Hume's Multilateral Adjustment Mechanism

Economics, FREEPOM, Premium POM128 Comments

By JC Collins

As the Special Drawing Right (SDR) rises to its position as primary reserve asset used in global trade, other countries outside of the current 4 which make up the composition, will seek to have their own domestic currencies added to the supra-sovereign asset basket.  China’s yuan is the obvious inclusion on this 2015 go around, but India, and other emerging economies, will likely be internationalizing their own currencies over the next 5 years to ensure they are included in the 2020 adjustments which will be made to the SDR basket composition.

As the USD is replaced with the SDR, we are likely to see the progressive implementation of a Multilateral Effective Exchange Rate Structure (MEERS) as both high income countries and low income countries will promote the benefits of pegging their domestic currencies to the SDR.

These benefits will include a reduction of exchange rate volatility for countries who join the MEERS framework.  This membership will grow and become more important as trade between higher and lower income countries continues to expand.

Other benefits include the enhancement and stability of global liquidity and a more equitable representation of the emerging economies within the International Monetary System (IMS).

As beneficial as the MEERS framework will be, it will not correct the deficiencies within the existing balance of payments system, which defines countries as having either trade surpluses or trade deficits.

David Hume (1711-1776) was an economist who made a logical argument against the existing (18th Century) model of Mercantilism. Under Mercantilism it was assumed that a country could maintain a positive balance of trade surplus, or net export.  This model would always be inherently flawed because of the balance of payments surpluses and deficits, the same type of systemic deficiencies explained in the Triffin Paradox, as one domestic currency is assigned as the reserve asset used to balance global trade.

The original Hume Adjustment Mechanism was based on gold standard models and is best explained as follows:

  1. A positive balance of trade (surplus) would cause inflation (higher prices) leading to a decrease in exports, which in turn would cause imports to increase, eventually leading to a neutral trade balance.
  2. A negative balance of trade (deficit) would cause deflation (lower prices) leading to an increase in exports, which in turn would cause imports to decrease, eventually leading to a neutral trade balance.

Adjustments between both scenarios would continue until the balance of trade between all countries involved equals zero, eliminating the balance of payments deficiencies.  Here is another way of looking at the mechanism.

Hume Mechanism

In the MEERS framework referenced above, we can replace the function of gold in the original Hume Adjustment Mechanism with the SDR.  But first let’s review some of the fundamentals surrounding how a Hume-Type Multilateral Adjustment Mechanism would be structured around the framework of the SDR and the International Monetary Fund data reporting and surveillance capabilities.

The IMF could allow countries to trade SDR to other central banks for their own currencies which have accumulated in the foreign reserve accounts of said central banks. A reversal of this transaction could also be completed as the central bank holding the foreign currency could also trade it back to the issuing central bank for SDR.

As such, any country with a balance of payments deficit could have its central bank buyback previously issued money with new allocations of SDR. (Note: The possibility of governments once again regaining control of their central banks would support the methodology described here. But these central banks, though now hypothetically under the control of governments, would still operate within the framework of the more macro globalization of central banks which is taking place. See post The Globalization of Central Banks.) This transaction of domestic reserve currency, such as the USD, to supra-sovereign SDR asset, will serve to reduce the monetary base of the country from which the currency was issued, in this case the United States.

The replacement of domestic fiat currency with international SDR reserve assets within a balance of payments framework (foreign reserve accounts) does not support the conclusions made by some analysts that the increase in the fiat monetary base can only be corrected, or accounted for, by an equal increase in the valuation of gold.

Instability during the multilateral transition process could support moderate increases in the valuation of gold, at least initially, but as the mechanism described above is implemented and gradually expanded, the valuations of gold are likely to experience decreases in the multiples of hundreds.

This same logic can also be applied to the conclusions that the USD will in fact not collapse as a domestic reserve currency.  A reduction in the monetary base of the USD, and all other currencies, will eliminate many of the systemic imbalances which exist today.

Under the existing monetary framework, a central bank which issues a reserve currency, such as the USD, is not obligated to redeem that currency.  Under a Hume-Type Multilateral Adjustment Mechanism, explained above, the transaction from domestic currency to SDR will be mandated to ensure a neutral trade balance is maintained.

There are two methods which SDR can be generated by a countries central bank.  One is through new allocations of SDR, and the other is through the use of substitution accounts.

The large scale substitution of currency reserves for SDR would have some fundamental advantages, such as preventing sudden and sizable portfolio shifts between reserve currencies, reducing fiscal costs and limiting systemic instability, which has previously led to disagreements and a breakdown on substitution account negotiations.

A Multilateral Adjustment Mechanism would be more effective under a framework where SDR is traded directly for reserve currency amounts issued by a countries central bank. In this scenario, the SDR would have to be created through new allocations.  This allocation of SDR would be facilitated by each country’s central bank, a sort of multilateral QE program meant to expand global liquidity and balance the trade system.

Considering the numerous variables and unknowns involved in the transition from a unipolar USD system to a multilateral SDR system, we are likely to see the utilization of both substitution accounts and new allocations, all of which will be based on the MEERS methodology described above.

The International Monetary Fund would be required to expand its surveillance capabilities, which include broader data reporting from member countries, and the reforming of its governance structure, as outlined in the 2010 Quota and Governance Reforms.  These reforms will be implemented either as originally outlined, or through Plan B implementation, which is visible in the expansion of alternative international financial institutions, such as the Asian Infrastructure Investment Bank, AIIB.  (See post IMF and G20 Moving Forward on Plan B)

At the same time as countries around the world are joining the AIIB, the multilateral transition is visible in the process by which the Chinese currency will be added to the SDR basket composition, effective January 1, 2016.   The integration of eastern and western financial architecture will support the processes described here, and the intricacies of the transition itself are interwoven within the macroprudential policies and machinations of the international financial institutions, such as development banks, and central banks.  - JC

128 Comments on “Hume's Multilateral Adjustment Mechanism”

  1. Thanks JC.

    There are still two things I don't understand about this transition:

    1) How can the tertiary economy still take precedence over the primary economy, i.e. the world's natural resources. The way I see it, no matter how much we play with numbers, we're still ruining the real economy, which is the ecology;

    2) How can we even consider a Nation's assets, when so much has been privatised? I have not seen this issue addressed.
    ******

    A lot of people are going to be upset if your predictions about gold are true.

  2. Thanks again for clarifying the mechanisms by which the SDR will transition, the Hume mechanism and MEER. The only question I have is how will the landscape of the developed countries aka US, Europe, Canada etc look like in a few years as this happens ? Will manufacturing and true job creation even be a possibility? It seems like the advanced economies are peaking in a lot of parameters involving economic and population growth, debt to GDP ratio, number of retirees to working population whereas the developing ones are not having some of those issues at least not to the extent. In the US the massacre from an economic standpoint is so great that I think everyone who thinks they are going to actually retire must be smoking ganja. I see retirement for me as death when life takes what it has given me back.

