Fedcoin would eliminate the high price volatility that is common to cryptocurrencies (Graph 1, centre panel).12Moreover, as Koning (2014) notes, Fedcoin has the potential to relieve the zero lower bound constraint on monetary policy. As with other electronic forms of central bank money, it is technically possible to pay interest on a DLT-based CBCC. If a retail CBCC were to completely replace cash, it would no longer be possible for depositors to avoid negative interest rates and still hold central bank money.
Any decision to implement a retail CBCC would have to balance potential benefits against potential risks. Bank runs might occur more quickly if the public were able to easily convert commercial bank money into risk-free central bank liabilities (Tolle (2016)). There could also be risks to the business models of commercial banks. Banks might be disintermediated, and hence less able to perform essential economic functions, such as monitoring borrowers, if consumers decided to forgo commercial bank deposits in favour of retail CBCCs."
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My added comments: If you are wanting to learn more about all this, you may find this report pretty informative. It does a good job of explaining what can be a somewhat complex topic. We have pretty much covered the basics of what is talked about in this report here for some time. A long time ago we were talking about the concept of being able to access money on a mobile phone in real time and send funds around the world at very low cost, etc. We have talked about individual central banks looking at new technology for some time as well. So the section of this report that talks about that idea is nothing surprising here. 
At this point the big issues going into the future will more likely be just what various central banks actually decide to do first of all. The decisions they make will then provoke some kind of public reaction (favorable or unfavorable) depending on what they decide to do. Since so many variables are still possible I view it as premature to try and speculate what most central banks will end up doing.
Here are a few key points I think I can make with confidence based on direct input I get from very high credibility sources:
- all this will take some time to develop and most likely will come along in stages unless some kind of new major financial crisis creates a sense of urgency to move faster that does not appear to exist today. Global consensus and political will is very low at this time.
- I think the most likely thing we would see first are a few central banks issuing electronic forms of their existing currency using what they will call "blockchain" technology as the ledger system to record transactions. I think Singapore is a good place to watch for something like that to show up.
- there is no indication at this time that either the IMF or the BIS is close to using any kind of blockchain based new version of the SDR (at least not the official SDR). I might expect instead to see the IMF looking closely at promoting the use of the private SDR more by the middle of next year after reviewing a study along those lines. The private SDR would not be backed by anything. It would simply be valued based on the existing basket of five currencies used now to value the official SDR. I look at the private SDR as just simply holding a combination of the five currencies that make up the basket in the ratio used for that basket and not really much more than that. More like using the name SDR to describe how the instrument owned is denominated and certainly not owning any actual official SDRs. I don't view that as anything that is a major change to existing monetary system. 
- I do not think any final decisions have been made as to whether to even use central bank digital currencies at many central banks at this time. When the first few roll out the concept (perhaps by early next year), I would expect others to watch closely how well that is received by the public and how well it works in the real world. I do not expect "digital currencies" to eliminate the use of physical cash any time soon in most parts of the world including the US.
- I do not believe there are any plans to restrict ownership of gold or silver coins (of any kind) by central banks, the IMF, or the BIS at this time. If something happened to send the price of gold and silver sky rocketing higher, it would not shock me to seem them impose some kind of "windfall profits" tax on unusually high gains in some countries. But I don't know that any plans to do even that exist currently.
- I do not think we are close to ANY kind of new global reserve currency that would replace the US dollar very soon. The only thing I can see that might speed up that process would be a crisis or war significant enough to disrupt the existing monetary system. I should add that Jim Rickards is now on the record with a public interview predicting that war with North Korea will be such an event and will happen within the next 8 months (more details on this coming Friday).
Summary: Based on the best information I have at this time, readers should follow the situation with North Korea closely. That seems like the most likely trigger event to bring about a potential crisis that could then lead to some bigger changes in the monetary system.
If no crisis does emerge, the most likely scenario that I am aware of is for some central banks to slowly but surely stick their toes into the central bank digital currency waters, perhaps starting in Singapore working with some major private partners. If a dozen or more other central banks follow along, we can expect that central banks around the world, the IMF, and the BIS will watch closely to see how things work out for them (sort of like trial runs). I would be surprised if these first steps are completed before at least the middle to the end of next year based on current information. We might see the process start up this fall. The public reaction to these steps will probably depend on exactly what individual central banks decide to do in various countries. The major issues will probably be what happens to cash and whether the ability to maintain privacy in monetary transactions is preserved. 

