Competing Currencies

[bernorange 8,348]

On 1/26/2023 at 8:15 AM, bernorange said:

... Aside from that, I also believe that there is massive systemic risk in the credit markets.  The Fed is doing it's best applying pressure to the rails in the grand Shoot the Moon game.  Whether they can maintain the see saw action without something breaking is still an open question....

SVB et al:

 

On 1/26/2023 at 8:15 AM, bernorange said:

I believe that we are approaching an inevitable event horizon where the petrodollar system will break down and the FRN dollar will lose it's world reserve privilege.  I believe the wheels are already turning (slowly).  America will face a currency and sovereign debt crisis.  It might 10 years out.  It might be 50 years out.  It might be longer than that.  But it is coming. ...

On 2/19/2023 at 5:00 PM, Fudge Nuggets said:

If countries have a choice between joining Brazil, Russia, India, China and South Africa or stable(ish) western democracies I don’t think that’s going to work out the way the gold bugs and crypto kooks think it will.

https://www.surlyhorns.com/board/topic/4200-tin-foil-hats-and-the-total-perspective-vortex-redux/?do=findComment&comment=5100309

 

[Dahobbs 17,449]

🙄 

The failure of a single bank isn't a sign of the collapse of the dollar. Come the fuck on. 

[Neonmoon 38,127]

Petition to change thread title to "Anti-Central Bank Goldbugs Conspiracy Jamboree"

 

[bernorange 8,348]

11 minutes ago, Dahobbs said:

🙄

The failure of a single bank isn't a sign of the collapse of the dollar. Come the fuck on. 

I didn't say that it was.  The SVB failure is directly related to the Fed raising rates and is an example of "something breaking". 

[Neonmoon 38,127]

51 minutes ago, bernorange said:

I didn't say that it was.  The SVB failure is directly related to the Fed raising rates and is an example of "something breaking". 

No, the SVB failed because they bet their clients money in the open market. The bank has to be aware of the risk of doing so, which includes, losing their clients money due to conditions such as, the Fed raising interest rates to combat inflation. 

But how could they foresee a black swan event like the pandemic? Which caused the Fed to lower rates to help millions of small businesses avoid collapse, which led to inflation, which led to the Fed raising rates? They couldn't, no one could. That's why putting your money into the market brings risk, even in US Treasuries. 

[Fudge Nuggets 19,151]

This black swan event happened over the course of three years.  Over the last year it was no surprise at all that rates were going up.

[Dahobbs 17,449]

45 minutes ago, Fudge Nuggets said:

This black swan event happened over the course of three years.  Over the last year it was no surprise at all that rates were going up.

It is the equivalent of getting run over by the Zamboni in Austin Powers. 

[pantone159 712]

2 hours ago, bernorange said:

The SVB failure is directly related to the Fed raising rates and is an example of "something breaking". 

The SVB failure is directly related to the bank management making the obvious mistake of backing short-term money (deposits that can be withdrawn) with long-term assets (long duration Treasuries). This has caused plenty of banks to fail in the past and being aware of this risk should be Banking 101 level obvious. For a more local variety of this issue, see the S&L crisis from the 1980's or so. At least the S&L's had the excuse that they were basically forced into investing in long-term mortgages, while in SVB's case, being that they invested in marketable securities which they chose, was an unforced error.

And it should also be completely obvious that bank deposits in excess of FDIC coverage were a credit risk from the bank. It is kind of astonishing really that somebody who claims to be financially sophisticated (Ackerman) would ever think to utter that. This should have been 100% totally obvious to the management of every single one of the companies who had large deposits with SVB.

I do agree that there will be rippling effects that go beyond SVB's customers, which will have unknown consequences, but for now those who are caught by this made their own unforced mistake. They will probably eventually get almost all of their money out, but for now I guess their management has finally learned that credit risk is a thing.

Edit: I am mixing threads in my head and was half responding to this:

Edited March 11, 2023 by pantone159

[Dnaguy 11,777]

30 minutes ago, pantone159 said:

The SVB failure is directly related to the bank management making the obvious mistake of backing short-term money (deposits that can be withdrawn) with long-term assets (long duration Treasuries). This has caused plenty of banks to fail in the past and being aware of this risk should be Banking 101 level obvious. For a more local variety of this issue, see the S&L crisis from the 1980's or so. At least the S&L's had the excuse that they were basically forced into investing in long-term mortgages, while in SVB's case, being that they invested in marketable securities which they chose, was an unforced error.

And it should also be completely obvious that bank deposits in excess of FDIC coverage were a credit risk from the bank. It is kind of astonishing really that somebody who claims to be financially sophisticated (Ackerman) would ever think to utter that. This should have been 100% totally obvious to the management of every single one of the companies who had large deposits with SVB.

I do agree that there will be rippling effects that go beyond SVB's customers, which will have unknown consequences, but for now those who are caught by this made their own unforced mistake. They will probably eventually get almost all of their money out, but for now I guess their management has finally learned that credit risk is a thing.