  3. I can't speak for your 2 points but I do believe the issue regarding gold is true. I believe there will be a spike, to how large a spike I believe depends on whether there will be a panic or not. But when the dust settles gold will fall dramatically. Mike Maloney from hidden secrets of money.com goes into this quite a bit. Apparently when it rises is when you cash it in or convert it to another asset, knowing when is what you pay him for by subscribing.

    1. That's not really how gold behaves, not the normal price spike and crash. If you have already bought you'll be ok. The equilibrium point after the big short squeeze will be much higher than recent prices. Centrals Banks, think the BuBa and PBoC, will always have a bid to put a floor on the price of gold, much as the ESF has always had a bid under the current reserve asset, USTreasuries.

      Keep a close eye on Germany. Together with the Chinese it will be the driving force behind this new currency system set to unfold and a high gold price in terms of RMB will be a huge tailwind in the effort to internationalize the RMB. Gold revaluation will be the next form of QE, what should ave been done in the first place. Instead of rolling over NPLs , the liquidity will go towards real development of the economy and helicopter drops for the deleveraging of the private sector.

      Remember, it's debt saturation that is the problem. The current reserve asset is down to its last telomere and entering apoptosis. Merely repacking said reserve asset as a different debt instrument won't solve the financial equation.

      Revaluing gold is the central bankers' way of rolling over unpayable debt. Afterwards the nominal price of gold will be very unexciting.

      1. Hi, thank you for your reply. 4 years ago my daughter bought her house and on my advice, instead of putting $20,000.00 extra on her house she bought gold & silver. Now I worry it may have been the wrong advice. Cheers

  4. Thoughtful & inspiring post as always, JC. I agree with some of the general themes (e.g. moving to a SDR world thus lifting the Triffin burden from national currencies, tomorrow´s SDR is as fiat as today`s currencies, USD will not collapse etc.)

    "Gold in the multiples of hundreds":

    Not very possible, IMO. Oil went south, so did other (mining) commodities but Gold. They manufactured QE to prepare the world for SDR. As long as they keep inflating the monetary base to pursue their SDR ponzi as long will Gold be a hedge against it. Ordinary people are not stupid. They might not understand what`s going on within the financial world but they do so see something is wrong. NIRP, ZIRP etc. Their safe harbor is precious metals. Even Yellen recently admitted "currency is not a good store of value". Apart from that, it`s an open secret that China`s gold reserves are much higher than the official
    numbers. They are not buying gold in the USD 1100-1200 range just to have their wealth cut by two thirds a few years later.

    Any chance that the SDR concept might fail due to the European Monetary Union (=Euro) break up? Or will that just translate into a delay because the SDR basket needs to be re-negotiated?

  5. JC
    Your insight and explanation joins up all the dots to make it understandable! Add the release of the Historical Bonds funds and the clever re-distribution of wealth in the expected currency revaluations (the real scam was calling it a scam!) and we have real hope for a settled world where economic wealth can be created by the people for the people....

    The structure as you describe has been well thought out and are we surprised based upon 18th century thinking! Nothing really changes; human nature with its weaknesses and in particular greed for power and personal wealth at any cost (including wars) often ignore the best for all. And now 3 centuries on we see such a move to achieve the benefits you describe. It will, I am sure, be a long journey but well done the Chinese for persisting to see the required changes now being implemented.

    1. Wow, beautiful catch dripfood, maybe that's why Iceland has been portrayed as the proud small nation standing up to the globalist bullies for years. Wonderful place to start this experimentation and widen the practice later. I remember the G30 paper J.C shared and both of your excellent analysis of it. IMF as an SDR exhange maker, lessened need for forex reserves(thus national currencies), deleveraging and minimizing the side effects of the process with POMF model, using nominal GDP as a more widespread anchor than inflation rate, downsizing commercial banks gradually and eventually depriving them of the capability to "create money out of thin air" as most love to put it. Finally ,attainment of pre-determined growth rates with pre-determined growth in centralized money supply that is to be fed by central banks; ultimate technocracy for the technosexual supranational leaders!!

  6. Previous articles have been somewhat bullish on gold and links have pointed to papers suggesting revaluation of gold to $6,000 in order to effectively counterbalance some swings within the SDR composition. With this article the tone has now suddenly become longer term bearish. I really would like to see this further explained. Is the expected depreciation of gold based on the higher spike and the lower price then settles somewhere near say the proposed $6K price or do you see long term price being back to (or lower) current levels?
    Secondly, do you have an opinion on why China is accumulating gold? Especially if China is working for a stable SDR based system that isn't dependent on revaluation of gold, why do you think they are buying so much? (Is it in you opinion only mis-guided speculative private buying?)

    1. At no time have I written in a bullish manner on gold. In fact, I deplore the terminology of bull and bear financial symbolism. And I have repeatedly spoken against suggestions and analytical conclusions that gold will revalue upwards by thousands. You will not see $6000 gold, or $10,000 gold. Period. There are so many assumptions made regarding gold that any level of accumulation, by any country, or any news about gold in general, is taken as evidence of imminent upward revaluations. A price for gold will be determined, like under Bretton Woods at $35.00/oz, and will be nowhere near $3000 or any amount higher. After a potential spike of hundreds during the initial stages of the transition, the value of gold will be set somewhere in the $700 -$800 range.

      In regards to China, gold accumulation is serving multiple purposes. Some of it involves the private market, some of it involves the honoring of gold backed historical bonds, and some it it may have something to do with converting gold reserves into SDR bonds, with the gold put on loan with the IMF, just like gold was given to America under Bretton Woods.

      Finally, it has been specifically stated on this site that the SDR system will be partially dependent on gold, just like Bretton Woods. Whether gold is added directly into the SDR composition, or the currencies in the composition are partially supported by gold, once again like Bretton Woods, its value will be set at multiples lower than many expect. I'm simply not telling people what they want to hear, I'm giving them real conclusions built on real analysis, not wishful thinking.

      Gold is a great store of wealth, but wealth is not created through unrealistic revaluations of gold. People are dreaming of getting rich quick from absurd claims that gold is going to skyrocket. This is simply false analytical pandering to the lowest human common denominator which attempts to manipulate a persons inner deficiencies and greed. Same old, same old, and people continue to fall for it. There is no substitute for hard work which leads to wealth that is earned. Unearned wealth is extremely destructive, and yet, we seek it out through all sorts of fables and wishful thinking.

      1. JC said,

        "This is simply false analytical pandering to the lowest human common denominator which attempts to manipulate a persons inner deficiencies and greed. Same old, same old, and people continue to fall for it. There is no substitute for hard work which leads to wealth that is earned."

        Swish! 4 points as JC cuts to the core of the issue. Greed.

