Economic Crisis: World Money: Five Hidden Signals From The IMF
Includes: Sweden Inches Closer To Cashless Society As Churches And Homeless Now Accept Plastic
The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary. On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways.
The discussion revealed what global central banks are planning for a future crisis and how the IMF is orchestrating policy for financial bubbles, currency shocks and institutional failures.
Why the urgency from the financial elites?
In theApril 2017 “Global Financial Stability Report,” IMF researchers targeted the U.S corporate debt market and how extreme changes in its equity market has left the global economy at risk. While the report may have been missed by major financial news outlets, it was enough to give major concern to those paying attention.The IMF research report noted:
“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…”
In another segment the IMF report said:
“Corporate
credit fundamentals have started to weaken, creating conditions that
have historically preceded a credit cycle downturn. Asset
quality—measured, for example, by the share of deals with weaker
covenants—has deteriorated.”
“At the same time, a rising share of
rating downgrades suggests rising credit risks in a number of
industries, including energy and related firms in the context of oil
price adjustments and also in capital goods and health care. Also
consistent with this late stage in the credit cycle, corporate sector
leverage has risen to elevated levels.”
This report together with the panel discussion highlights a very concerning trend. Jim Rickards, a currency wars expert
and macroeconomic specialist, has identified the special drawing rights
(SDR) as a class of world money that is a tool used to bailout central
banks during crisis.World Money, The IMF and Signals for Economic Crisis
World money was praised for its ability to be a catalyst for international loans during the IMF spring panel discussion.The panel discussion was moderated by Maurice Obstfeld, an established academic who serves as a Director of Research at the IMF. Obstfeld is connected, knows the right people, and can see the macroeconomic implications of SDRs.
In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”
“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”
Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar.
1. China Spars for the SDR Market
Yi Gang, the Deputy Governor of the People’s Bank of China disclosed to the IMF panel that, “China has started reporting our foreign official reserves, balance of payment reports, and the international investment position reports.”“All of these reports, now, in China are published in U.S dollars, SDR and Renminbi rates… I think that has the advantage of reducing the negative impact of negative liquidity on your assets.”
What that means in real terms is that China views the opportunity of being a part of the exclusive world money club as an opportunity to diversify away from the U.S dollar.
The Bank of China official took that message even further saying that he hopes that China could lead in world money operations by integrating it into the private sector.
“If more and more people, companies and the market use SDR as unit of accounts – that would generate more activity in the market with focus on the MSDR. [The hope would be] that they could create more products and market infrastructures that would be available for trade products to be denominated in SDR.”
The People’s Bank of China official referenced how this trend was already underway. Just last year Standard Chartered bank began to maintain accounts in SDR’s. “In terms of the first and secondary markets they will develop fairly well.”
Perhaps the most important segment that the Chinese official signaled was his reference that, “The Official Reserve SDR (OSDR) that allocation from the IMF is very important. [This allows] Central Banks to make the SDR an official asset, and easier for them to convert that asset into the reserve currency they need.”
What that means is that China will become an even greater player in the world money market.
Nomi Prins, an economist and historian stated when analyzing China’s economic positioning, “The expanding SDR basket is as much a political power play as it is about increasing the number of reserve currencies for central banks for financial purposes.”
2. Special Drawing Rights: The Case for Liquidity and Central Banks
Jose Antonio Ocampo, one of the foremost scholars on international economics and a board member of the Central Bank of Colombia noted, “The main objective of SDR reform is actually… for it to be a major reserve asset for the international monetary system.”“First of all, it is a truly global asset. It is backed by all of the members of the IMF and it doesn’t have the problems that come with using a national currency as international currency. Second, it has a much better form of distribution of the creation of liquidity. Because it is shared by all members of the IMF… in that regard, it does serve as unconditional liquidity.”
That means that IMF and institutional economists view the SDR as a potential way of financing not only national government loans, but markets.
The most fascinating point that Ocampo made about the SDR was about the position of conditional reserves and what it could mean for more SDR reform. Conditional reserves reference the ability of central banks to borrow and repay loans in a timely manner with conditionality.