Edit: I am mixing threads in my head and was half responding to this:

 

Is this the same Ackerman who caused the market to almost collapse during Covid shutdown hysteria when he went on CNBC?

dudes a Douche who speaks up when  he can make significant $ market drop and on volatility.

Convince me I’m wrong.

 

[Nivek 16,862]

He is wrong. Probably has friends hurt or has some angle here.

[Bullneck 18,987]

3 hours ago, Neonmoon said:

Petition to change thread title to "Anti-Central Bank Goldbugs Conspiracy Jamboree"

 

Seconded.  

[Neonmoon 38,127]

2 minutes ago, Nivek said:

He is wrong. Probably has friends hurt or has some angle here.

Yep. He wants his friends to get their money back from the taxpayer. It’s not fair they have to lose money by investing 

[Bullneck 18,987]

3 hours ago, bernorange said:

I didn't say that it was.  The SVB failure is directly related to the Fed raising rates and is an example of "something breaking". 

Imagine being a banker and a guy in the money business and not realizing things may not always go the way you want them.  

A few years ago Goldman Sachs got one of their major business lines cut back by a change in regulations.  The next quarter they announced they were losing money.  Imagine having such a simple minded approach to your business that you can't make money unless you are cheating people.  

[Fudge Nuggets 19,151]

59 minutes ago, pantone159 said:

The SVB failure is directly related to the bank management making the obvious mistake of backing short-term money (deposits that can be withdrawn) with long-term assets (long duration Treasuries). This has caused plenty of banks to fail in the past and being aware of this risk should be Banking 101 level obvious. For a more local variety of this issue, see the S&L crisis from the 1980's or so. At least the S&L's had the excuse that they were basically forced into investing in long-term mortgages, while in SVB's case, being that they invested in marketable securities which they chose, was an unforced error.

The Great Financial Crisis provided another prime example of this.  Those toxic mortgage bonds built on 30-year (or longer) mortgages were being financed via the Fed's overnight lending window.  When you leverage up 30:1, that's a recipe for disaster when rates move against you and the value of your assets starts to decline.

[nbmishoid 941]

Didn’t Aesop cover this?

[bernorange 8,348]

Eyes wide open:

https://nypost.com/2023/03/11/why-the-us-dollar-has-become-an-at-risk-currency/

[Bozo_Casanova 26,290]

This thread hits close to home!

[bernorange 8,348]

Bold emphasis is mine:

Quote

March 12, 2023

Joint Statement by Treasury, Federal Reserve, and FDIC

Department of the Treasury

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Washington, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm

The Fed has essentially announced that they are going to backstop 100% of depositors across the entire banking system.  This is how fragile the banking confidence game has become.  If this ever gets tested by a loss of confidence broad based banks run, it's going to require the Fed to conduct massive (digital) money printing.

[bernorange 8,348]

Quote

...  During a visit by Xi Jinping to Moscow last week, Vladimir Putin pledged to adopt the renminbi for "payments between Russia and countries of Asia, Africa, and Latin America," in a bid to displace the dollar. And this comes as Moscow is already increasingly using the renminbi for its swelling trade with China and embracing it in its central bank reserves, to reduce its exposure to "toxic" -- American -- assets.

Does this matter? Until recently, most Western economists would have said "heck, no." After all, it has long been assumed that the closed nature of China's capital account is an impediment to wider use of its currency.

But right now Putin's announcement is packing an unusually emotional punch. One reason is that concerns are afoot that this month's U.S. banking turmoil, inflation, and looming debt ceiling battle is making dollar-based assets less attractive. "The dollar is being debased in order to fund the bank bailouts," Peter Schiff, the libertarian economist, thundered this week, echoing a view widespread on the American right.

Meanwhile, Jim O'Neill, the former Goldman Sachs economist who launched the "Brics" tag (short for the Brazilian, Russian, Indian, and Chinese bloc), published a paper this week arguing that "the dollar plays far too dominant a role in global finance" and calling on emerging markets to cut their risks.

But the other factor sparking unease is that even before Xi's visit to Moscow, the Saudi government announced that it will start invoicing some oil exports to China in renminbi. Separately, France just did its first liquid natural gas sale in RMB and Brazil has embraced the currency for some of its trade with China.

There is absolutely no sign that these token gestures are hurting the greenback right now. Yes, the dollar's proportion of global reserves has sunk from 72% in 1999 to 59%, as central banks increasingly diversify their investment funds and discard currency pegs. And it is also true that the advent of wholesale (bank-to-bank) central bank digital currencies could theoretically accelerate this diversification by making it easier for non-American central banks to deal directly with each other in their own currencies.
...
... some thought-provoking research on trade invoicing published last year by the Centre for Economic Policy Research.