        This simple statement is at the crux of what ails us as a species. Capitalism is an ethical system so long as it is understood properly. It is extremely vulnerable to greed and corruption and is easily and quickly (at least in the cosmic sense) converted into a type of fascism. A truly ethical and honest economic system is only possible when its actors (us) become introspective, abandon or at least recognize want, desire and greed and instead embrace service and productivity. Wealth, spiritually and physically, comes from these two concepts naturally. If we take care of the needs (and even wants) of others in an _honest_ manner with the idea of service/integrity in the forefront of what we do then it is my belief that wealth will naturally follow our labour. Will we get rich?

        What is rich? Does the kind of money you would find in a lotto make us rich?

        The commercials for Lotto sicken me not because they represent an acquisition of capital that is unearned (certainly luck plays a part in our existence and is not something that should be shunned) but because it represents and abandonment of productivity (either physically or spiritually) and a rejection of our creative capacity and ability to find joy in our work and service towards others. It emphasizes sloth over industry and leads us to believe/desire that the ends we seek is nothing more than physical pleasure and the lack of "having to do anything". It embraces laziness. We believe being 'rich' means we can turn off our minds , cease to engage in introspection and simply indulge our physical desires. It is a death spiral.

        But you don't have to get or be rich to live this mentality.

        Every day I meet people in my business who are virtuous and un virtuous in this sense; those who understand and see value in the _honest_ labour of themselves and of others and those who do not. For those who do not - their lives appear to me to primarily rotate around the concept of greed and self-centeredness. Such people are personally doomed. They will never have enough money, you will always have too much and be undeserving of theirs and they will go to their graves believing they never had enough, neither trusting nor being trusted neither truly living or understanding who they are and why they are here.

        We joke about the Zombie apocalypse. When will it happen? What will it look like? My assertion is the undead are here and living amongst us.

        Isn't it interesting that the book of Timothy does not tell us that "money" is the root of all evil but rather "the love of money" is? Such a subtle difference is wording. Such a profound difference in meaning.

        Peace and Wisdom.

        Nanook

        1. I believe it is a very personal thing. What it is for one maybe something entirely different for another. That is where we fall prey to prejudging. I see money/wealth exactly the same as I do firearms. There is nothing wrong with firearms, it is in fact the people using those firearms that is the issue. It comes back to intentions, as in all things and it is important I believe that we don't label anything or anyone. Cheers

      2. I’m always amazed by the passion and polarizing effects that just the mention of gold can bring forward.

        JC, this is one of those rare times where I push back on you a bit. Your statement that gold “will not see $6,000 gold, or $10,000 gold. Period.” is rather silly, unless of coarse you have some insider knowledge or are simply clairvoyant. While I do have my own biases (mostly from being a student of monetary history) I believe that the price of gold will be much higher for some period of time (I don’t speculate on how high) due to its current mispricing and have no idea what happens to its price thereafter. Every asset goes through booms and busts due to human nature. I have held gold since 2004 not to “get rich” but simply to preserve my wealth through the transition. I do beleive it will be a part of whatever system comes next, for there is no conceivable way to me that people will have faith in an SDR, or any other scheme, if it is simply a bunch of fiat currencies cobbled together.

        I wish commenters would stop discussing the "price" of gold, which brings no value to your excellent blog, and focus on the possible path instead.

        I do agree that those that think they will get rich in gold, biotech stocks or any other asset that doesn’t involve actual work are simply fooling themselves. We are going into a period that as one analyst stated, “Those who lose the least win."

        1. Steve, I respect your discourse as always friend. My statements on the valuation of gold are based on what I see as rationality and logic. As such, the thought of gold at the valuations some suggest does not jive for me. The world does not work that way, and there is no historical precedent in which we can reference such a dramatic upward move in gold. Interesting enough, there are many reference points for dramatic devaluations.

      3. Jc - I don't see how investing in gold can be seen as an attempt at gaining unearned wealth. Every person who purchases an ounce of gold, earned that wealth from working for it. Gold ain't cheap. You have to work hard to buy it. This notion that gold might revalue greatly upwards, would obviously be a great return on an initial investment, but gold's not a penny stock. You have to earn gold.

        And would not your same comment of unearned wealth we seek out through all sorts of fables and wishful thinking include currency revaluations such as the dong? There's just as much plausible potential for money to be made on possible revaluations in the forex market as there would be in the PM market given the whole system is being restructured as the musical chairs of chess pieces is playing out. Pretty much the entire world of investing is based off this notion that the price of something is revalued either up or down over the course of time. Oil recently was $4+ and has been "revalued" down to $2.50. Every commodity is in a constant flux of being revalued.

        History is replete with stories of people who invested in something when the price was very low, then that investment experienced dramatic upswings in price. The dotcom boom as an example, turned people into millionaires. There's countless stories of how smart and/or lucky people have built entire financial empires off the dramatic change in the price of an initial investment. If anyone is using the money they earned from working their job for investing in anything, and that anything goes up in price, how is that unearned wealth?

        So while I agree, it's very easy to play off people's inner deficiencies and greed , and this happens all the time, history has shown time and time again that people can and do get "rich quick" off of smart and/or lucky investing. I'm not saying that is what is going to happen with gold, merely pointing out that history has shown that getting rich quick is a part of our economic casino. That's all financial investing is, gambling in a casino... gambling in a casino owned by corrupt egomaniacs on rigged games of chance where the owners can change the rules of the games whenever it suits them.

        "After a potential spike of hundreds during the initial stages of the transition, the value of gold will be set somewhere in the $700 -$800 range."

        According to this comment, as others have pointed out, you are claiming to know what is going to happen. You do not say, "in my opinion gold will be set somewhere in the $700 - 800 range" instead you are making a claim that this is in fact what will happen. How can any of us know with any certainty, reading the analysis of known liars and known misdirection masters, how a rigged game will unfold?

        1. First, I did not say investing in gold is an attempt to gain unearned wealth, only expecting it to revalue at multitudes of thousands is unrealistic and people believe that script because of their greed which is being manipulated. Gold as a store of wealth, being time and labor, is extremely appropriate. You have actually supported my position rather thoroughly.

          In regards to currencies, I do not state how much I think they will re-valuate, only that they will. Which is something the government of Vietnam has stated itself. It is the extremely high multiples I reference, not the daily fluctuations of a few dollars here and a few dollars there.

          Yes, getting rich quick is a part of our reality, whether its penny stocks or bitcoin. Unfortunately those who experience such things usually end up suffering in unforeseen ways. So once again, you are supporting my position.

          My statements in reference to valuation levels are based on research, logic, and pattern trending. Because you, or anyone else, don't like hearing or reading my conclusions, do not make them any less true, or possible. Human denial is a powerful force, which is evident in the responses whenever I state gold valuation patterns that go against the norm. This high price of gold script is such a support beam of the alternative analysis that people get emotional when it is questioned. This could be looked at as proof of the effectiveness of those who have built this storyline, but for me it has more to do with the human predisposition to believe just about anything, and fight for those beliefs. History is replete with such ignorant absurdities.

