1. Dollar Dominance Under Multiple, Converging Threats

    For years, currency analysts have looked for signs of an international monetary “reset” that would diminish the dollar’s role as the leading reserve currency and replace it with a substitute agreed upon at some Bretton Woods-style monetary conference.

    That push has been accelerated by Washington’s use of the dollar as a weapon of financial warfare, including the application of sanctions. The U.S. uses the dollar strategically to reward friends and punish enemies.

    The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  2. Japan on a Larger Scale

     

    In my 2014 book, The Death of Money, I wrote, “The United States is Japan on a larger scale.” That was five years ago.

    Last week, prominent economist Mohamed A. El-Erian, formerly CEO of PIMCO and now with Allianz, wrote, “With the return of Europe’s economic doldrums and signs of a coming growth slowdown in the United States, advanced economies could be at risk of falling into the same kind of long-term rut that has captured Japan.”

    Better late than never! Welcome to the club, Mohamed.

    To read the rest of this article, click here.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  3. Are the Central Banks out of Bullets?

     

    We all know the outlines of how the Fed and other central banks responded to the financial crisis in 2008.

    First the Fed cut interest rates to zero and held them there for seven years. Then the Fed guaranteed every bank deposit in America regardless of the $250,000 limit on FDIC insurance. Next the Fed guaranteed every money market fund in America, even though such funds are not entitled to insurance or guarantees. Finally, the Fed did $10 trillion of currency swaps with the European Central Bank (to bail out Europe) and printed almost $4 trillion of new money under QE1, QE2 and QE3 to subsidize U.S. banks with risk-free profits.

    This extravaganza of zero rates, guarantees, swaps and money printing worked to ease the panic and prop up the financial system. But it did nothing to restore growth to its long-term trend or to improve personal income at a pace that usually occurs in an economic expansion.

    Now, after a 10-year expansion, policymakers are considering the implications of a new recession. There’s only one problem: Central banks have not removed the supports they put in place during the last recession.

    Interest rates are up to 2.5%, but that’s far lower than the 5% rates that will be needed so the Fed can cut enough to cure the next recession. The Fed has reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that’s still well above the $800 billion level that existed before QE1.

    In short, the Fed (and other central banks) have only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow. This article puts the Fed’s situation in the context of a global slowdown and increasing odds of a recession.

    It will takes years for the Fed to get interest rates and its balance sheet back to “normal.” Until they do, the next recession may be impossible to get out of.

    The odds of avoiding a recession until the Fed normalizes are low. The Fed cannot escape the corner they have painted themselves into.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

     

  4. Trump Continues to Show Who’s Boss at the Federal Reserve

    Almost two years ago, not long after Donald Trump was sworn in, I wrote several articles on the theme that “Trump owns the Fed.”

    The logic behind this claim was simple. There are seven members on the board of governors of the Federal Reserve System. When Trump came into office, only five of those seats were filled and there were two vacancies.

    Those vacancies represented a political miscalculation on the part of President Obama. The Obama administration would have had difficulty filling those two seats during Obama’s last year in office because of opposition from the Republican-controlled Senate. Obama didn’t worry because he liked the five members who were already on the board and was confident that Hillary Clinton would win the 2016 election and would fill the vacancies with safe hands.

    Trump’s shock victory handed the vacancies to Trump. It gets better.

    Within Trump’s first thirteen months in office, three other governors either retired or resigned. These three were Janet Yellen (resigned Feb. 3, 2018), Stan Fischer (resigned Oct. 16, 2017) and Dan Tarullo (resigned April 5, 2017). Those three resignations combined with the two vacancies left Trump in the position of being able to fill five of the seven seats on the board.

    One of the holdovers was Jay Powell, the current chair and a loyal Republican. This left Lael Brainard as the only Democrat on the board of governors — a lonely position indeed.

    Trump has filled three of the five vacancies by appointing Richard Clarida (the new vice chair), Michelle W. Bowman (filling the “community bank” seat) and Randy Quarles (the new vice chair for regulation). This still leaves the two original vacancies.

    As explained in this article, Trump’s prospective nominees are Herman Cain (founder of Godfather’s Pizza and a former presidential candidate) and Steve Moore (a supply-sider and think-tank head). The article’s author points out that a Ph.D. in Economics is not a requirement for membership on the board and too many Ph.D.s may actually be detrimental because of groupthink and lack of cognitive diversity.

    The latest reports show that Cain may have to withdraw his name because of opposition by Republican senators to claims of sexual harassment. In that case, Trump is sure to nominate another close ally with similar views and no personal baggage.

    The point is to nominate governors who favor lower interest rates and will hold Jay Powell’s feet to the fire to make sure that rates are not raised. The object is to avoid a recession and pump up the stock market in the run-up to the 2020 presidential election.

