A Solution to “Triffin’s Dilemma?”

This post A Solution to “Triffin’s Dilemma?” appeared first on Daily Reckoning.

Has the United States dollar conquered “Triffin’s dilemma”?

That is… is the dollar safely and securely perched atop the global monetary system?

Today we turn away from the bright, sunlit world of appearance… and seek our answer in the “shadows.”

For “the eye is always caught by light,” as author Gregory Maguire styles it — “but shadows have more to say.”

To these shadows we shall listen.

Belgian economist Robert Triffin argued decades ago that:

If a nation’s currency is to put in double duty as a global reserve currency, the issuing nation must print drowning amounts — far beyond its national needs.

Why? To keep global trade going along.

The Burden of a Global Currency

A failure of its printing press would deprive the world of required funds. And the gears of global commerce would grind down.

That is, the issuing nation must issue heroic amounts of currency to hold global trade together.

An Argentina, for example, may wish to purchase oil from a Saudi Arabia. But Saudi Arabia — understandably — may not accept Argentine pesos in exchange.

But if Argentina dangles out United States dollars instead, these Saudi Arabia can use.

Multiply this example in countless directions and you have the flavor of it.

Why then the dilemma?

Because the nation ladling out the reserve currency must run chronic current account deficits.

Triffin argued these chronic deficits would eventually bring down tremendous weights upon the currency.

That is, the currency’s vastly excessive supply would fatally undermine its value.

This currency would plunge toward nothingness. Interest rates would go skyshooting as the world emptied overboard the increasingly worthless paper.

Hence… Triffin’s dilemma.

But come pull up to the facts…

Why Hasn’t the Dollar Collapsed?

The United States has piled up record current account deficits lo these many years — twinned with a $23 trillion national debt.

And trillion-dollar annual budget deficits run out to the distant horizon.

Yet — yet — the dollar has rarely been mightier. And interest rates have rarely sunk lower.

10-year Treasury yields scrape along under 2%. And 30-year Treasury yields?

They run scarcely higher… at 2.24%.

That is, debt has never scaled such dizzied and obscene heights. Yet the dollar remains king, as deeply enthroned as ever.

And interest rates wallow near record lows.

Where then is the long-lamented death of the dollar? Where is the mass exodus from the greenback?

Shrieks about its looming demise have gone out for decades.

Yet here it stands.

It is true, this central bank or that central bank may reduce its dollar holdings. It may heave part of its Treasury holdings out the door.

But it makes no nevermind, argues Jeffrey Snider of Alhambra Partners…

Central Banks Aren’t Central

That is because central banks are no longer central — as Mr. Snider has previously argued in these pages. The dins, clamors and carrying-ons of the central banks signify nothing:

The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central. It flies in the face of everything you have been taught and told your whole life. There is no money in monetary policy; it is entirely psychology…

Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…

How we perceive monetary policy?

Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.

Just so. But it has clearly failed.

If central banks are no longer central… what then is central?

As Snider has also argued in these pages, here is the answer:

The “shadow banking system.”

The Shadow Banking System Casts Its Shadow Across the World

The shadow banking system is the deeply interconnected network of banking institutions that operate outside direct control of central banks.

They include the large Wall Street banks and their offshore units.

This shadow banking system extends its shade across Europe, the Caribbean and Asia — the world over.

It first took shape in the 1950s and ’60s. That is, after Bretton Woods hoisted the dollar up to global dominance.

It expanded through the 1980s, ’90s… and beyond.

Entirely beneath notice, the shadow banking system shouldered the central banks out of the international monetary system.

“The Dollar Did Not Replace Gold in 1971. The [Shadow Banking System] Did Long Before 1971”

Snider: “The global money system moved on without central banks bothering to notice.” More:

The dollar did not replace gold in 1971. The [shadow banking system] did long before 1971…

Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade. What actually happened was it became a parallel banking system unto itself… with no backing by gold or by physical cash issued by the U.S. Treasury…

That balance clearly shifted and changed throughout the ’80s. When the pound crisis hit in 1992, central bankers were astounded by the massive offshore liquidity that easily dwarfed what they could answer with. The balance of money had shifted, dramatically, yet economists and policymakers did not shift with it…

And the shadows are so opaque, so impenetrable… they escaped regulation:

So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.