“Countries that hold excess SDR’s should deposit them in the IMF. The IMF then could use those SDR’s to finance its lending. [This will reduce] the need to have quotas, borrowing arrangements and methods to finance IMF programs. Like any decent central bank in the world they could use their own creation of liquidity as a sort of financing of that central bank.”
While the IMF has been a “central bank for central banks” this proposal would see the international monetary system shift entirely.
Jim Rickards takes his analysis a step further showing that the liquidity and lending offer the IMF the ability to act during a crisis, as it did during the most recent global financial crisis.
Rickards, The New York Times best-selling author, reveals, “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.”
3. Elites Signaling the Blueprint Plan for World Money
Mohamed El-Erian a former Deputy Director of the IMF and the Chief Economic Adviser at Allianz (affiliated with PIMCO) was the premier panelist to discuss the future blueprint plan of world money.El-Erian started out his discussion, “If the SDR is to play a really important role you cannot go through the official sector only today.”
He outlined the current political landscape for world money saying, “The politics today do not favor delegating economic governance from national to multilateral levels. Yet the case for the SDR is very strong.”
“It is not only about the Triffin Dilemma and [acting as] the official reserve, it’s because if you ask anybody do you want to reduce the cost of self-insurance, they’ll say yes. Do you want to facilitate diversification? They’ll say yes. If you ask anybody, do you want to make liquidity less reciprocal, they’ll say yes.”
“The SDR helps address every one of these issues. So, it solves problems not just at the official level but it solves problems in the private sector.”
To break that jargon down Jim Rickards offers, “In other words, the latest plan is for the IMF to combine forces with mega-banks, and big investors like BlackRock and PIMCO to implement the world money plan.”
“El-Erian is ‘signaling’ other global elites about the SDR plan so they can prepare accordingly.”
4. The SDR Signals Death of the Dollar
Catherine Schenk, a professor of International Economic History at the University of Glasgow, is one of the top scholars of economic relations. While speaking she took up the case of what the special drawing rights meant for the U.S dollar.Dr. Schenk when asked whether the international market could proceed without a “lender of last resort” she pressed, “Why would you use a relatively illiquid element when you have the U.S dollar?”
“The U.S dollar has a lot of problems, some of it is unstable but the depth and liquidity of it in financial markets are unrivaled. The history of trying to create bond markets for other currencies or other instruments shows that it takes a long time.”
She then elaborated later in the conversation the premise that, “What we are talking about with the market SDR is trying to turn it and add more facilities to turn it into money. That will take time. Having reluctant issuing, I am worried about how that market it going to be created.”
As the dollar continues to have its issues what central banks like the Federal Reserve select to do matters significantly.
Christopher Whalen pens, “Whether you look at US stocks, residential housing markets or the dollar, the picture that emerges is a market that has risen sharply, far more than the underlying rate of economic growth. This is due to a constraint in the supply of assets and a relative torrent of cash chasing the available opportunities.”
Whalen then asks the bigger question and one that could specifically matter for the SDR when he notes, “What happens when this latest dollar super cycle ends?”
How the competition for the top world reserve position unfolds between the SDR and U.S dollar will be answered in time.
5. World Money Becomes Central Bank Money
During the final Q&A for the panel on the SDR’s, they were asked what the political climate looks like facing the issues of world money and the direction of political headwinds?In response Jose Antonio Ocampo said, “In the issue of liquidity, we still have a basic problem during a crisis – which is, how do you provide liquidity during crisis?”
Ocampo, the Colombian central bank official disclosed, “My view is that it is a function for the SDR as central bank money, let’s say.”
The SDR specialist took it further, “The real question is whether any of the major actors… and whether the U.S, either from the previous administration or the current administration, was willing [to politically act]?”
He offered, “From the point of view of the U.S the use of SDR’s as a market instrument should be more problematic than the reforms of the SDR to be used as central bank money.”
Under such circumstances the demand and confidence for the U.S dollar as a global reserve would be diminished.
Jim Rickards summarizes, “By the time the final loss of confidence arrives, much of the damage will already have been done. The analytic key is to look for those minor events pointing in the direction of lost confidence in the dollar.”
“With that information investors can take defensive measures before it’s too late.”