Tuesday, September 19, 2017

BIS Quaterly Review

The latest BIS email alert is on their new quarterly review (summary pasted in below). A blog reader here pointed out the following to me:

"under Special Features;  Central Bank Cryptocurrencies, a 17 page paper,  too long for me to read in full, but with a very good breakdown of the many possible types, uses,  and issues with each."
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September 2017 BIS Quarterly Review: Strong outlook with low inflation spurs risk-taking

17 September 2017

Press release

Low inflation despite a stronger economic outlook helped push markets up in recent months and reduced the expected pace of tightening of monetary policy in major economies. Signs of increased risk-taking have become apparent in a number of areas, including narrow credit spreads, increased carry trade activity and looser bond covenants.
"All this puts a premium on understanding the 'missing inflation', because inflation is the lodestar for central banks," said Claudio Borio, Head of the Monetary and Economic Department.
The September 2017 issue of the Quarterly Review:
  • Shows a pickup in the growth of international debt securities in the first half of 2017, when total stocks rose to $22.7 trillion. The outstanding stock of securities issued by banks grew at its fastest pace in six years.
  • Calculates that credit-to-GDP ratios remained well above trend levels for a number of jurisdictions, often coinciding with wide property price gaps. Demand from projects financed by property developers may play a role.
  • Reviews the doubling in outstanding government debt of emerging market economies since 2007, to $11.7 trillion at end-2016. Government debt rose from 41% to 51% of GDP over the same period. Emerging market government borrowing is mostly at longer maturities, at fixed rates and in local currencies, and its pattern increasingly resembles that of advanced economies.
  • Reports on new data initiatives aimed at assessing the exposure of economies to foreign currency risk. From now on, the BIS will regularly publish a currency breakdown of cross-border loans and deposits. Bank loans can be added to debt securities to estimate the build-up of total foreign currency debt. Country-level estimates of total US dollar, euro and yen credit provide a better gauge of foreign currency indebtedness of borrowers in a given country and its vulnerability to currency fluctuations. The BIS is also releasing new data series on monetary policy rates and exchange rates.  
Special features look at topical issues in global markets and economics:
  • Claudio Borio, Robert McCauley and Patrick McGuire (BIS)* analyse the amount of debt incurred by borrowing through FX swaps and forwards, a missing element in assessments of financial stability risk. The authors estimate the size, distribution and use of this missing debt, and assess its implications for financial stability. The off-balance sheet dollars owed by non-banks outside the United States may exceed their $10.7 trillion of on-balance sheet dollar debt (as of Q1 2017). The missing debt is secured with foreign currency, is mostly short-term and is likely to generally serve as a hedge for FX exposures in cash flows and on balance sheets. But rolling over short-term hedges of long-term assets can still spark or amplify funding and liquidity problems during periods of stress.

  • "This research is the first to put a number on the amount of dollar debt missing from balance sheets and fills in a gap in our understanding of liquidity risk posed by financial firms operating across different currencies," said Hyun Song Shin, Economic Adviser and Head of Research.
  • Morten Bech (BIS) and Rodney Garratt (UCSB)* outline how central banks might create and use blockchain-based digital currencies. They identify two types of such potential central bank cryptocurrencies, one for consumers and the other for large-value payments, and compare them with existing payment options.
  • Codruta Boar, Leonardo Gambacorta, Giovanni Lombardo and Luiz Pereira da Silva (BIS)* find that countries which frequently use macroprudential tools have tended to have higher and more stable economic growth rates. On the other hand, ad hoc interventions could hurt growth.
  • Torsten Ehlers and Frank Packer (BIS)* argue that more consistent standards for green bonds could help develop the market for instruments to finance investments with environmental or climate-related benefits. Although there is some evidence that investors have paid a premium on average at issuance for certified green bonds, the bonds have not generally under performed conventional ones in the secondary market.

Sunday, September 17, 2017

Another Crisis? Fed's Dudley Does Not See One Coming

New York Fed CEO William C. Dudley gave a speech recently in New York outlining how he sees things going in the US economy. Notably absent is any mention of concern that the US might see any kind of new major crisis any time soon or that markets are in an overvalued bubble condition. 