          My analysis and conclusions have been questioned and doubted on almost every front, and yet time is proving the validity of those conclusions, as real world events catch up to the things we have discussed here. It matters not though, the divide between human ignorance and wisdom is littered with the forgotten dreams and desires of countless generations. No matter what happens in the coming months and years, that is one trend that will continue for generations to come.

      4. Gold is 75,000 as we speak...in RUB. 19 years ago, it was 1,000 RUB

        There is no reason it can't hit $10,000 or more...the inflation of the money supply has already occurred for the past 40 years to drive it well beyond there.

        I guess I don't understand the American exceptionalism why the dollar cannot collapse against gold like every other fiat currency in every other country in every other time in history.

    1. That's an unquantified assumption Cramley. In a deflationery cycle the cost to mine and produce will also decrease. This is basic economics. Your comment is a perfect example of the unrealistic conclusions I referenced in my original comment.

      1. The cost of mining was below the extraction costs at the time. If mining costs were come down so that 800 dollar gold would be profitable we would see derivative events that would freeze the system just like Lehman. There are a lot of loans out in the system collaterallized by current commodity prices. If prices fall the gearing that worked in favor of the financing will reverse. This is why markets go up slowly but fall fast.

        1. The high risk component of derivative contracts will be allowed to fail, while the low risk component of derivative contracts will be re-structured. This will allow reality to settle back over the global monetary system. Any analysis which is based on the existing models are incorrect, such as your statement about the cost of mining, etc..

  7. Apologies if it came out wrong. I didn't suggest the $6,000 price suggestion came from yourself. It was from a linked paper on what share/value gold ideally should have in the SDR composition. This combined with your stated position that gold will be part of SDR was taken by myself as a "bullish" view. Add to this Jim Rickards' suggested revaluation of gold to $7,000+ it seemed like a reasonable ballpark. As other posters here also mentioned there is a debt issue that needs to be addressed. But it is of course possible that SDR doesn't address this in any way and that each nation needs to deal with such separately. But as I see it that still sets the foundation for a revaluation of gold. Although it might not happen, I don't see $6,000 gold outlandish in any way if gold balanced against debt or monetary base or used as a mechanism to debase currency. In 1980 gold price reached a level where USA could have gone back to a gold backed currency. If same happened today POG would be >$12,000

  8. I have been reading your essays for more than 1 year and agree with most of the facts. A couple of things still don't add up. Recently Jack Lew stated he was dead set against the Yuan entering the SDR basket and as we know the US did not pass the 2010 reforms. I can only conclude that if the other countries continue with Plan B, the US will become isolated from the world economy. If the US is cornered they could become a very dangerous nation and cause all kinds of problems worldwide including the use of nuclear weapons.....worse case. At the very least disrupt every attempt of reform.Sorry...I don't see the US cooperating.

    In regards to the price of gold going to 600 dollar range.If we follow through on reforms and gold goes to 600 dollars, that would put silver in the 9-10 dollar range. That means that silver could not be mined profitably Silver is the most widely used commodity next to oil. So I'm guessing that we will have deflation in wages, commodities, and taxes, but what about our mortgage?
    .

    1. "Sorry…I don’t see the US cooperating." I agree Rick. As much as I would like to see such financial restructuring as JC lays out so well take place, with the least amount of volatility possible, the US made clear their plan for the new American century is full spectrum.dominance. I see the US remaining as the bully in the playground, becoming isolated and eventually going out with a big bang. Unfortunately.

      1. Hello Maria, where can I read up on the documentation for "the US made clear their plan for the new American century is full spectrum dominance?"

        This seems like a contradiction to the reductions of US military budget that Chuck Hagel announced last year. Which will put the US at "Pre-World War II Level's."

        http://www.nytimes.com/2014/02/24/us/politics/pentagon-plans-to-shrink-army-to-pre-world-war-ii-level.html?_r=0

        http://www.defense.gov/news/newsarticle.aspx?id=121703

        http://www.nbcnews.com/storyline/military-spending-cuts/pentagon-set-slash-military-pre-world-war-ii-levels-n37086

      2. In response to danackerman (as his posts have no reply button)
        I take anything western politicians say with a pinch of salt. In the UK they boast readily about economic recovery and wave around manipulated GDP figures, but the reality on the ground is a stark contradiction as there are food banks all over the country, and the UK's debt has increased from circa 700 billion to almost 1.5 trillion under the current regime. Yes there are a million other factors to consider, but forgive me for remaining sceptical where these vipers are concerned.

        http://www.globalresearch.ca/the-pentagons-strategy-for-world-domination-full-spectrum-dominance-from-asia-to-africa/5397514

        http://www.sourcewatch.org/index.php/Project_for_the_New_American_Century

        http://www.telegraph.co.uk/finance/economics/11117335/Just-how-big-is-Britains-debt-mountain.html

  9. If we have deflation in terms of USD then the banking assets become NPLs. SDR bonds become NPLs.

    But if we have deflation as measured by ounces of gold then life can go on.

    Why do CBs have gold on the balance sheet? For much of the time it hangs around looking pretty and amounting to a very small contribution to the balance sheet. But then BAM! When all fails. When the marginal utiily of debt becomes negative (which going to the SDR will not correct), CBs always have that fail-safe--the nuclear option--the modern debt jubilee.

    http://www.gata.org/files/PeterMillarGoldNoteMay06.pdf

    "These episodes demonstrate two occurrences during the last century of the typical monetary cycle, which has five
    phases. The first cycle unfolded as follows:

    · Phase One: stability under a Gold standard until 1914
    · Phase Two: inflation until 1921 which resulted in a build-up of Debt
    · Phase Three: disinflation which brought stability and allowed asset inflation until 1929, but encouraged a
    further build-up of Debt
    · Phase Four: instability after 1929 caused by deflation of assets from over-priced levels and exacerbated by
    excessive Debt levels, leading to depression of economic activity
    · Phase Five: Monetary reform enabled by a revaluation of Gold to overcome deflationary Debt depression

    In the second half of the twentieth century we saw a repeat of the first three phases of the same cycle:

    · Phase One: stability from 1944 to 1968 under a Gold Standard
    · Phase Two: inflation from 1968 to 1981, which caused and justified another build-up of Debt
    · Phase Three: disinflation from 1981 until the end of the 20th Century, and maybe to the present
    However, it appears that Phase Four (instability and ultimately deflation due to excessive Debt) may have started. If so, Phase Five (revaluation of the Gold price to raise the monetary value of the World Monetary Base and hence reduce the burden of Debt) becomes likely or inevitable. The extent of that revaluation would need to be major
    according to our calculations, probably by a factor of at least 7 times, possibly up to 20 times the current price of Gold."---May 2006 when gold was trading around 700 USD.