As was confirmed by both the IMF report and the elite panel on special drawing rights, the U.S dollar is facing severe competition while undergoing a fiscal crisis.
Rickards leaves a stark warning, “The U.S. is playing into the hands of these rivals by running trade deficits, budget deficits and a huge external debt.”
Sweden Inches Closer To Cashless Society As Churches And Homeless Now Accept Plastic
The citizens of Sweden are perhaps closer to
completely giving up a component of their individual sovereignty than
any other country on earth. In a world where government's abuse of
power and intrusion into the personal lives of its blissfully ignorant
enablers grows more disturbing by the day, at least for now, cash offers
the one opportunity to transact in a truly anonymous way.
That said, Swedes are ditching their physical currency at a breakneck pace with notes and coins in circulation dropping consistently for the past 6 years and down over 15% in 2016 alone.
According to the following chart from Bloomberg, notes and coins in public circulation dropped to an average of 56.8 billion kronor, just $6.4 billion, in the first quarter of this year, the lowest level since 1990 and more than 40% below its 2007 peak with the pace of the decline accelerating to its fastest ever in 2016.
As Bloomberg notes, the avoidance of cash has become so prevalent in Sweden that churches, and even the homeless, now accept plastic and/or digital payments.
And you shouldn't t worry too much about those cyber attacks either...because those things rarely happen these days..."Worst-Ever Recorded" Ransomware Attack Strikes Over 57,000 Users Worldwide, Using NSA-Leaked Tools".
That said, Swedes are ditching their physical currency at a breakneck pace with notes and coins in circulation dropping consistently for the past 6 years and down over 15% in 2016 alone.
According to the following chart from Bloomberg, notes and coins in public circulation dropped to an average of 56.8 billion kronor, just $6.4 billion, in the first quarter of this year, the lowest level since 1990 and more than 40% below its 2007 peak with the pace of the decline accelerating to its fastest ever in 2016.
As Bloomberg notes, the avoidance of cash has become so prevalent in Sweden that churches, and even the homeless, now accept plastic and/or digital payments.
Of course, we should all promptly ignore the negative, unintended consequences of a cashless society in the name of "innovation." Forget about the ultimate power and control it gives to governments to track your every move and to Central Banks to ram their reckless policies down your throat.A growing number of Swedish parishes have started taking donations via mobile apps. Uppsala’s 13th-century cathedral also accepts credit cards.
The churches’ drive to keep up with the times is the latest sign of Sweden’s rapid shift to a world without notes and coins. Most of the country’s bank branches have stopped handling cash; some shops and museums now only accept plastic; and even Stockholm’s homeless have started accepting cards as payment for their magazine. Go to a flea market, and the seller is more likely to ask to be paid via Sweden’s popular Swish app than with cash.
“Fifteen years ago I would withdraw my entire salary and put it in my wallet, so I knew how much I had left, but these days I never really carry cash,” said Lasse Svard, the acting vicar at the parish of Jarna-Vardinge, about 50 kilometers (31 miles) south of Stockholm.
"A drive for innovation has been created in Sweden to come up with cost-effective and user-friendly alternatives to cash,” Skingsley said. Cash is likely to “more or less disappear” as a means of payment in the private sector, she said.
And you shouldn't t worry too much about those cyber attacks either...because those things rarely happen these days..."Worst-Ever Recorded" Ransomware Attack Strikes Over 57,000 Users Worldwide, Using NSA-Leaked Tools".
Evercore: If Markets Drop More, Don't Expect To Be Bailed Out By The Fed This Time
When we were discussing the self-reinforcing dynamics of
vol-neutral funds yesterday, which may or may not continue selling
today depending on what the VIX does, we concluded that aside from the
decision-making mechanics of systematic funds, the biggest question
would be if the Fed, or other central banks, do not do step in to prop
up the market as they have on every other similar occasion in the past 8
years.
His full note below:
According to a follow up note sent overnight by Evercore ISI's Krishn Guha, the answer is yes... at least for the first 10% of any upcoming market drop. As Guha writes, "with the US equity market sell-off intensifying Wednesday afternoon, a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 - 10 per cent type correction and maybe not immediately even then.Would that imply that traders - be they CTAs, risk-parity, or simply carbon-based - are finally on their own?