In fact, Mr. Dudley says he thinks things are going pretty well and that the Fed should be able to stay on course to shrink its balance sheet in the months ahead. He adds that he does not think the shrinking of the balance sheet is likely to have much impact. Below are excerpts from the introduction and the concluding remarks sections of the speech.  

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"Good evening.  It is a pleasure to have the opportunity to speak at this Money Marketeers event.  In my remarks, I will focus on two topics:  1) The economic outlook and the implications for monetary policy, and 2) the Fed's balance sheet normalization process, which is likely to begin relatively soon.  As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.
Overall, the economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. labor market.  Over time, this should support a rise in wage growth.  When combined with a firmer import price trend-partly reflecting recent depreciation of the dollar-and the fading of effects from a number of temporary, idiosyncratic factors, that causes me to expect inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.  In response, the Fed will likely continue to remove monetary policy accommodation gradually.  But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable long-run growth path is likely to be considerably lower than it was in prior business cycles. 
The process of balance sheet normalization-in which an increasing proportion of maturing Treasuries and agency mortgage-backed securities (MBS) repayments are allowed to run off the Fed's balance sheet-should also exert some monetary policy restraint over time.  But, I believe this impact will be quite modest.  Not only is this shift in policy now widely anticipated, but we have also seen that the impact on the level of long-term interest rates has been small as expectations have adjusted."

. . . . 

"To sum up, I expect that the U.S. economy will continue to perform quite well, with slightly above-trend growth leading to further gradual tightening of the U.S. labor market.  As this occurs, I would anticipate that wage growth will firm and that price inflation will gradually rise.  In response, I expect that we will continue to gradually remove monetary policy accommodation.  Balance sheet normalization will likely be part of this process.  But, we expect this to have only a mild impact and to run passively in the background.  Short-term interest rates will remain the primary tool of monetary policy."
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Friday, September 15, 2017

Jim Rickards on Trump and the Fed

In this new article, Jim Rickards suggests that Trump will have an historic opportunity to shape the Federal Reserve since there so many vacant seats to fill, probably including Janet Yellen. Below are a couple of excerpts from the article.

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"Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson.

President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all five of the other participating members.

Now Trump has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then."

. . . .

"But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations. Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice."

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My added comments: It's interesting that Jim Rickards expects President Trump to go with a "hard-money board" filling positions with "strong-dollar people" given his forecast for a much weaker dollar. Perhaps he expects the dollar to weaken substantially first and then get some support from the new Fed members later? Time will tell.

Tuesday, September 12, 2017

Canada Explores Central Bank Digital Currency

We have covered the concept of central bank digital currencies here on the blog for some time now. While it is clear that the idea is being looked at by many central banks, we are still waiting for the first central bank digital currency to arrive. 



This article on the OMFIF web site explains how The Bank of Canada is researching the idea. It is clear that research is still in progress, that this project will not replace cash any time soon, and that various ideas on how to actually implement a central bank digital currency are being studied. Below are a few excerpts. 

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"Digital currencies aren't new. Most money in advanced economies is already digital: a bank account balance is but a computerised entry in a ledger at a commercial bank. However, the digital money of the future could have very different characteristics from present forms.

. . . . .

It's no wonder that the possibilities of new digital currencies have sparked the interest of the private sector and the central banking community. The questions raised are of fundamental significance to the core functions of central banks because they have implications for monetary policy, financial stability, funds management and currency issuance.

Research-driven decisions: The Bank of Canada is approaching the subject from three angles: research, experimentation and co-operation. The bank has been investigating questions related to private and central bank digital currencies for some years, and is building a set of research papers. It aims to examine the underlying benefits and risks of digital currencies to the functioning of the economy, and for the central bank mandate.

. . . . .

Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the wellbeing of people could be reduced by its introduction.

Research on whether a central bank should issue a digital currency is still under way. The Bank of Canada has outlined a framework for analysis that highlights the importance of understanding the types of new economic activity that could be enabled. There are many considerations to be explored, not least who should have direct access to the central bank balance sheet and what this would imply for the transmission of monetary policy and financial stability."



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My added comments: This statement in the article above is one I find interesting:

"Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the well being of people could be reduced by its introduction."