    1. Hogwash, the error of your assumption is found in the nature of the monetary base itself. As I mentioned in the post, the monetary base of each nation can be reduced through the SDR allocation process. The debt will still need to be managed, but it is no longer a factor in the functioning monetary base. This is what many are not understanding, the monetary framework is shifting and it will not function under the same principles as currently exist. The accumulation of currencies in foreign reserve accounts will be reduced and the assumed relationship between fiat currency levels and gold falls apart. As Steve H. has stated, we will not allow this site to fall into pointless debates about the valuation of gold. There are bigger things in motion which we need to focus on.

      1. Why would each nation wish to reduce its monetary base? To do so without reducing human population will cause untold human misery...the UK tried this post-WW1 and suffered greatly...they finally acquiesced and in 1931 (wait for it) devalued sterling against gold.

  10. Nice to see Gold mentioned in the same light my brother;-)

    Many a slip between the cup and the lip my..............

    Our malignant monetary masters don't have our interests in mind, they always put their self serving interests first, that's what troubles me in all of this.

    In the end, is this simply a new more advanced globalized form of debt servitude.

    I'd rather nature's own shiny glow act as the golden governor on the means of exchange throttle.

    God help us all.............

  11. Hi JC - like many I have followed you for a while and appreciate the balanced POV you present in the Jack Webb style. Like many, I have too seen the dramatic response to the price of gold discussion when it surfaces.
    Where I feel comfortable is in the knowledge that most here recognize that the tempo is increasing toward something different and have the drive to understand what it is and what it will look like. I am interested in shifting the gold discussion to value versus price. IOW, in the vision you see of lower "priced" gold - do you see it being able to acquire more tangibles in the future than it does now or do you see it as a linear power to purchase?
    respectfully,
    TAoM

    1. IMO

      Gold acts as a placeholder to assure you have a place in the coming global monetary reset............same as it ever was.

      When the trust breaks down between the Sovereigns, Gold remains the only common denominator still left standing to re-establish a new means of exchange.

  12. Gold rises during periods of war thru history and when confidence in Government disappears. So Gold in an insurance against things going wrong. Silver on the other hand is a technology necessity. Rare earth metals production is corned by the Chinese and prices there they will control to keep their technology based industry moving but silver is a commodity that is getting increasingly harder to mine. Gold has always been preserved and hoarded but silver has been used and disposed of as a cheap industrial metal. Silver one day in the near future will be the Achilles heal of this debt paradigm system. Technology needs Silver for all devices and investors who cannot afford Gold cherish Silver. So let them cap the price of Gold who will that really effect ? The rich who are not in the Boy's Club. But they cannot cap silver because supply and demand will lead to much higher prices in a free market system. Apple will pay much higher silver prices to continue supplying iphones. So when a shortage appears large manufactures will seek to hoard large enough supplies to keep their supply lines moving.

    Our future depends on technology and China depends on technology and technology depends on Silver. Silver is mined as a by product mostly. Investment demand vs industrial demand vs unprofitable mining operations are coming together to reveal cheap Silver prices vs demand.

  13. Hi, have been reading since day 1, excellent stuff JC, sort of a rolaids for the spirit too. IMHO, gold may spike but drop back and net out somewhere close to it's current range. Spikes can happen and smart people take advantage of them. Also, to relay the thoughts of Martin Armstrong, gold may be a hedge against government and against overall lack of confidence. CONFIDENCE is a huge key to money and "good as gold" is understood by the masses.
    Might the SDR need a golden vote of confidence in it's beginning? And might certain sovereign intra-county currencies need the same (if they are subject to relative devaluation?).
    JC, you're one sharp dude!

  14. Some interesting information on some upcoming viable energy sources that appears to be directly on the horizon.

    Electrical Power from Water Fuel
    "Blacklight has developed a system engineering design of an electric generator that is less than a cubic foot in volume, to generate ten million watts of electricity, enough to power ten thousand homes."
    [youtube http://www.youtube.com/watch?v=A8KX27HUtcc&w=420&h=315%5D
    "...BlackLight’s nonpolluting power-producing SunCell™ catalytically converts H2O-based solid fuel directly into brilliant light-emitting plasma power, an essentially fully ionized gaseous physical state of the fuel comprising essentially positive ions and free electrons. The SunCell™ plasma is the same temperature as the Sun emitting the same solar spectrum of light, but at extraordinary power equivalent to 50,000 times the Sun’s intensity at the Earth’s surface. Optical power is converted directly into electricity using photovoltaic cells (solar cells). Very high-power, high-efficiency cells are commercially available to convert the SunCell™ optical power directly into electricity at its 100 billion watts per liter power density..."
    "...Specifically, BlackLight has developed a commercially competitive, nonpolluting source of energy that forms a predicted, previously undiscovered, more stable form of hydrogen called Hydrino..."
    "...Essentially all power sources: thermal, electrical, marine, rail, aviation, aerospace, as well as automotive sources, become untethered from an electrical distribution or fuel infrastructure and are also independent of the Sun, wind, or other external variable power sources at capital cost of less than 10% of that of historic systems..."

    YouTube channel
    Press
    Demos

    You also have the likes of Italian scientist Andrea Rossi and his eCat:

    "It took Andrea Rossi almost 18 years to develop the Energy Catalyzer (ECAT), a device which will be the principal component in a new energy product range. Leaving neither toxic nor radioactive waste, Rossi’s ECAT has the potential to solve the global energy problem by delivering inexpensive and completely green energy."

    We'd have to argue that technological advancements in energy production are just around the corner and that those systems are being designed for a managed cost effective integration into existing systems - without breaking the global economy. One reason perhaps for keeping the value of PM's contained is for the absolutely off the chart applications for gold and silver nanoparticles in science/medicine/clothing/electrics etc.

    Is Gold scarce?

    1. Cooper, there is a good deal of chatter these days about new free energy technologies waiting in the wings to be allowed to be unveiled. It's all fascinating and, if true, has implications of paradigm-shift proportions. I'm sure there are many vested interests who would rather not see free energy become available. Wikipedia for one is quite skeptical:
      https://en.wikipedia.org/wiki/BlackLight_Power

      1. As someone ready to deploy the proceeds of the Historical Bonds for humanitarian purposes I can assure you this and other lower cost new technologies in particular free water are very much on the agenda. At last domination by very large suppliers will be challenged for the betterment of the human race not just the "few" ......

  15. Dear JC. Thanks again for posting this intriguing article. I have a couple of questions - When you say "A reduction in the monetary base of the USD, and all other currencies, will eliminate many of the systemic imbalances which exist today", in your view:

    a) How will this "reduction" be conducted? i.e. the mechanics: market or government driven?

    b) When you say "monetary base", do you include commercial bank money and revolving credit in this or just the money supply issued by the central bank? What immediately springs to mind with this if revolving credit is included is card companies immediately reducing credit limits cutting many people off from the liquidity that has been a lifeline for so long. Not necessarily a bad thing of course, but which G20 politician would dare underwrite such a thing!?