A decade ago, it was widely assumed that another factor underpinning the dollar was the "stickiness" of trade invoicing patterns, as Gita Gopinath, deputy head of the International Monetary Fund, has noted. But the CEPR paper suggests this might now be slowly shifting -- as Chinese trade has expanded in recent years, RMB use has risen too.

So much so, in fact, that it now exceeds euro use for trade invoicing, which is “striking, given China's low degree of capital account openness," the CEPR says. And it argues that "contrary to conventional wisdom, lack of capital account openness may not fully prevent the RMB from playing a stronger role as an international and reserve currency."

After all, it notes, a $200 billion offshore RMB market has already emerged -- and the currency is being used "in invoicing and settling China's foreign trade and payments" and "a global network of clearing and payments."

The net result, the CEPR predicts, is that a "multipolar" currency world could emerge in the coming years, of the sort that O’Neill is now calling for. That would not be as dramatic a switch as Putin or Xi might like to see, or that Washington alarmists fear.

But to my mind it seems a sensible medium-term bet. And even "just" a multipolar pattern could come as a shock to American policymakers, given how much external financing the U.S. needs.

So investors and policymakers alike need to watch the geeky details of trade invoicing in the coming months. Putin's bluster may turn out to be toothless; but it could also be a straw in the wind.

https://www.ft.com/content/f8f3b2cd-6690-4f26-b81e-e972751c8799

h/t (non-paywall):  https://gata.org/node/22529

 

tick tock

[bernorange 8,348]

Quote

...

How far is the talk of de-dollarization going to proceed? Probably not very.

...

https://www.bloomberg.com/opinion/articles/2023-04-13/the-dollar-rules-the-world-now-and-for-the-foreseeable-future

[Mullet Free 40]

Biden fave stirring the pot

 

[bernorange 8,348]

The Hill is not drinking Bloomberg's coolaid.

Quote

In talking this week with a friend about the United States seemingly imploding from within across multiple sectors, my friend stressed: “It’s not just from within. There is a run on the United States from certain nations and business interests around the world. Just like there was a run on banks after the collapse of Silicon Valley Bank, many nations are either thinking about — or actually proceeding with — transferring at least a portion of their allegiance, assets and commitments from the ‘Bank of the U.S.’ to the ‘Bank of China’ or elsewhere.”

This was not just some person sitting on a porch casually talking about current events while whittling a stick waiting for his Social Security or pension check to hit the mailbox. This was a former high-level U.S. government official, now a CEO, someone who sits on the boards of directors for multiple companies. He has massive real-world and business experience and believes the United State may be on the verge of collapse. ...

https://thehill.com/opinion/white-house/3950467-is-there-a-worldwide-run-on-the-bank-of-the-united-states-of-america/

[Brisketexan 104,635]

The Hill is not drinking Bloomberg's coolaid.

In talking this week with a friend about the United States seemingly imploding from within across multiple sectors, my friend stressed: “It’s not just from within. There is a run on the United States from certain nations and business interests around the world. Just like there was a run on banks after the collapse of Silicon Valley Bank, many nations are either thinking about — or actually proceeding with — transferring at least a portion of their allegiance, assets and commitments from the ‘Bank of the U.S.’ to the ‘Bank of China’ or elsewhere.”
This was not just some person sitting on a porch casually talking about current events while whittling a stick waiting for his Social Security or pension check to hit the mailbox. This was a former high-level U.S. government official, now a CEO, someone who sits on the boards of directors for multiple companies. He has massive real-world and business experience and believes the United State may be on the verge of collapse. ...

https://thehill.com/opinion/white-house/3950467-is-there-a-worldwide-run-on-the-bank-of-the-united-states-of-america/

Yes. That seems like a very credible take, free from any wild-eyed nutbar agenda….

Some fear the Biden administration is losing control of our southern border; losing control of our decaying, crime-infested big cities; creating a recession; vilifying and needlessly destroying the fossil fuel industry while pushing suspect and subsidized “green” energy alternatives; leaving tens of billions of dollars in military equipment in Afghanistan while withdrawing our troops and abandoning an ally; stepping closer to a trip-wire in the Ukraine war, which could trigger a nuclear strike; turning on Israel over ideological issues as Turkey and others call on Arab and Muslim nations to unite and crush the Jewish State; weakening our military with one “woke” edict after another; focusing on “trans” issues at the expense of failing transportation infrastructure; cheerleading the social justice warrior takeover of our colleges and universities; and weakening the dollar (the currency much of the world depends upon).
Is it any wonder, then, that nations such as France, India, Saudi Arabia, Japan, Mexico, Brazil and others are suddenly hedging their bets by looking beyond the United States of America for partnerships and stability?

[Mullet Free 40]

Whether anyone thinks it was justified or not, the freezing of Russian central bank reserves is going to have predictable effects. I think this is part of what we’re seeing.
 

Even some of our closest allies (like France) are publicly attempting to hedge their exposure to dollars and the US financial system. It won’t all happen overnight, but these moves are going to continue. 