It points out the fact that central banks already issue "digital currency" for the most part. Unless there is a compelling reason like significant cost savings or some advantage to the public that does not currently exist, it is fair to ask if just issuing a "central bank digital currency" based on "blockchain" is really needed. They go on to say that in some cases where cash is a viable alternative, the well being of the public could be reduced by introducing a central bank digital currency. This does not sound like a ringing endorsement of replacing cash with a blockchain based "central bank digital currency" to me.

Friday, September 8, 2017

US Dollar Watch

Sometimes a very long term chart can provide a perspective that you don't get looking at a much shorter time frame. Now that the US dollar has sunk into the potentially key 90-92 level, perhaps a look at its long term chart would be worthwhile.


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Note the very long term downtrend in play. In the last major crisis in 2008 the US dollar sunk to an all time low just above 70 on this index. It appears that the next key area lower to watch is the 85-86 area. Failure to hold there could well indicate we are headed back down 80 fairly quickly. If you see the dollar drop below 70 at any time in the coming months or years, we would then be at new all time lows. Just below is a look at how the dollar has done over the past one year.




It is oversold right now and should bounce in here somewhere soon. If it does not, the 80 level seems likely to arrive fairly quickly. It has only taken about 4 months to drop nearly 10% down to the present level. I will remind readers of this note we published on 8-1-17 about Jim Rickards forecast on the dollar made to me by email back in March of this year.



My email to Jim dated 3-27-17:

"I am not a technical analysis expert by any means. However, this chart indicates to me that the USD has once again reached an important support level here around 99. It appears to me that if that fails, 95-97 would show up pretty quickly. After that, an even sharper drop looks possible. 


If you look back in time the 99 level seems pretty pivotal and the 200 day average sits just below right now at 98.44. The last time this happened the dollar held and rallied. So the next few days/weeks are probably important for direction if I read this chart correctly."


Jim's email reply dated 3-27-17:

"I expect the dollar will hold, and gold will pause to catch its breath, but only temporarily.


By late June or early July, I expect the dollar to come down a lot and gold to rally. We're just not there yet.
We'll need one more Fed rate hike in June to drive a spike in the economy. Then the Fed will flip-flop to ease again, and we're off to the races."  ------    James Rickards
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Added note: Venezuela, which has suffered a horrific devaluation of its own currency lately, will now try to get away from the US dollar if possible.

Paola Subacchi - Saving the International Order

This article by Paola Subacchi appearing on Project Syndicate makes some of the same points we have made here for some time in regards to the prospects for global consensus on changes to the existing monetary system. While I constantly see articles that seem to suggest that some kind of new global monetary system will be imposed by the IMF, the reality that I find over and over again is that the consensus that would be needed for that kind of change simply does not appear to exist at this time. Below are a few excerpts from the article.

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"This autumn, the International Monetary Fund and the World Bank will once again hold their annual conference in Washington, DC. At a time when the liberal world order that these institutions underpin is under threat, they cannot afford to stick with business as usual. Instead, they must consider deep reforms – and that will require abandoning the paternalistic, even hostile, tone that has often dominated discussion of the topic."

Since the election of Donald Trump as US president last November – the culmination of an upsurge in nationalist-populist sentiment across the Western world – the weaknesses of existing multilateral frameworks have come increasingly to the fore. But the current crisis of the liberal world order has been a long time in the making.

In fact, it has been apparent since before the turn of the century that the post-World War II governance structures were untenable, because the assumptions that formed their foundation were beginning to crumble. In particular, with emerging economies, especially China, on the rise, the division between the West and the “rest” was narrowing fast.

Yet the global economy’s institutional underpinnings – the IMF and the World Bank – have remained largely unchanged. Indeed, the multilateral institutions on which global governance rests do not look all that different today than they did in 1944, when Britain’s John Maynard Keynes and America’s Harry Dexter White convened representatives from 44 countries in in Bretton Woods, New Hampshire, to design the post-WWII international order."

. . . .

"To be sure, since the 2008 financial crisis, there has been much debate about globalization, governance, international cooperation, and the tension between open markets and domestic politics. Well-rehearsed discussions of issues like financial surveillance, coordination, moral hazard, international lenders of last resort, a debt-resolution regime, and sustainability in development finance will surely inform the work of the eminent persons group.