Somehow we doubt that after 8 years of propping up market, the Fed will suddenly walk away, but who knows: maybe this time it is different.Clients need to rely on their own hedging and risk management strategies, not assume a public put that is anywhere near the current spot price. Indeed Fed officials might even welcome (within reason, it would be unwise to push this too far) the opportunity to disabuse the markets that such protection exists.
His full note below:
IF MARKETS WEAKEN FURTHER, DON’T EXPECT TO BE QUICKLY BAILED OUT BY THE FED
With the US equity market sell-off intensifying Wednesday afternoon, a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 - 10 per cent type correction and maybe not immediately even then. Clients need to rely on their own hedging and risk management strategies, not assume a public put that is anywhere near the current spot price. Indeed Fed officials might even welcome (within reason, it would be unwise to push this too far) the opportunity to disabuse the markets that such protection exists.
To be very clear we are not forecasting a market correction; markets have shrugged off political woes before, the cushion from a weaker dollar and very low ten year yields provide some support for valuations, and a moderate but persistent step-up in volatility need not generate a large sell-off from here. We do however fear that there is a gap between market expectations and likely Fed behavior that could intensify any correction that did take place at the point at which market participants realized that expectations of early Fed support were not valid.
In our view the right way to think about the so-called “Fed put” is as follows. There is no direct Fed put in the sense that even those policymakers who are sensitive to market developments do not view a given value of the equity market as a goal of policy or as a necessary condition for achieving the macro goals of policy (full employment and 2 per cent inflation). There is however an indirect and partial Fed put in the sense that policymakers do respond to shocks — including from sudden large declines in the stock market — to the extent that these shocks threaten the achievement of its macro policy goals, and these actions tend to be stabilizing to markets.
The Fed macro put is time-varying with respect to equity market prices. First, the Fed is more sensitive to equity market declines — as to any other form of negative shock — when it is pinned against the zero bound on rates as was the case for most of the past decade but is no longer strictly the case today. Second, the Fed is more sensitive to equity market declines when weakness is sustained, pervasive across asset classes (credit as well as equity) and geographies, and appears associated with real economic developments that threaten a marked deterioration in the outlook and balance of risks that could in turn be compounded by market weakness — as was the case in early 2016 but is not obviously the case today.
As we wrote earlier this month we believe that the factors that caused the Fed to appear skittish in 2015 and 2016 — weak and fragile global growth, extreme dollar strength and associated tightening in financial conditions, pronounced weakness in indicators of inflation expectations and the paucity of plausible upside risks — no longer apply in force today and the Fed is therefore likely to appear more resolute, both with respect to soft patches in the data and any equity market sell-off.
Of course as with soft patches in the data this is not an absolute statement: a large enough and persistent enough decline in the equity market and associated loss of wealth and tightening of financial conditions would obviously have implications for the Fed policy path. However, the FOMC is likely to take a longer-range view than most market participants as to what the benchmark for this evaluation should be. If the S&P 500 fell another 5 per cent it would “only” be back where it was at the time of the December FOMC meeting, since when the dollar has weakened appreciably; even a 10 per cent decline would “only” wipe out the gains since the day before the election. It is not obvious that either consumption or investment were highly sensitive to those moves on the way up, though it is certainly possible that they could be more sensitive on the way down.
Faced with a 5 - 10 per cent equity market decline that appeared driven by a correction of excessive valuations and fiscal policy hopes rather than a more troubling deepening of what the Fed currently assesses to be transitory early year economic weakness, we think the Committee might well still move forward with a June rate hike. The Committee is not so far from the zero bound that it could prudently be too dismissive of an equity market correction and might at that point underline that subsequent tightening would be conditional on the economy continuing to evolve broadly in line with its expectations. But if the macro data on payrolls, unemployment, activity and inflation in the period running up to September indicated that the economy had firmed up following the soft patch in Q1 with relatively little sign of drag from the equity market correction, a September hike, December start to balance sheet roll-off and some further hiking in 2018 would remain plausible — even if there would probably be a little less cumulative hiking over this period than would have been the case with a more robust equity market