[Neonmoon 38,127]

5 hours ago, Mullet Free said:

Whether anyone thinks it was justified or not, the freezing of Russian central bank reserves is going to have predictable effects. I think this is part of what we’re seeing.
 

Even some of our closest allies (like France) are publicly attempting to hedge their exposure to dollars and the US financial system. It won’t all happen overnight, but these moves are going to continue. 

[Fudge Nuggets 19,151]

8 hours ago, Brisketexan said:

Some fear blah blah blah....

Yes, some fear.  Those people are known as morons.

[Mullet Free 40]

3 hours ago, Neonmoon said:

 

[bernorange 8,348]

Yellen is a tin foil hat wearing moron per Surly peanut gallery:

Quote

Economic sanctions imposed on Russia and other countries by the United States put the dollar's dominance at risk as targeted nations seek out an alternative, Treasury Secretary Janet Yellen said Sunday.

"There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar," Yellen said on CNN. ...

https://news.yahoo.com/yellen-says-sanctions-may-risk-163713593.html

[Neonmoon 38,127]

No, because unlike you fucking kooks, I am capable of basis reading comprehension. You fall for the click bait title because it panders to your anti-Fed utopia where Bitcoin and gold reign and big bad inflation doesn’t exist. Read the entire fucking article. If you conclude Yellen believes the dollar will lose its reserves status, your English teacher should have the right to beat you to death. 
 

Quote

Economic sanctions imposed on Russia and other countries by the United States put the dollar's dominance at risk as targeted nations seek out an alternative, Treasury Secretary Janet Yellen said Sunday.

"There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar," Yellen said on CNN.

"Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative," she told the network's Fareed Zakaria in an interview. "But the dollar is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties."

The robust US capital markets and rule of law "are essential in a currency that is going to be used globally for transactions," she added. "And we haven't seen any other country that has the basic... institutional infrastructure that would enable its currency to serve the world like this."

Yellen noted that sanctions are an "extremely important tool," all the more so when used by the United States and its allies as "a coalition of partners acting together to impose these sanctions."

Asked about the possibility of using frozen Russian assets to rebuild war-ravaged Ukraine after Moscow's invasion, Yellen said that "Russia should pay for the damages that it's caused."

But she noted there are "legal constraints on what we can do with frozen Russian assets, and we're discussing with our partners what might lie in the future.

[Hefeweizen 5,307]

[Mullet Free 40]

52 minutes ago, Neonmoon said:

No, because unlike you fucking kooks, I am capable of basis reading comprehension. You fall for the click bait title because it panders to your anti-Fed utopia where Bitcoin and gold reign and big bad inflation doesn’t exist. Read the entire fucking article. If you conclude Yellen believes the dollar will lose its reserves status, your English teacher should have the right to beat you to death. 
 

No shit. Here’s the play by play.  
 

I said there’s a link between our increasing sanctions and countries looking for ways around dollar system.
 

You said muh tinfoil hat.
 

Yellen said there is a risk there, but essentially that it’s a long shot. 
 

You, missed the point. 
 

There are a couple things she missed though. 
 

52 minutes ago, Neonmoon said:

The robust US capital markets and rule of law "are essential in a currency that is going to be used globally for transactions," she added.

I guess she misses the irony of citing the importance of our rule of law when what we’re talking about is an unprecedented set of sanctions and freezing of a massive amount of assets of a country. And I saw the justification for it. I just question how much other nations see us freezing sovereign foreign reserves and say, “See look at their rule of law. How reliable.”
 

That’s the other thing she misses. It’s not Russia or Iran we should be worried about. It’s the rest of the world that sees it and starts to think about their options for hedging or avoiding that risk. 

[Neonmoon 38,127]

20 minutes ago, Mullet Free said:

You said muh tinfoil hat.

 

20 minutes ago, Mullet Free said:

That’s the other thing she misses. It’s not Russia or Iran we should be worried about. It’s the rest of the world that sees it and starts to think about their options for hedging or avoiding that risk. 

So we just have to worry about the the rest of the world seeing the power of the "unprecedented set of sanctions and freezing of a massive amount of assets of a country" that is committing genocide and the rest of the world seeing that the US is bad and getting rid of the dollar? Even if I forget some posters 15 year history of saying the dollar is going away, I just have to worry about the rest of the world agreeing with yall's irrational fear?

But not tin foil hat? Right?

 

[Nivek 16,862]

Some people love to promote russian talking points without any thought.  

 

[wildcat09 29,263]

On 4/16/2023 at 8:51 AM, bernorange said:

The Hill is not drinking Bloomberg's coolaid.

https://thehill.com/opinion/white-house/3950467-is-there-a-worldwide-run-on-the-bank-of-the-united-states-of-america/

Who is Douglas Mackinnon and why should anyone care about his opinion?

[hayden_horn 11,360]

24 minutes ago, wildcat09 said:

Who is Douglas Mackinnon and why should anyone care about his opinion?

he's a fucking nut, no huge surprise.