But discussion does not imply consensus, and I am not convinced that agreement on any of these topics is strong enough to produce concrete policy action. The question of how to pursue governance and quota reform in the Bretton Woods institutions – critical to these bodies’ survival – is nowhere near answered. And Trump’s US, which is engaged in its own rethinking of its role in world affairs, remains a wild card."


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My added comments: I put the last paragraph above in bold italics because it basically says almost exactly what we have been saying here for some time. When I see articles saying that the IMF will do this or will do that I have to ask this question:

How will the IMF do anything significant to change the existing monetary system without the global consensus of the major powers that are its members (not to mention all the other nations that are members).?

No such consensus appears anywhere on the near horizon at this time as best I can tell. Readers here are probably tired of hearing this, but this is why I am convinced that the world will have to see a major global financial crisis of the kind Jim Rickards and others are predicting before we are likely to see any kind of movement towards consensus on these huge issues. All of the individual governments and central banks at the IMF have to work on behalf of the interests of their own nations first and foremost. Those interests simply do not line up too many times to get much consensus on the big issues. 

Things can always change and if they do we would certainly report that here. But it is important to report things accurately based on the information that is available. At this time, the best information I know of suggests no such major monetary system change is on the near term horizon at either the IMF or the BIS. 


Tuesday, September 5, 2017

Centralbanking.com - Email Exchanges Between Allan Meltzer & Robert Pringle

Earlier this year, we ran a two part article featuring a series of email exchanges between Centralbanking.com Founder Robert Pringle and economist Allan Meltzer where they talked about monetary system reform. 


Now Centralbanking.com has published a new more time extended version of their email exchanges that I think readers would find fascinating. Below is a just a brief excerpt. You can read the full article here on Centralbanking.com. They discuss a wide variety of issues related to monetary policy and the need for reforms.

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Robert Pringle 


"Allan Meltzer was a mentor and friend for more than 40 years. We met in 1974, when I was editing The Banker, and angrily trying to draw attention to the link between monetary growth and inflation – a link denied by the Bank of England (BoE), UK Treasury, all politicians except Keith Joseph and many commentators. Allan and Karl Brunner, a fellow monetarist, invited me to participate in a new venture, the Interlaken Seminar on Analysis and Ideology – an early effort to apply individualistic, economic reasoning to broad sociological and political issues. The mornings were spent discussing academic papers and the afternoons walking in the Alps – the best format for a week-long seminar ever developed! I attended several of these annual get-togethers in the 1970s, and we kept in touch subsequently. Allan was a strong supporter of Central Banking Publications from the start and a natural choice to be a founder member of our editorial advisory board. I believe he was pleased with the way it has developed. “It’s where I go to learn about the people and the policies” of the central banking world, he said. 
Apart from the formal interviews that he gave to Central Banking and numerous contributed articles, he and I also kept up a lively private email correspondence. I would often bounce ideas off him. He would invariably respond. The following is a selection of our exchanges. It covers, among other topics, the markets, the US Federal Reserve Board, central bank independence, money and banking." 
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Added note: Robert Pringle gave us this additional comment by email to use in an article here on this blog about Allan Meltzer written by John Taylor:
"I first met Allan when he was looking for people with a wide range of interests to invite to a seminar series that he was setting up with Karl Brunner. It was called officially the Interlaken Seminar on Analysis and Ideology that met annually from 1974 to the late 1980s. The aim of the Seminar ( as he put it in his own tribute to Brunner ) was to extend economic analysis into many areas of social policy. As he described it, the conference organization was as unusual as the topics discussed: "We met only in the morning. Afternoons were given over to hiking in the Swiss Alps, or for a few playing golf. The idea was to have informal discussions while hiking. We reassembled for dinner."

You can imagine how much I, as a young financial writer with an interest in economic history and sociology , leapt at the chance of participating. It was a top rate group with future nobel laureates such as Jim Buchanan and others participating - only about 25 of us in all.  I was privileged to attend for several years - every year in fact until  I joined the G30 in New York in 1980.

We have remained in touch ever since. He was a tremendous supporter of Central Banking and a founding member of our editorial advisory board from 1990. 

By the way, he wanted John Taylor to be the next Fed chair."           

All best,
Robert

Sunday, September 3, 2017

Nikkei Asian Review: China sees new world order with oil benchmark backed by gold

There have been many rumors and hints for some time that at some point China might make a push to try and undercut the so called Petrodollar and steer the world away from the US dollar if possible. This new article in the Nikkei Asian Review says China is prepared to take a bold step forward in this plan soon. It will be interesting to see if this does materialize any time soon and what the US reaction to it may be. Below are some excerpts from the article.