“The Real Action Transpires in the Shadows”

This shadow banking system runs on dollars — as the respiration runs on oxygen, as autos run on gasoline — as politics runs on lies.

As much as 80% of international trade is invoiced in the dollar. And this dollar participates in nearly 90% of all foreign exchange trades.

Meantime, nearly 40% of the world’s debt is issued in dollars. And offshore banks sit upon perhaps $18 trillion in dollar-denominated international liabilities.

Yes, the real action transpires in the shadows. Snider:

The world needs dollars for the purposes of a global reserve currency. It gets them from this [shadow banking] system…

You want to swap yen for U.S. Treasuries? Credit-based “dollars.” You want to swap yen for Singapore bonds? Credit-based “dollars.” A company in Brazil wants to ship China raw material? Credit-based “dollars.” A firm in Europe is trying to build capacity in Thailand? Credit-based “dollars”…

The [shadow bank’s] dollar is the world’s true reserve currency; therefore, problems in it are going to be problems shared by the whole interconnected global economy…

A Way out of Triffin’s Dilemma?

Can we conclude the shadow banking system offers the way out of Triffin’s dilemma?

After all, its thirst for dollars is seemingly infinite. And the dollar packs a wallop… despite record debts and infinitely mushroomed deficits.

So turn your focus away from the central banks, argues Snider.

Is the Russian central bank hoarding gold in conspiracy against the dollar? Is the People’s Bank of China shoveling dollars overboard? Is the Bank of Japan losing its yen for dollars?

Be not deceived.

As long as the shadow banking system runs on dollars… so does the world:

Unless and until the banking system moves away from dollars, diversifying national reserve holdings means absolutely nothing. Nothing… despite a decade’s worth of noise, fury and quite often heartache, there is simply no realistic alternative… We are stuck with this arrangement largely because the media, politicians, central bankers, etc., don’t know a thing about it.

But perhaps each American should fall upon both knees… and thank fortune for this shadow banking system.

It may be the central pillar holding the dollar up high…


Brian Maher
Managing editor, The Daily Reckoning

The post A Solution to “Triffin’s Dilemma?” appeared first on Daily Reckoning.

Trade Wars Just Getting Started

This post Trade Wars Just Getting Started appeared first on Daily Reckoning.

Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.

A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

China has now regained its lost economic and military strength and refuses to make similar concessions today.

In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.

This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War.

This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.

Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.


Pictured above are Vice President Mike Pence (l.) and Secretary of State Mike Pompeo (r.). Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.

The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below:

The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public.

“America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.

Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.

Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels.

Instead it called China — and its de facto ally Russia — “revisionist powers” and “rivals.”

At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact… those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”

The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.

Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.

Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun by China 24 years earlier when China devalued its currency (1994) and continued when China joined the WTO (2001) and immediately started to break WTO rules.

The trade battle is now joined, but no critical issues have been resolved and none will be in the near future. The U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.

China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.

The EU is caught in the crossfire. The U.S. is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favored interests.

The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.

Neither is likely soon.


Jim Rickards
for The Daily Reckoning

The post Trade Wars Just Getting Started appeared first on Daily Reckoning.

Ed Moya – Senior Market Analysts at OANDA – Wed 16 Oct, 2019

Just how strong is the US consumer?

Ed Moya, Senior Market Analyst at OANDA joins me to recap the recent mixed data that is shinning a light on the US consumer. The weak retail sales data is a negative sign but the strong bank earnings are telling a different story. These are both back looking data points but they are important to note as the consumer has been the main support leg for the US economy. We also wrap with comments on the extreme volatility in the Pound all thanks to the recent Brexit advancements.

Click here to follow along with what Ed is writing over at ONADA.

Chris Temple from The National Investor – Tue 6 Aug, 2019

The disconnect behind labeling China a currency manipulator

Trump is back to attacking China as a currency manipulator so Chris Temple and I breakdown the issues we have with this argument. Whether Trump know what he is doing or not if China goes off the cliff it’s going to bring down a lot of other countries as well.

As for the quality, our connection was very inconsistent. I am on the road all this week and the internet at my current location is not the best. Hopefully you can still all understand what Chris was saying.

Click here to visit Chris’s website and learn more about his newsletter.