 

[bernorange 8,348]

Another nutbar tinfoil hat wearing moron recognizing the winds of change with Russian talking points.  Lagarde's speech:

Quote

The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponization of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster.

We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.

All this could have far-reaching implications across many domains of policymaking. And today in my remarks, I would like to explore what the implications might be for central banks.

In short, we could see two profound effects on the policy environment for central banks: first, we may see more instability as global supply elasticity wanes; and second, we could see more multipolarity as geopolitical tensions continue to mount.

Today the United States is completely dependent on imports for at least 14 critical minerals. And Europe depends on China for 98% of its rare earth supply. Supply disruptions on these fronts could affect critical sectors in the economy, such as the automobile industry and its transition to electric vehicle production.

In response, governments are legislating to increase supply security, notably through the Inflation Reduction Act in the United States and the strategic autonomy agenda in Europe. But that could, in turn, accelerate fragmentation as firms also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global firms planning to regionalize their supply chain almost doubled – to around 45% – compared with a year earlier

This “new global map” – as I have called these changes elsewhere – is likely to have first-order implications for central banks.

One recent study based on data since 1900 finds that geopolitical risks led to high inflation, lower economic activity and a fall in international trade. And ECB analysis suggests similar outcomes may be expected for the future. If global value chains fragment along geopolitical lines, the increase in the global level of consumer prices could range between around 5% in the short run and roughly 1% in the long run.

These changes also suggest that a second shift in the central bank landscape is taking place: we may see the world becoming more multipolar.

During the Pax Americana after 1945, the US dollar became firmly ensconced as the global reserve and transaction currency, and more recently, the euro has risen to second place. This had a range of − mostly beneficial − implications for central banks.

But new trade patterns may have ramifications for payments and international currency reserves.

In recent decades China has already increased over 130-fold its bilateral trade in goods with emerging markets and developing economies, with the country also becoming the world’s top exporter. And recent research indicates there is a significant correlation between a country’s trade with China and its holdings of renminbi as reserves. New trade patterns may also lead to new alliances. One study finds that alliances can increase the share of a currency in the partner’s reserve holdings by roughly 30 percentage points.

All this could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks – be that for reasons of political preference, financial dependencies, or because of the use of financial sanctions in the past decade.

Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.

There are also attempts to create alternatives to SWIFT. Since 2014, Russia has developed such a system for domestic and cross-border use, with over 50 banks across a dozen countries using it last year. And since 2015 China has established its own system to clear payments in renminbi.

These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.

https://mishtalk.com/economics/as-amazing-as-it-sounds-ecb-president-christine-lagarde-is-making-some-sense

Important observation:

Quote

...  weaponizing the US dollar. That's something Lagarde failed to mention. ...

It is the US weaponizing the US dollar that directly led to many of the key points that Lagarde made.
...

Yellen, Lagarde, et al are recognizing the global shift.  It remains to be seen what Saudi Arabia does with the BRICS.  It's the fulcrum that could accelerate events or stagnate them IMO.

[Neonmoon 38,127]

I'm not commenting on whatever weird precious metals website horseshit take you linked

Here's the entire speech from Lagarde.

https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34fbd6.en.html

Quote

It is a pleasure to be here in New York.

The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponization of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster.

We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.

All this could have far-reaching implications across many domains of policymaking. And today in my remarks, I would like to explore what the implications might be for central banks.

In short, we could see two profound effects on the policy environment for central banks: first, we may see more instability as global supply elasticity wanes; and second, we could see more multipolarity as geopolitical tensions continue to mount.

A changing global economy
In the time after the Cold War, the world benefited from a remarkably favorable geopolitical environment. Under the hegemonic leadership of the United States, rules-based international institutions flourished and global trade expanded. This led to a deepening of global value chains and, as China joined the world economy, a massive increase in the global labor supply.

As a result, global supply became more elastic to changes in domestic demand, leading to a long period of relatively low and stable inflation. That in turn underpinned a policy framework in which independent central banks could focus on stabilizing inflation by steering demand without having to pay too much attention to supply-side disruptions.

But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks. Recent events have laid bare the extent to which critical supplies depend on stable global conditions.

That has been most visible in the European energy crisis, but it extends to other critical supplies as well. Today the United States is completely dependent on imports for at least 14 critical minerals. And Europe depends on China for 98% of its rare earth supply. Supply disruptions on these fronts could affect critical sectors in the economy, such as the automobile industry and its transition to electric vehicle production.

In response, governments are legislating to increase supply security, notably through the Inflation Reduction Act in the United States and the strategic autonomy agenda in Europe. But that could, in turn, accelerate fragmentation as firms also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global firms planning to regionalize their supply chain almost doubled – to around 45% – compared with a year earlier. This “new global map” – as I have called these changes elsewhere is likely to have first-order implications for central banks.

