The IMF and the Post-dollar World

Original article can be found here: http://independenttrader.org/the-imf-and-the-post-dollar-world.html

Last month James Rickards increased his presence in the media. It coincides with him promoting his new book. I try to follow his thoughts and reports as he is connected with people in the central bank, the World Bank, and Pentagon circles.
 

What grabbed my attention is his thoughts about the shape of the future IMF governed the monetary system. Rickard’s is definitely not a prophet but where he draws the line may be similar to what we are going to see in the near future. What you will read is a combination of his suggestions, opinions of myself and people who I occasionally consult investment decisions with.

Insolvent central banks

For the last 40 years, we have seen constant growth of indebtedness on every level: individual, corporate and public. The expansion of financial sector being a result of legal manipulations and deregulation and inception of a market for derivatives led to the first serious crisis in 1998 when a hedge fund managed by two Nobel Prize winners went bankrupt. Long Term Capital Management thanks to a bad decision and huge leverage generated loss of few billion USD. To prevent the domino effect of bankruptcies the debt was bought by investment banks from Wall Street. Back in the days, it was an unprecedented bail-out.

The level of debt and leverage rose continuously until next crisis in 2008 when Wall Street banks were in trouble. Instead of letting them go bankrupt effectively cleansing the system, the FED printed out of thin air 800 billion USD and bought all toxic assets from those banks. It didn’t end there. Between 2009 and 2010 Bernanke without consent from Congress and any other supervisory body printed another 16 trillion USD (more than the USD GDP then) and gave it as a credit to banks in the US, Japan and Europe. Only in 2011 we could hear about it but the case was quickly silenced. This already shows that central banks are beyond anyone’s control.

Later central banks accumulated various assets to help their shareholders (commercial banks) and to prevent the total collapse of the monetary system from which they benefit the most. Today balance sheets of central banks are very rich:

a) Government debt – today bonds are the guarantee of a loss. For the last 30 years, central banks had a good run as yields were falling and the price was going up. With today policy of ZIRP (and sometimes NIRP) it will take a very small change in price for the bank to face insolvency.

b) Commercial debt – central banks stepped in because there was no buyer for corporate bonds. This can postpone cascade of bankruptcies and debt restructuring that could result in the fall of a few big investment banks. In other words – another worthless asset.

c) The debt secured by a real estate mortgage. Added to the list to again prevent the collapse of the system. Worthless.

d) Equities and real estate investment funds. After central banks were forced by swaps to increase the supply of a local currency, they acquired a surplus of USD. They invested this capital in equities and REITs. Contrary to the previous groups of assets this one has a significant value. The problem here is that volatility of price is dependent on the mood in financial markets.

e) Gold – the majority of investors don’t know how much gold each central bank has. We can only look at official statistics but those are far from reality. Chinese constantly publish lower numbers than actual data. Germany on the other hand, has decent reserves. Berlin’s gold is deposited in London and New York. In the case of any systemic problems it is hard to imagine anyone would be given their reserves. This would increase sovereignty at the expense of the hegemony across the Atlantic.

With today’s prices, government bonds are the clear majority. With very high leverage of central banks, an increase of yield by 2-3% puts the bank on the verge of collapse, at least theoretically. We are talking about theories as there is no central bank audit on the horizon. There are no controls over them. A bankruptcy of a central bank would be initiated when a new design is ready for implementation. Those who will benefit from that change are probably working on a new monetary system as we speak: order out of chaos.

Another IMF bail-out

The only chance for buying a little time, Rickards thinks, lies with the IMF. The IMF is the issuer of the SDR – supranational currency with no backing in material goods. The SDR basket is no different than any other fiat currency. The issuer can without any control print the amount needed.

For the moment, the value of SDR amounts to 200 billion USD which is a rounding error on a global scale. The situation may change in the face of another global crisis. Just like Rickards said, if the SDR basket works is only because no one understands that it is just the same form of fiat money.

Another monetary crisis will most probably touch also central banks with their toxic assets bought systematically from insolvent governments (bonds) or commercial banks (junk assets). Under those circumstances, the IMF being supranational institution can offer a solution for such turbulent times. Ultimately no crisis should be left unused.

To decrease the central banks’ debt the IMF can just take over the worthless assets in exchange for freshly printed SDRs. Slowly the IMF currency would gain function of a reserve currency after the USD. The dollar’s role simultaneously should be reduced in a controlled manner in international trade and as a currency reserve of governments and central banks. The USD finally reduced to the national currency level would share the same fate as British pound.

The supply of the SDR then grows with each IMF’s move. Later, few countries could gain the ability to issue debt denominated in the new currency and international corporations implement a new way to settle their deals according to the SDR basket.

Why would anyone accept the SDR?

Let’s divide reasoning into two groups: threats and incentives.

Threats:

a) Destruction of a local currency.

A change of a monetary system is not an easy task. In the beginning, we need a crisis. An inflationary crisis coupled with an economic depression. The result: people need to require the government to do ‘something’. From one side we have a destruction of a local currency, hyperinflation and an economic depression with all their consequences magnified by mainstream media. On the other hand, we have the proposition to join a new ‘better’ system.

b) Takeover of national wealth

Continue reading here: http://independenttrader.org/the-imf-and-the-post-dollar-world.html 

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