Three Steps to Save America from Collapse

This post Three Steps to Save America from Collapse appeared first on Daily Reckoning.

Our monetary system is broken. It’s given us low growth, a shrinking job force, inequality beyond what a healthy economy would produce, inefficiency, and the unnatural growth of finance as a portion of the economy.

Our aging Federal Reserve System starves both small businesses and Silicon Valley of the capital needed to grow jobs and wages.

Fed policy translates into zero-interest-rate loans for the government and its cronies, and little or nothing for savers or small businesses. And it has transformed Wall Street from an engine of innovation into a servant of government power.

But I believe America can be set on the right path towards a robust and broadly shared capitalism again with just three steps. 

Step 1: Abolish Capital Gains Tax on Currencies 

This country already allows gold currency. The Treasury mints millions of one-ounce silver eagle dollars that are worth more than twenty dollars apiece and one-ounce gold eagle fifty-dollar pieces that are worth $1,150 apiece. 

Virtually all of these are hoarded. 

Though it has been legal since 1987 to use them at their metallic value, that route leads to a capital gains tax on their appreciation. 

Since the appreciation of a gold or silver piece is by reasonable definition all inflation, the tax is simple confiscation (like all capital gains taxes on spurious inflationary profits). 

The move of gold and silver coins into circulation would offer a corrective of constitutional money for any dollar debauchery by the Fed. 

Step 2: Remove Obstacles to Alternative Forms of Money

Despite imprudent governmental interference, the internet remains a bastion of American power, with U.S. companies such as Apple, Google, Amazon, Microsoft, Facebook, eBay, Cisco, Qualcomm, and scores of others capturing the bulk of all internet revenues. 

The internet plays a central role in the American economy. But there is a profound flaw in its architecture, as I have explained before. It was designed for communications, not transactions.

Around the globe, transactions are shifting toward the internet. Although online purchases remain between 6-7% of all commerce, internet trade is expanding rapidly. 

But to buy something on the Internet, you often have to give the supplier sufficient information — credit card number, expiration date, address, security code, mother’s maiden name, and so on — to defraud you or even to steal your identity. 

This information therefore has to be protected at high cost in firewalled central repositories and private networks, which are irresistible targets for hackers. 

With transactional overhead dominated by offline financial infrastructure, micropayments are uneconomic, and the internet fills with fake offers, bogus contracts, and pop-up hustles. Some 36% of web pages are bogus, emitted by bots to snare information from unwary surfers. 

The internet today desperately needs a new trusted and secure payment method that conforms to the shape and reach of global networking and commerce. 

It should eliminate the constant exchanges of floating currencies, more volatile than the global economy that they supposedly measure. It should be capable of transactions of all sizes. And it should partake of the same monetary sources of stable value that characterize gold. 

The new system should be distributed as far as internet devices are distributed: a dispersed organization based on peer-to-peer links between users, rather than a centralized hierarchy based on national financial institutions. 

Fortunately such a payment system has already been invented. It is set to become a new facet of internet infrastructure. 

It is called the bitcoin blockchain. 

The bitcoin blockchain is already in place. It functions peer-to-peer without the need for outside trusted third parties. And it follows theorist Nick Szabo’s precursor, bitgold. Its value, like gold’s, is ultimately based on the scarcity of time. 

Even if bitcoin proves flawed, scores of companies are developing alternatives based on the essential blockchain innovation that can serve as a successful transactions medium for digital commerce. The existence of such a system would enable sellers on the internet, such as content producers, to name their own prices and collect their funds directly. 

And the very process that validates the transaction would prohibit spam. There would be no hassle of bartering content for advertising revenues at some aggregator such as Google. Aggregators with advertising clout would merely add inefficiency to an automated system that minimize transaction costs. 

The internet would have a money system of its own.

With a low market price for goods and services — Google and other players could charge millicents for their services and still make a mint — the internet economy would transcend its current den of thieves and hustlers. 

It could attain its promise as a frictionless facilitator of human creativity rather than as a channel of chicanery. Its markets would impel the world toward new realms of knowledge and wealth. 

But the success of a new global standard of value on the internet entails a ban on taxation of internet currencies. If only government currencies escape taxation, alternative currencies such as bitcoin will always be relegated to niches.