One recent study based on data since 1900 finds that geopolitical risks led to high inflation, lower economic activity and a fall in international trade. And ECB analysis suggests similar outcomes may be expected for the future. If global value chains fragment along geopolitical lines, the increase in the global level of consumer prices could range between around 5% in the short run and roughly 1% in the long run.[

These changes also suggest that a second shift in the central bank landscape is taking place: we may see the world becoming more multipolar.

During the Pax Americana after 1945, the US dollar became firmly ensconced as the global reserve and transaction currency, and more recently, the euro has risen to second place. This had a range of − mostly beneficial − implications for central banks. For example, the ability of central banks to act as the “conductor of the international orchestra” as noted by Keynes, or even firms being able to invoice in their domestic currencies, which made import prices more stable.[

In parallel, Western payments infrastructures assumed an increasingly global role. For instance, in the decade after the Berlin Wall fell, the number of countries using the payments messaging network SWIFT more than doubled. And by 2020, over 90% of cross-border transmissions were being signaled through SWIFT. But new trade patterns may have ramifications for payments and international currency reserves.

In recent decades China has already increased over 130-fold its bilateral trade in goods with emerging markets and developing economies, with the country also becoming the world’s top exporter. And recent research indicates there is a significant correlation between a country’s trade with China and its holdings of renminbi as reserves. New trade patterns may also lead to new alliances. One study finds that alliances can increase the share of a currency in the partner’s reserve holdings by roughly 30 percentage points.

All this could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks – be that for reasons of political preference, financial dependencies, or because of the use of financial sanctions in the past decade.

Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee.

We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.

There are also attempts to create alternatives to SWIFT. Since 2014, Russia has developed such a system for domestic and cross-border use, with over 50 banks across a dozen countries using it last year.

And since 2015 China has established its own system to clear payments in renminbi.

These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.

Policy frameworks for a fragmenting world
How should central banks respond to these twin challenges?

We have clear examples of what not to do when faced with a sudden increase in volatility. In the 1970s, central banks faced upheaval in the geopolitical environment as OPEC became more assertive and energy prices that had been stable for decades ballooned. They failed to provide an anchor of monetary stability and inflation expectations de-anchored – a mistake that should never be repeated for as long as central banks are independent and have clear price stability mandates.

So, if faced with persistent supply shocks, independent central banks can and will go ahead with ensuring price stability. But this can be achieved at a lower cost if other policies are cooperative and help replenish supply capacity.

For example, if fiscal and structural policies focus on removing supply constraints created by the new geopolitics – such as securing resilient supply chains or diversifying energy production – we could then see a virtuous circle of lower volatility, lower inflation, higher investment, and higher growth. But if fiscal policy instead focuses mainly on supporting incomes to offset cost pressures (in excess of temporary and targeted responses to sudden large shocks), that will tend to raise inflation, increase borrowing costs and lower investment in new supply.

In this sense, insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognizing interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal.

We could see the benefits of this in Europe especially, where the multiplier effect of common action in areas such as industrial policy, defense and investing in green and digital technologies is much higher than Member States acting alone.

There is another benefit, too: achieving the right policy framework will not only determine how our economies fare at home, but also how they are viewed globally in a context of greater “system competition”. And while the international institutions established in the wake of Bretton Woods remain instrumental for fostering a rules-based multilateral order, the prospect of multipolarity raises the stakes for such internal policy cohesion.

For a start, an economic policy mix that produces less volatile growth and inflation will be key in continuing to attract international investment. Although 50-60% of foreign-held US short-term assets are in the hands of governments with strong ties to the United States – meaning they are unlikely to be divested for geopolitical reasons – the single most important factor influencing international currency usage remains strength of fundamentals.

By the same token, for Europe, long-delayed projects such as deepening and integrating our capital markets can no longer be viewed solely through the lens of domestic financial policy. To put it bluntly, we need to complete the European capital markets union. This will be pivotal in determining whether the euro remains among the leading global currencies or others take its place.

Central banks also have an important role to play here – even as protagonists.

For example, the manner in which swap lines are used could influence the dynamics of major international currencies. Both the Federal Reserve and the ECB, within their respective mandates, have been proactive in providing offshore liquidity when recent crises have hit. But others are moving too, which is consistent with a rising role of their currencies. We have already seen the People’s Bank of China set up over 30 bilateral swap lines with other central banks to compensate for the lack of liquid financial markets in renminbi.

How central banks navigate the digital era – such as innovating their payment systems and issuing digital currencies – will also be critical for which currencies ultimately rise and fall. This is an important reason why the ECB is exploring in depth how a digital euro could best work if launched.

So, we need to be ready for the new reality that may well lie ahead. The time to think about how to respond to changing geopolitics is not when fragmentation is upon us, but before. Because, if I may paraphrase Ernest Hemingway, fragmentation can happen in two ways: gradually, and then suddenly.

Central banks must provide for stability in an age that is anything but stable. And I have no doubt that central banks will measure up to the challenge.

Thank you.