    I'm wondering what the general population would think of this as such an event would surely make the evening news on the day it occurred...

      1. Dear Mr Cooper-Smith

        Many thanks for posting the ZH article. However, I cannot glean an answer to my questions from it, if of course it was your intention to point me in any kind of direction. I'm simply interested to know how you would go about reducing a country's monetary base to eliminate the imbalances JC speaks of in as orderly as fashion as possible. As my query is in direct relation to a statement made in this thread, I don't see how my comment is out of place. Sorry...

      2. thank you Frosty for your comment.

        I am a little embarrassed because I've attacked your comment without a proper understanding of what you were asking.

        I focused on:
        "I’m wondering what the general population would think of this as such an event would surely make the evening news on the day it occurred".

        Rather than:
        "I’m simply interested to know how you would go about reducing a country’s monetary base to eliminate the imbalances JC speaks of in as orderly as fashion as possible."

        And saw red:
        [youtube http://www.youtube.com/watch?v=GuD07NekuQc&w=420&h=315%5D

        I note that I've taken other posts on this site out of context. It's me that is sorry. In all honesty I don't know how to respond to your pertinent question.

        Cheers

    1. Frosty, we might all be too busy trying to dodge the nukes by then, and our credit card limits might be the last thing on our minds 🙁

  16. I don't understand what this means since this article is in Chinese. I also don't understand the point of... the yuan should not be a country's currency, should be used in the world.Is that China's opinion or JP Morgan's or yours?

    1. View these links in Chrome, right-click to translate or c/p into Google translate. A perusal of the Chinese blogs and news reveals a different picture of the Chinese strategy than offered by even the alternative media. The RMB inclusion into the SDR is the exoteric plan. Think Trojan horse. China has something big planned. And it is not on board with the BIS/CityofLondon/IMF/DC/Big Four Central Banks complex. Oh my lord, it at war with what it calls agents of the "virtual economy that robs people". Remember the term " catfish effect". If the IMF/World bank, ADB are to continue to exist it will be as assimilated clones of the Chinese multilaterals. China's going for it folks. It wants to be the top of the monetary food chain.

  17. Japan joining will be a big step away from the dollar standard. Japan was probably threatened with another "tsunami" if it didn't back out.

    Who's conspicuously missing from the AIIB?
    The Philippines. Probably also threatened by weather weaponry to stay on the leash. Keep an eye for the South China Sea dispute to heat up.

      1. I don't know about what cramley is saying or who Benjamin Fulford is but I'm curious: Are you suggesting these weapons do not exist and are not being used somewhere for some purpose right now this moment?

        1. I'm saying that storyline has been manufactured by the person referenced. The existence of methods to cause earthquakes is public knowledge. Weapons is one of those inflammatory words which I will not reference without proper evidence. Notice the difference?

      2. Fair enough. Weapons that manipulate the weather. Weapons that manipulate the jet stream, snuff out low pressure systems, and cause droughts. This guy predicted four months ago that there would be no snowpack to feed the Central Valley this summer. No one else did that. He did becasue he can identify with simple meteorological tools the signature of these ionospheric heaters or scalar interferometers or whatever you want to call them (as long as it isn’t 
“Haarp”). The consequences of this behaviour will obviously have massive economic consequences. So, do these actions fit into the "macroprudential mandates of the multilateral framework?" Are these criminal actions, like what you say are the “proxy wars,” being allowed by the BIS? Or are they rogue elements with the US military industrial complex which is obviously not going down without a fight?

        https://www.youtube.com/watch?v=RwRm-jxbKOM

        1. If my memory serves me correctly, nearly a year ago now, Lyndon Larouche stated in one of his podcasts (although time consuming, can be verified by checking his website) that California and the area to a particular river (unable to remember which one) was gone, finished and nothing could be done for it and the people there needed to accept them and migrate. I sent the website an email asking where exactly did he think the people were going to migrate to? Was it possibley China? All those new cities that have been built and sitting vacant. Of course I never got a reply. Again it is difficult to document an intention. Generally speaking it is far more successful after the fact than before. I do believe your point is valid. Cheers

      3. So if "we the people" had to choose whether we wanted the west coast to be bombarded with typhoons or to defend the land against those typhoons with a artificial high pressure (HAARP) which leaves the result of drought what would we choose?

        I hear people say everytime there is an election that they choose the lesser of two evils so what is the lesser evil here?

        But what would happen if water was to be introduced and traded on Wall Street?

        http://www.financialpost.com/scripts/story.html?id=4b015243-8ded-409f-bddc-d1cb8924a0ff

        http://www.cnbc.com/id/101789481

        http://www.investopedia.com/articles/06/water.asp

  18. ". This guy predicted four months ago that there would be no snowpack to feed the Central Valley this summer. No one else did that."
    I disagree meteorologist and astrophysicist Piers Corby has accurately been predicting weather, drought and even earthquakes based on solar activity, meteors and their impact on jet streams etc.

  19. JC Can you help me understand why the United States opted to raise the national debt to over $18 Trillion without investing in infrastructure?
    I see Shadowstats states unemployment at 23% compared to official at 13% but either way if they would of invested a few trillion in infrastructure then thousands would be working real skill jobs contributing to a better economy. A better economy would bring in more tax dollars. My point is if these guys running the government are so smart then why all the stupidity?

  20. DB floats a trial ballon..."The bank believes that the market might be [surprised how] rapidly advancing Chinese renminbi internationalization and capital account liberalization are."

    The google translate is a little stilted so I cleaned it up a bit.

    http://finance.ifeng.com/a/20150409/13617215_0.shtml

    http://www.valuewalk.com/2015/04/china-moves-to-make-rmb-appealing-world-currency/

    China and Germany are the big driving forces behind the changes to come.

    http://www.turkishweekly.net/news/181927/high-level-china-germany-financial-dialogue-maps-cooperation-ahead.html

  21. Being a new student to this..could you do a, balance of payments deficit..for dummies explanation. I am not grasping exactly how this is going to work. Thank you JC.

    As such, any country with a balance of payments deficit could have its central bank buyback previously issued money with new allocations of SDR. (Note: The possibility of governments once again regaining control of their central banks would support the methodology described here. But these central banks, though now hypothetically under the control of governments, would still operate within the framework of the more macro globalization of central banks which is taking place. See post The Globalization of Central Banks.) This transaction of domestic reserve currency, such as the USD, to supra-sovereign SDR asset, will serve to reduce the monetary base of the country from which the currency was issued, in this case the United States.