    We’ll see if Trump’s strategy works. Meanwhile, there’s no question about the long shadow that Trump casts over the mighty Fed.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  5. Dollar Threats Are Coming From All Directions as Russia, China Buy Gold

    Attacks on the dollar are not limited to SDRs. The most imminent threat comes from the oldest form of money — gold. Specifically, a combination of gold and digital currency may constitute a potent alternative to the dollar.

    The fact that Russia and China have been acquiring gold is old news. Both countries have more than tripled their gold reserves since 2009. In addition to buying gold, Russia has been dumping U.S. Treasuries and has reduced its dollar asset position to almost zero.

    Still, there are practical problems with using gold as a form of currency, including storage and transportation costs. As explained in this article, Russia is solving these transactional hurdles by combining its gold position with distributed ledger technology.

    Russia and China could develop a new cryptocurrency that would be transferred on a proprietary encrypted ledger with message traffic moving through an internet-type system not connected to the existing internet. Other countries could be allowed into this new system with permission from Russia or China.

    The new cryptocurrency would be a so-called “stable coin,” where the value was fixed with reference either to a weight of gold or another standard unit such as the SDR. Goods and services would be priced in this new unit of account. Periodically, surpluses and deficits would be settled up in physical gold.

    Such net settlements would require far less gold than gross settlements (where every transaction had to be paid for in real-time). This type of system (also called a “permissioned blockchain”) is not pie-in-the-sky, but is already under development and will be deployed soon.

    Apparently, the U.S. government will be the last to know.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  6. The Drumbeat for “World Money” to Replace Dollars Keeps Getting Louder

    For years, currency analysts have looked for signs of an international monetary “reset” that would diminish the dollar’s role as the leading reserve currency and replace it with a substitute agreed upon at some Bretton Woods-style monetary conference. The signs of a reset are everywhere, but at least for now the dollar is still king of the hill.

    The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. With such a dominant position, the dollar will not be easy to replace. Still, the trends are not good for the dollar.

    The international reserve position may be 60%, but as recently as 2000 it was over 70% and just a few years ago it was still at 63%. That trend is not your friend.

    Russia and China have been amassing massive quantities of gold (see article below). Russia has sold off almost all of its dollar-denominated U.S. Treasury securities and has increased the gold portion of its official reserves to over 20%.

    Another challenger to the dollar, as described in this article, is the IMF’s special drawing rights or SDRs. The SDR is a form of world money printed by the IMF. It was created in 1969 as the realization of an earlier idea for world money called the “bancor,” proposed by John Maynard Keynes at the Bretton Woods conference in 1944. The bancor was never adopted, but the SDR has been going strong for 50 years.

    This article describes how the IMF could function more like a central bank through more frequent issuance of SDRs and by encouraging the use of “private SDRs” by banks and borrowers. At the current rate of progress, it may take decades for the SDR to pose a serious challenge to the dollar.

    But that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalized their balance sheets from the last crisis. In that case, the replacement of the dollar could happen almost overnight.

    Individuals will not be allowed to own SDRs, but you can still protect you wealth by buying gold. That’s what Russia and China are doing.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  7. The U.S. Has Fallen Into the “Japan Trap” and May Stay There for Years

    In my 2014 book, The Death of Money, I wrote, “The United States is Japan on a larger scale.” That was five years ago.

    Last week, prominent economist Mohamed A. El-Erian, formerly CEO of PIMCO and now with Allianz, wrote, “With the return of Europe’s economic doldrums and signs of a coming growth slowdown in the United States, advanced economies could be at risk of falling into the same kind of long-term rut that has captured Japan.” Better late than never! Welcome to the club, Mohamed.

    Japan started its “lost decade” in 1990. Now their lost decade has dragged into three lost decades. The U.S. began its first lost decade in 2009 and is now entering its second lost decade with no end in sight.

    What I referred to in 2014 and what El-Erian refers to today is that central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt. In Japan this problem began in 1990, and in the U.S. the problem began in 2009, but it’s the same problem with no clear solution.

    The irony is that in the early 2000s, former Fed Chair Ben Bernanke routinely criticized the Japanese for their inability to escape from recession, deflation and slow growth. When the U.S. recession began during the global financial crisis of 2008, Bernanke promised that he would not make the same mistakes the Japanese made in the 1990s. Instead, he made every mistake the Japanese made, and the U.S. is stuck in the same place and will remain there until the Fed wakes up to its problems.

    Bernanke thought that low interest rates and massive money printing would lead to lending and spending that would restore trend growth to 3.2% or higher. But he ignored the role of velocity (speed of money turnover) and the unwillingness of banks to lend or individuals to borrow.

    When that happens, the Fed is pushing on a string — printing money with no result except asset bubbles. Get ready for more disinflation (or deflation), slow growth and possible recession. The central banks are stuck and there’s no way out.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  8. A TAX ON RAIN? A TAX ON THE AIR YOU BREATHE? GET READY FOR THAT AND MORE

    Well, it’s tax time again. Tens of millions of Americans are getting ready to file their tax returns before the April 15 deadline, while millions more are requesting extensions (but you still have to pay the taxes by April 15).