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"China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.

The contract could become the most important Asia-based crude oil benchmark, given that China is the world's biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.

China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong."

. . . . .

"If Saudi Arabia accepts yuan settlement for oil, Gave said, "this would go down like a lead balloon in Washington, where the U.S. Treasury would see this as a threat to the dollar's hegemony... and it is unlikely the U.S. would continue to approve modern weapon sales to Saudi and the embedded protection of the House of Saud [the kingdom's ruling family] that comes with them."



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Added notes: DrStephen Leeb has been predicting for some time that something like this was in the works in China. It is certainly something to keep an eye on. Jim Rickards adds his comments on it here on his Twitter feed. Russia Insider runs this article and then another comment by Jim Rickards.


Added note 9-7-17: Sputnik News adds this story along these same lines 

Added update 9-15-17: The Daily Coin publishes this article with email comments by gold researcher Koos Jansen about the article featured above in the Kikkei Asian Review. He questions the significance of the article and suggests that this may be much ado about nothing. Here are a couple of quotes by Koos from the Daily Coin article:

"In my opinion the story is misleading. The journalist in question from Nikkei Asian Review confirmed to me he used no official sources on the oil benchmark backed by gold” story."

. . . .

"Surely China is working hard to promote their currency internationally. And they are eager to have more oil and gold priced and traded in renminbi. It’s also true that Russia and Iran, and other countries, like to use less dollars in international trade. But, in my very humble opinion, the Nikkei story should be taken with grain of salt."

Saturday, September 2, 2017

Jim Rickards on Potential Market Risks

In this recent article we noted that Yale School of Management has a blog that covers potential systemic risk and also offers a masters degree in the study of systemic risk. In this recent interview, Jim Rickards gives his latest thoughts on a couple of risks he sees out there at this time.





Jim mentions that he sees the economy starting to roll over in many different areas which could lead to a significant stock market down turn into the end of this year. He also provides an update on the prospects for war with North Korea. In that regard, Jim told me in an email earlier this year to pay close attention to the time frame between November 2017 and February 2018 for the potential for an actual shooting war to break out. Obviously that event would have significant impact on the markets if it were to happen.


Added note: It appears that both Russia and China are getting increasingly nervous that a war will break out between the US and North Korea. Also, Australia agrees to join with the US if such war does happen.

Friday, September 1, 2017

Systemic Risk Blog - Yale School of Management

On this blog we watch for and report any signs of potential risk to the financial system since that is clearly something that can trigger a serious financial crisis. Such a crisis could then lead to major changes in the monetary system that could impact all of us. Readers here may know we have a full page of documented articles that talk about various kinds of systemic risks identified by either the IMF or the BIS. 


However, this is not the only blog that monitors systemic risk. Did you know that the Yale School of Management has such a blog?  In fact, Yale even offers a masters degree in the study of systemic risk. It's good to know that someone else takes this topic seriously. Below is an example article from the Yale blog that talks about the risks that clearinghouses for derivatives (CCP's) have to deal with. Here are a couple of excerpt paragraphs.
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Example article - The Failure of a Clearinghouse: Empirical Evidence (Banque de France)


"By insulating its members from bilateral default risk, clearinghouses, or central clearing counterparties (CCPs), play a critical role in the orderly settlement of transactions, both in over-the-counter and in exchange-based markets. Following the objective decided at the G20 Pittsburg summit in 2009, central clearing is mandatory for standardized derivatives in most countries, as regulators expect it to prevent market breakdowns or financial contagion. However, a new risk arises: the CCP itself could fail, with dramatic effects for financial stability.

Against this background, our paper is the first to empirically study the failure of a CCP by relying on internal documents from both the CCP and the major clearing member which failed. The failing CCP was the Caisse de Liquidation des Affaires en Marchandises. It was the only clearinghouse operating in the Paris Commodity Exchange, a market most active for sugar futures. Between 1973 and 1974, a six-fold increase in global sugar prices (see Figure I) spurred trading activities. Starting in November 1974, margins calls due to the collapse of prices induced the largest clearing member, and ultimately the CCP, to fail.   . . . . "