If you think this speech is anti-central bank or anti-US dollar, then we believe in different worlds of reading comprehension. 

 

 

[bernorange 8,348]

Good read with a sober look at the big picture:

https://research.eurizonslj.com/linkapp/cmaview.aspx?LinkID=pageid100543649nqn~xx9xjt9~tntr~qrzfn9~z~x~f~f~n

[bernorange 8,348]

Posted from my phone last night, so I didn't include a snippet.  Here's the conclusion from the report:

Quote

...
Bottom line

The dollar’s global dominance should be assessed along two distinct lines: reserve and international currency status.  Adjusting for exchange rate (price) changes, the dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions.  While it is well understood that the dollar had, for close to 20 years, suffered a quiet erosion in its reserve currency status, in 2022, the dollar’s share in global reserves – in real terms – collapsed at 10 times the average speed.  Global reserve managers sold a lot of dollars in 2022 when the dollar rallied.  The prevailing view of ‘nothing-to-see-here’ on the USD as a reserve currency seems too innocuous and complacent.  Having said this, the dollar still enjoys substantial network advantages as an international currency, mainly because of its huge, liquid, and reasonably well-functioning financial markets.  The persistence of these preconditions, however, is not preordained.  If the US makes more policy errors and abandons the culture of self-examination, there will likely come a time when much of the rest of the world will actively avoid using the dollar. Finally, what needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.

 

[bernorange 8,348]

From Ruchir Sharma, chair of Rockefeller International via Financial Times:

Quote

What strong gold says about the weak dollar

Today commentators overwhelmingly agree that a weakening U.S. dollar cannot possibly lose its status as the world's dominant currency because there is "no alternative" on the visible horizon.

Perhaps, but don't tell that to the many countries racing to find an alternative, and such complacency will only accelerate their search.

The prime example right now is gold, up 20% in six months. Surging demand is not led by the usual suspects -- investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative.

Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33% of monthly global demand for gold.

This buying boom has helped push the price of gold to near-record levels and more than 50% higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices.

Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India, and China. Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate goal: to trade with one another directly, in their own coin.

"Every night I ask myself why all countries have to base their trade on the dollar," Brazilian president Luiz Inácio Lula da Silva said recently on a visit to China, arguing that an alternative would help "balance world geopolitics."

Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer.

During the short banking crisis in March, gold kept rising while the dollar drifted down. The difference in the movement of the two has never been so large.

And why are emerging nations rebelling now, when global trade has been based on the dollar since the end of the Second World War?

Because the U.S. and its allies have increasingly turned to financial sanctions as a weapon.

Astonishingly, 30% of all countries now face sanctions from the U.S., the EU, Japan, and the UK -- up from 10% in the early '90s. Until recently most of the targets were small. Then this group launched an all-out sanctions attack on Russia for its invasion of Ukraine, cutting off Russian banks from the dollar-based global payment system.

Suddenly, it was clear that any nation could be a target.

Too confident in the indomitable dollar, the U.S. saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances.

Nations cutting deals to trade without the dollar now include old U.S. allies such as the Philippines and Thailand.

The number of countries with central banks looking at ways to launch their own digital currency has tripled since 2020 to more than 110, representing 95% of the world's gross domestic product. Many are testing these digital currencies for use in bilateral trade -- another open challenge to the dollar.

Though some doubt a dominant dollar matters for the U.S. economy, high demand for the currency in general tends to lower the cost of borrowing abroad, a privilege America sorely needs today.

Among the top 20 developed economies, it now has the second highest fiscal and current account deficits after the UK and the second highest foreign liabilities (as reflected in its net international investment position) after Portugal.

The risk for America is that its overconfidence grows, fed by the "no alternative" story. That narrative rests on global trust in U.S. institutions and rule of law, but this is exactly what weaponising the dollar has done so much to undermine.

It rests also on trust in the country's ability to pay its debts, but that is also slipping, as its reliance on foreign funding keeps growing.

The last line of defence for the dollar is the state of China, which is the only economy sufficiently large and centralised to challenge U.S. currency supremacy -- but even more deeply indebted and institutionally dysfunctional.

When a giant comes to rely on the weakness of rivals, it's time to look hard in the mirror.