    People grumble about income taxes, but most accept it as the price we pay to maintain a government that offers the rule of law, defense and help for the needy. People take the same view of property taxes that support towns and cities in offering police protection, road maintenance and parks, among other services.

    We may complain about high rates and government waste, but we accept income and property taxes as part of the social contract. But, what about a tax on rain?

    As this article explains, New Jersey now has a “rain tax” based on the runoff from your property into streams and rivers that the state says it must maintain.

    New York has just imposed a “congestion tax” on drivers into midtown and lower Manhattan. Never mind that you already pay a gas tax, bridge and tunnel tolls and a personal property tax on your car. Now you have to pay extra to drive to a Broadway show.

    In Washington, House Democrats now want a stock tax on unrealized gains. So even if you don’t sell your shares, you still pay an annual tax on paper gains. There’s another name for that — a wealth tax.

    This list goes on. What’s clear is that no matter how many taxes the government collects, they have an insatiable appetite for more and more. Pretty soon, they will tax the air you breathe. Oh wait, there’s already a proposal to do that that too.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  9. BOOM OR BUST? MARKET SIGNALS ARE MIXED, BUT ONE HAS THE BEST TRACK RECORD

    Despite all of the happy talk from Larry Kudlow and other Trump administration officials, the data make it clear that the U.S. economy is slowing down. The U.S. economy had an outstanding performance in the second quarter of 2018 (4.2% annualized growth) immediately after the Trump tax cuts. But the performance since then has been all downhill.

    The third quarter of 2018 was 3.4%. The fourth quarter of 2018 was 2.2%. The estimate for the first quarter of 2019 is 2.1% as of now (we won’t have the official numbers until late April).

    On the whole, it looks like the second quarter of 2018 was a temporary “Trump bump” from the tax cuts and growth is regressing to the same average growth of 2.23% we’ve had since the expansion began in June 2009. That’s the weakest expansion in U.S. history.

    The Trump economy looks a lot like the Obama economy and the Fed has failed to find a way to change that. Does declining growth mean we’re heading for a recession?

    This article takes a close look at two of the top leading indicators on the economy – stocks and bonds. Unfortunately, the two indicators are sending mixed signals.

    The continued rise in the stock market is sending a signal that the economy is fine, growth has stabilized and corporate earnings will grow later this year after a first-half rough patch. The bond market is sending recession signals with falling rates, disinflation and an inverted yield curve (where longer-term rates are lower than short-term rates; usually the opposite is true). Is it boom or doom?

    History shows that the bond market indicator has a better track record at predicting recessions than stocks. The most likely outcome is that rates may fall a bit more and then find a floor. Stocks may rise a bit more, but hit the same ceiling around Dow 26,700 where they have topped out three times since January 2018. In other words, expect more of the same.

    That’s not great news, but it’s not a disaster, either. Debt is still growing faster than the economy, but a debt or currency crisis may still be a few years away.

    Every portfolio should have some cash (to protect against deflation) and gold (to protect against inflation). Then you can sit back and watch stocks and bonds slug it out while still protecting your wealth.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  10. KISS THE DOLLAR GOODBYE. SAUDIS THREATEN TO PRICE OIL IN EUROS AND YEN.

    Investors have been speculating for years about the demise of the “petrodollar” deal struck by Henry Kissinger and William Simon in 1974. Now, according to this article, the Saudis themselves are confirming that they may be getting ready to push the dollar to one side when it comes to setting the price for oil.

    In 1974, the price of oil was skyrocketing, partly due to inflationary policies pursued by the Federal Reserve and partly due to an Arab oil embargo in response to U.S. aid to Israel in the Arab-Israeli Yom Kippur War of 1973. The world economy was under threat unless a way could be found to “recycle” the dollars the Arabs were receiving back into U.S. banks.

    President Nixon and Henry Kissinger asked Treasury Secretary William Simon to negotiate with Saudi Arabia on this issue. The Saudis and other OPEC members agreed that oil would be priced in dollars (the “petrodollar”) and the dollars would be deposited with U.S. banks so they could be loaned to developing economies who could then buy U.S. manufactured goods and agricultural products.

    The deal worked well for everyone and continued until today. Now, the U.S. Congress is considering legislation that would expose OPEC members to U.S. antitrust lawsuits.

    Saudi Arabia has said that if that pending legislation becomes law, they will end the petrodollar deal. The result would be that oil could be priced in euros, yen, yuan or even gold.

    The result for the U.S. dollar and U.S. economy would be catastrophic. The best protection for investors is to allocate part of your assets to gold as insurance against an unexpected collapse in the dollar.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.