  22. JC -

    First time poster. I've been reading your blog for a few months now after initially running into your posts on dinarrecaps. I'm one of those guys that looked up to the alternate media gurus for answers and they have only confused me further and left my head spinning even harder. I took all of them seriously and it took me a while to figure out that I saw them as subject matter experts simply because they spoke and wrote so confidently. Most of these guys are just noise and use fear to sell their ideas.

    I am analytical by nature and I’ve been trying to understand what’s going on for a while. Your blog and the comments posted by you and your expert followers helped me immensely. There is very little out there that even comes close to your blog. Every time you wrote, I went back and read your older posts to further my understanding. Despite that however, I still have major gaps in my understanding. I’m hoping that you’d take time to address my questions. I'd greatly appreciate it.

    Thank you,
    RK

    How the Multilateral system works?

    In the multilateral framework, it appears to me that the goal is to peg exchange rates (may be within a narrow band) once implemented. If this is true, then

    1. the only thing that can change is the volume of domestic currency in accordance with the forex surpluses/deficits to keep the exchange rate pegged. How else it could work?

    2. countries can’t print as they want anymore. They can only print according to the agreed upon formula. In that case, how is the domestic inflation/deflation addressed if the exchange rate can’t change? Domestic currency exchanged for SDR to find the optimal mix? What happens when domestic policy needs contradict with international mandates?

    3. currency exchange rate pegging is the goal of the new system, it will ultimately lead to one world currency. Am I right thinking this way?

    QE

    The way I see it is that the multilateral planners used the QE to get all the ducks lined up - such as bringing the forex (USD) levels of each country up/down to align with their target allocation ratios, and to manage currency volatility to have them stay within a band in preparation for the new system etc. This clearly requires funding. This means QE really has nothing to do with the US economy and all the stock/real estate gains are an unintended side effect of this implementation?

    It also means that the gains will be taken away once the new system is approved and implemented? Am I right for thinking this way?

    What about the $s given to US banks that are deposited back with the Fed? What is the purpose of this?

    Gold

    The purpose of the gold transfer to China seems to agreed to by all parties and the goal is to make Yuan look good for internationalization. No one will question the Yuan’s credibility if China puts gold behind it. Once Yuan builds credibility, then there is no use for gold just like the situation we now have in the western countries.

    Is this why you say Gold will go down along with everything else once the system is fully implemented and bought into?

    If the gold was in fact moved to China for this purpose, does this also mean that the multilateral planners are banking on the fact that no one will question the amount of gold left in US and other countries that are already part of the SDR? I’m assuming that gold in the US was moved out here. I don’t know if that is true or not.

    US specific Questions

    One of your other readers asked why the US debt levels were increased so much over the past few years without investing them into infrastructure etc.

    1. Was this a planned misallocation or an unintended side effect of the QE/funding of the multilateral system?

    2. Clearly in the new system, the amount of USD in circulation has to be drastically reduced. Is the plan to deflate all the markets/assets and then use the debt to take out as much USD out of the system as possible?

    3. This also means that the ultimate strategy is not to devalue the dollar when this is fully implemented, but to deflate. This means a lot of folks that have debt/mortgages will go broke?

    4. I can’t see how the US specifically not getting impacted quite a bit one way or the other (devaluation or deflation). You seem to be fairly confident that US people will make it out ok from all of the dramatic USD inflation/deflation. I’m having a hard time drawing that conclusion. Where I am wrong?

    5. If deflation is the final strategy, what about the devaluation that already took place - especially in the last 15 years due to ZIRP and QE?

    Multilateral system implementation - Planned or law of unintended consequences?

    The way I understand it, the new multi-lateral system will only work if all parties agree and work together. In your opinion, US congress not passing the imf reforms is a planned event by the multilateral system planners or there exists a faction or two that doesn’t want to see the new system implemented?

    If there are in fact cooperating with each other, how do you explain Ukraine/Syria etc.?

    1. moksha2020 & JC, I'd like to add a few more questions to this great set, as I believe they will fit in:

      a) How exactly are the present debts of each country going to be dealt with in the new system, in the sense that the largest debts seem to be with the western welfare state countries who have, to certain extent, been 'de-industrialised' because of various factors.

      What I'm wondering here is: are all country's debts going to be rolled up as one (i.e. consolidated), and then shared by all, so to speak - or by some other arrangement.

      Will the situation be that no-one country will be a loser, or will some countries have to 'pay'.

      b) How is intended that the western welfare state countries will manage economically, given their disadvantage (in terms of global competitiveness), and the basic reality that they will always operate with a deficit.

      Aside from their many virtues, I see a necessity (for the global elite) to keep the western welfare states stable, because the technological tracking and monitoring grid (TTMG) at the heart of them requires such. I don't necessarily mean 'spying' and breaching citizens privacy here, rather I'm referring to the core technologies which form the basis of the brave new world. So this goes back to my question above: that surely, making any society 'pay' could risk disrupting and/or jeopardising the TTMG.

  23. Quite the bromance we have between FOFOA and JC. It seems a few posters over there are under threat of banishment for merely thinking out loud that a paper instrument could serve as a store of value. That gold could go up in value when the debt can't offer enough interest to cover currency devaluation.

    You go Judie Toy, Georgiew89 and PeaknikMicki. You've been nothing but civil and intellectually curious and to be threatened as such just shows how parochial and intellectually dishonest that group is over there.

    "PeaknikMicki said...
    The scenario was not gold "backing" SDR in that SDR is this case wouldn't have a fixed value, nor would gold but by the law of nature as fiat is debased gold would be pushed up and thus offsetting the deterioration of fiat. As I see it this would be very close to the core free gold model. "

    You're close Peaknik. What's hampering you is this idea that gold should compensate for fiat expansion( devaluation). That's not what gold does. That's where the QToM perspective leads so many goldtards astray in the inflation/deflation debate. It's the interest on currency that offsets the debasement of currency. Think 'real positive rate". It's when the interest rate can no longer compensate or the existential threat of too much debt in that currency that the gold price in that currency takes on the SoV function.

    Goldtards often tout this graph:

    http://thumbnails.visually.netdna-cdn.com/purchasing-power-of-the-us-dollar-1913-to-2013_517962b78ea3c.jpg

    What they forget is the accumulation of interest to make up for the debasement. If you drop the idea of gold rises with monetary inflation and see it as an alternate SoV reservior during debt deflation, then the concept of having gold as a component of the SDR makes sense.

    http://www.tldm.org/News22/ShkvalTorpedo2.jpg

    Think of the fiat/debt/gold structure as a cavitating golden torpedo. At a certain velocity fiat/debt generates an air pocket serving as a SoV. This is when real rates are above 2%. If the torpedo slows ( real rates slip below 2% or debt saturation), the bubble collapses and SoV functions rests with the golden torpedo until a debt reset and cavitation re-emerges.