Step 3: Fix the Dollar 

That brings us to the third step: fixing the U.S. dollar.

How do we do this? 

Monetary scholar Judy Shelton already devised a play. The chief instrument would be the creation of Treasury Trust Bonds — five-year Treasuries redeemable in either dollars or gold. They could be enacted either through legislation or as a Treasury initiative.

Legislation would specifically authorize the issuance of five-year Treasury securities that pay no interest, but provide for payment of principal at maturity in either ounces of gold or the face value of the security, at the option of the holder. 

The instrument would be an obligation of the U.S. government to redeem the nominal value (“face value”) in terms of a precise weight of gold stipulated in advance or the dollar amount established as the monetary equivalent. The rate of convertibility (in gold grams) is permanent throughout the life of the bond; it defines the gold value of the dollar.

As Alan Greenspan declared in the Wall Street Journal during the previous era of monetary turmoil, in 1981: 

In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a gold standard has become an issue that is clearly rising on the economic policy agenda.”

In fact, Greenspan suggested that “Shelton bonds” would pave the path to the future…

“The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear.”

Of course, as Fed chairman, Greenspan went on to become a major maestro of monopoly money at the Fed. And in his subsequent books he expressed many regrets and misgivings about the nature and role of central banks. 

But in an era of new monetary turmoil, Shelton bonds still have traction. In addition, as bitcoin blockchain innovations spread through the internet, borrowers could also issue bonds with a bitcoin payoff. So new systems based on gold and blockchain innovations can evolve into a new world monetary infrastructure.

These are the three steps that can restore integrity to the monetary system. 

As I explained yesterday, this is how we can save Main Street from the menace of monopoly money, transcend the dismal science of stagnation and decline, and restore the American mission and dream.


George Gilder
for The Daily Reckoning

The post Three Steps to Save America from Collapse appeared first on Daily Reckoning.

Zimbabwe allays fears over gold sales, remittances after currency reform

Zimbabwe's central bank has reassured gold companies and people receiving money transfers that they will still be able to receive foreign currency in their bank accounts after a ban takes effect in shops. On Monday, Zimbabwe declared its interim RTGS dollar the only legal tender, ending the decade-long use of multiple currencies including the US dollar.

Exclusive Comments from Marc Chandler – Fri 17 May, 2019

Recapping the trade events of the week and corresponding impacts on the currency markets

Marc Chandler, Managing Partner at Bannockburn Global ForEx joins me to recap the news of the week and look ahead to next week. It was all about trade again this week as tensions with China remain high but there were some nicer developments with Europe, Japan, Canada, and Mexico. We focus on the moves in currency markets where the US continues to the be the preferred currency. As for next week there are a lot of news and data that will be important to watch.

Click here to visit Marc’s free blog, Marc to Market.

Zimbabwe’s currency reforms aren’t sufficient, miners say

Zimbabwe’s currency reforms have not gone far enough and complete liberalization is needed to end a critical shortage of foreign exchange that is hampering business, senior executives from the nation’s mining industry said. The southern African country began formal trading in February of what’s effectively a new currency, known as RTGS dollars, through a newly created interbank market. While it abolished a 1:1 peg between the U.S. dollar and the RTGS$’s predecessor, so-called bond notes and their electronic equivalent, trading has been thin and the difference between the interbank rate and the black market remains wide.

Chris Kimble – Kimble Charting Solutions – Fri 5 Apr, 2019

Key Levels On Some Currencies Related To Metals

Chris Kimble, Founder of Kimble Charting Solutions joins me to breakdown the 5 charts below. All with a focus on future metals moves we look to some of the larger currencies that are testing key levels. Follow along with the charts below and click here to visit Chris’s site.

Chris Kimble – Kimble Charting Solutions – Fri 1 Mar, 2019

Currency and Metals Charts – Don’t Fight The Trend!

Chris Kimble, Founder of Kimble Charting Solutions shares some key metals and currency charts that outline key levels that must be broken for a bullish trend to solidify. As Chris points out at the end, you need to focus on sustainable trends and not try to find the trend.

Follow along with the charts below and click here to visit Chris’s site for more valuable charting commentary.

Remember – Don’t Fight The Trend!