When it faces challenges from a "barbaric relic" such as gold and new contenders like digital currency, it should be looking for ways to strengthen trust in its finances, not taking its financial superpower status for granted.

https://www.ft.com/content/e9c78b99-8a29-47e2-b5bf-9f7542608cf6

h/t (no paywall):  https://gata.org/node/22596

~~~

Quote

THE Reserve Bank of Zimbabwe (RBZ) is set to introduce a gold-backed digital currency to be used as legal tender for transacting in the country as part of interventions to stabilise the local currency.

Introduction of the digital gold tokens, a form of electronic money backed by gold held at the RBZ, will represent the first steps by the central bank towards using the country’s gold reserves to anchor the Zimbabwe dollar.

Monetary authorities envisage the digital gold tokens will allow those holding small amounts of Zimbabwe dollars to exchange their money for tokens in order to store value and hedge against exchange rate volatility.

The development comes as the RBZ is also mulling releasing more Mosi-oa-Tunya gold coins onto the market to tame the recent depreciation of the Zimbabwe dollar on the parallel market.
...

https://www.sundaymail.co.zw/rbz-introduces-gold-backed-digital-currency

Need more details, but it sounds like they are trying to make it easier for (poor) people to buy/use small/fractional bits of gold.

[TexasEd 8,064]

1 hour ago, bernorange said:

From Ruchir Sharma, chair of Rockefeller International via Financial Times:

https://www.ft.com/content/e9c78b99-8a29-47e2-b5bf-9f7542608cf6

h/t (no paywall):  https://gata.org/node/22596

~~~

https://www.sundaymail.co.zw/rbz-introduces-gold-backed-digital-currency

Need more details, but it sounds like they are trying to make it easier for (poor) people to buy/use small/fractional bits of gold.

BitGold?  Trademarking that shit.

Edited April 24, 2023 by TexasEd

[Mullet Free 40]

59 minutes ago, TexasEd said:

BitGold?  Trademarking that shit.

Not sure if serious but there’s been a bitgold. 
 

https://www.investopedia.com/terms/b/bit-gold.asp

 

 

[bernorange 8,348]

* bump *

So many implications in this simple admission from the BIS:

Quote

...
In EMDEs, crypto-assets are relatively popular. The more popular they are, the more they could erode the effectiveness of domestic monetary policy. Because people may start preferring crypto-assets or stablecoins over domestic currencies.
...

https://www.bis.org/review/r231011f.htm

[bernorange 8,348]

* bump *

Some key items of note happening lately that pertain to issues raised in this thread:

• KSA has joined the BIS sponsored/developed mBridge payment rail with China and the UAE. 
• KSA has joined the BIS sponsored/developed mBridge payment rail with China and the UAE. 

  Quote

  Saudi Arabia has joined a China-dominated central bank digital currency cross-border trial, in what could be another step towards less of the world's oil trade being done in U.S. dollars.

  The move, announced by the Bank for International Settlements on Wednesday, will see Saudi's central bank become a "full participant" of Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand and the United Arab Emirates.

  The BIS, a global central bank umbrella organisation which oversees the project, also announced that mBridge had reached "minimum viable product" stage, meaning it will move beyond the pro type phase.
  ...
  "The most advanced cross-border CBDC project just added a major G20 economy and the largest oil exporter in the world," said Josh Lipsky, who runs a global CBDC tracker, opens new tab at the U.S.-based Atlantic Council.

  "This means in the coming year you can expect to see a scaling up of commodity settlement on the platform outside of dollars – something that was already underway between China and Saudi Arabia but now has new technology behind it."

  The mBridge transactions can use the code China's e-yuan is built on. That code is also available to the project's 26 other "observing members" that include the likes of the New York branch of the Federal Reserve, the International Monetary Fund and European Central Bank.

  The BIS also said the mBridge platform was now compatible with the Ethereum Virtual Machine - a piece of software that forms the backbone of the network used by the Ether cryptocurrency.
  ...

  https://www.reuters.com/technology/saudi-arabia-joins-bis-led-central-bank-digital-currency-trial-2024-06-05/#:~:text=Future of Money-,Saudi Arabia joins BIS- and China-led,central bank digital currency project&text=LONDON%2C June 5 (Reuters),being done in U.S. dollars

• The security agreement between the USA and KSA that is (or has been) the lynchpin of the petrodollar quid pro quo has expired and our disfunctional Senate stands in the way of a new agreement (arguing over dictating Israel policy to KSA)

• The kooky goldbugs at the BIS published a paper today that states:

  Quote

  ... When private holders have access to alternative forms of money and other financial claims, fiat money needs to command unquestioned trust on the part of the private holders. While network effects will preserve support from private financial entities, erosion of trust could shift the economy closer to potential “tipping points” when holders abandon domestic money in favor of alternatives, whether they are metal coins in the 1700s or other reserve fiat currencies or crypto stablecoins in the modern era ...

  https://www.bis.org/publ/bppdf/bispap146.pdf

[bernorange 8,348]

Quote

Gathered Wednesday at a summit in the Russian city of Kazan, the members of BRICS adopted a joint declaration calling for the creation of an independent payment system based on their national currencies, a move in response to what they regard as illegal sanctions that are damaging the global economy.

BRICS member countries, which account for about 35% of the global economy, issued the Kazan Declaration, which calls for the "elimination" of "unilateral economic sanctions and secondary sanctions that are contrary to international law."
...

https://www.voanews.com/a/china-backs-russia-proposed-brics-payment-system-/7836865.html

BRICS+ stopped short of announcing or committing to developing a new currency.  The alternative payment rail is the BIS sponsored mBridge system mentioned previously.