    1. Yes of course. Positive real interest rates would have the opposite effect. Hence I think gold would act as a balance both ways to smoothen fluctuations. Having that said, and it remains to be seen, I am not so sure the world can handle positive real interest rates. Or should I say, I doubt political leadership have the spinal fortitude to go through the consequences that would lead to. The day will come eventually but meanwhile I don't see voluntary abandonment of expansion and anything but a slow deterioration of the social contract. But I stand prepared to re-think my position should evidence of the contrary emerge.

      1. You're right the current debt load cannot tolerate real positive rates. The marginal utility of debt has turned negative.

        http://www.sutton-associates.net/images/debt_sat_04232010.jpg

        Even if we roll this dollar denominated debt into SDR debt, the above graph will not change. The debt has to be restructured. Problem is this debt serves as the collateral for the financial system. Something else has to be marked up to keep the system solvent. Who will mark this asset. It won't be shrimps, it'll be CBs. Just like re-calibrating the thermostat. The Shemitah.

        It's afterwards when the debt container is no longer filled to the brim that positive real rates can come back w/o crushing the system. Then gold would take a back seat as SoV resides in paper. Move the frame of reference to interaction of interest rates, price levels, and debt capacity.

    2. Cramley, suppose public debt would be made intrest free and partly permanent.
      Further suppose commercial debt creation would be bound to stricter rules aimed to stimulate productive investment.

      Would such measures then be able to solve the problem of debt saturation in your view?

  24. FOFOA and FreeGold is a concept that will not see light of day until 2032. Until then the Captains of the Age of Globalization are in control of a mighty powerful construct of technology and enslavement. History shows big moves in Gold happens with war not inflation. Gold is a hedge or insurance against governments. I have fire insurance on my home, it never caught on fire, my neighbors never caught on fire but yet I have to have fire insurance. My stored value for my days worked should be insured especially considering the fools making decisions have lost sight of their obligation to the people and the Constitution.

    Now if all people were wise enough to have financial stability insurance there would not be enough open market Gold and Silver available for all those who understand what is really a store of value rather than some paper or digits. This is where JC I believe states that the individual is responsible for the mess of the country and the world. Everyone wants more conceived wealth even if its only paper or digits on a computer it is enough to be immoral. Until we crash and burn people will not recognize truth but does that mean one should ignore truth because it is the trend.

  25. @Cramley
    It's interesting how FOFOA responded the way he did to some of our posts over on his blog - calling us "trolls", when all we were doing was raising alternative viewpoints to his hypothesis of freegold. Not that I disagree with him in the long long term, or at least in essence that gold is the one true honest money, but It seems as if he does not accept any alternative viewpoints for the sake of discussion. He did not provide any substantial rebuff, but merely decided to try and make JC look bad, as well as the SDR. It's either arrogance brought on by a sincere belief behind his work and that freegold will play out, or a fear of all that work on his blog being made redundant, at least in the short term. Ironically I feel Like both JC and FOFOA are the only two that provide any information of quality on the internet on such matters.

    1. It doesn't need to be fully convertible for SDR addition. US interests will argue that it shouldn't be included because of this, but the IMF has stated they are likely okay with it for the initial inclusion. We could see a staged increment inclusion of the RMB based on a broader convertibility in the coming months and years. Or we are just as likely to see full inclusion without prerequisites.

      1. I recently read a hypothesis that interpreted the non-convertibility of the included yuan as a stimulus for SDR adoption: Why use yuan, when one can settle in SDR?

        So the full convertibility of the yuan might rather be postponed for a while than be accelerated.

      2. Here's a statement made last month by the Chinese premier Li:"China will speed up the basic convertibility of yuan on the capital account" and Zhou Xiaochuan pledged capital account liberalization this year.

        http://www.forbes.com/sites/gordonchang/2015/03/29/china-pledges-radical-moves-to-open-capital-account-in-2015/

        From what I understand, once Chinese yuan gets the nod from IMF and starts ending up in central bank reserves of other nations, the liberalization will take place, resulting in a gradual and fast appreciation against dollar.

  26. Thanks, I111, but I am very familiar with those folks and they all have missed with their predictions since 2008. Chris Duane, JC, Armstrong, Kim Michaels together provide a clearer picture full of facts and data than those. I have got to believe Jim Sinclair and Jim Willie are two of the biggest disinformation agents out there along with some guy called Alex Jones. Now I see why you object to my truths. I do not want to convert you or convince you, I will go on my way and you go yours.

    https://www.youtube.com/watch?v=Ped9BrJ5lmg

  27. I'm coming across material now in the Chinese press that RMB inclusion in the SDR is not a slam dunk this year. This whole making googly eyes at the IMF these last few years may indeed have been a monstrous feint. If the RMB is going into a suprasovereign structure one thing is clear--- it will be on China's terms. It ain't taking no bitch seat

    http://i.dailymail.co.uk/i/pix/2014/09/30/1412109867356_Image_galleryImage_Embargoed_to_0001_Wednesd.JPG

    Capital account convertibility is the sticking point. China doesn't want to give up control of the flows in and out.

    1. What is the nature of the piece? Is it opinion? Fact based? What is the source? Western influenced or eastern influenced? Considering the US needs the RMB in the basket, it could be leverage used to create a better negotiating position. These broad statements with no source links or further analysis are not convincing or swaying in the least.

    2. AsiaTimes:
      http://atimes.com/2015/03/move-over-dollar-yuan-may-join-imfs-currency-basket/

      Reflecting China’s surging economic clout, the yuan will be the first non-convertible currency used to value the SDRs (the other currencies are the dollar, euro, yen and pound). As Citibank writes: “We may soon be in a world where the (yuan) becomes a reserve asset – which would happen by definition if it becomes part of the SDR – without being freely convertible. In other words, the concept of a reserve asset will no longer be “one size fits all.”

      Currently,  central banks can’t include yuan holdings in their foreign exchange reserves. However, via inclusion in the SDR basket, the currency will effectively enjoy a “back door” where convertibility is concerned. The upshot, according to Citibank, means increased yuan demand from central banks and further integration of the currency into global capital market flows.

      Importantly, China has espoused an “internationalisation” of reserve currencies away from U.S. dollar hegemony and dependencies on local economic fluctuations on exchange rates and stability. The yuan inclusion in the basket would be a step towards a more multi-lateral currency world. While full convertibility may still be far away, China’s ability to have a global reserve currency may soon be upon us.

  28. Hi JC,
    I asked this on another forum and want to get your view on this.

    Can you quickly simplify the process from the world using the USD currency as the reserve to the SDR as the reserve currency? Does it simply mean that instead of trading in USD between countries, trading is done in SDRs? Do SDRs only apply for country-to-country transactions?

    Also, what does it mean for the US debt which can never be paid off? Is there debt restructuring with moving to the SDR or what happens to it all?

    If you can answer this simply it would be really helpful.

    Thanks JC

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