Swiss Referendum on Gold and its wider macro ramifications

An interesting development is coming out of Switzerland, home of pretty mountains and secretive banking. 100,000 Swiss voters have signed a referendum calling for the government to maintain what many call a "partial gold standard". This move requires the Switzerland National Bank to hold 20% of its monetary reserves in the shiny gold bullion. This is big news to anyone following money and government monetary policies, since the gold standard has been used many years in the past. The world financial system has not been actively connected to gold since a couple of years after the Nixon Shock with references to gold removed by a 1976 government decree.

There are several reasons why this referendum is also big news:

1. The recent huge surge in gold reserve purchases by Russia, by India and by China
2. Long term of gold and other currencies that challenge the supremacy of the US dollar as the future reserve currency

The question is if Russia and China are buying up a lot of gold, what are their central banks going to do? Are they diversifying away from using the dollar as a fiat backer of their reserves or are they trying to establish a partial gold standard? There has been speculation for years that the Chinese government working in tandem with the Chinese Central bank has been planning for a Gold-Backed Yuan. Alan Greenspan, who is no stranger to central banking and monetary policy, said recently in an Foreign Affairs article published last month seemed to hint at China's resurgent gold reserve policies that were of huge importance to that of the United States. What's interesting is that Alan Greenspan has come out recently and mentioned that he's worried about the future of monetary policy, but also that gold should be a "good place to put your money these days given its value as a currency outside of the policies conducted by the governments. These statements don't surprise any of us that have been following Alan Greenspan. This goes back to his earlier associations with Ayn Rand and her Objectivist collective that he had participated in, with him penning Gold and Economic Freedom in Ayn Rand's book, Capitalism, the Unknown Ideal. He must think of the massive quantitative easing that the Federal Reserve has undertaken and the impending currency crisis that the Federal Reserve will eventually face.

Where does this lead us to with the Swiss referendum? If the policies on the referendum pass the voters, it would have to go through the many cantons within the Swiss Confederation. If this vote can pass, it would have huge ramifications on the gold markets, the financial markets and the world fiat currency system. If countries that are much larger in scope and in size, like China or Russia, also adopted similar currency laws for their Central Bank, it would create enormous demand for gold, driving up gold prices, while decreasing worldwide demand for the current reserve, which is the US dollar. This vote could have significant macroeconomic ramifications for the world.

Johan's November Reading List

Since I will be mostly likely very busy for the rest of this month and most of next month, I've decided to post my November reading list! There are 4 books I'm planning on reading and not all of them are Econ-related.

1. Avinash Dixit, Barry J Nalebuff - Thinking Strategically
2. Roger B Myerson - Game Theory: Analysis of Conflict
3. Thomas Piketty - Capital in the Twenty-First Century
4. Francis Fukuyama - Political Order And Political Decay

Russia Ruble, Gold Reserve Purchases, Depressed Oil Prices

Russia's ruble has made financial news as of late, just as their conflict with their neighbor, Ukraine, has been frozen in the last month or so. Western sanctions have had a profound effect on Russia's monetary policy and the value of its currency, the ruble. According to the latest data, they have made another currency intervention by purchasing ruble from its mostly dollar-denominated currency reserves. This has been done to keep the ruble from falling even further down versus the US dollar, due to US and Western sanctions on key sectors of the Russian economy. This event coupled with falling oil prices have marked a perfect storm for Russia, but Russia has silently been buying up gold reserves. Does this mean that Russia will attempt to entirely decouple from the Western financial system? The answer is probably no, but they are slowly moving away from basing their international trade activities on the US dollar.

I have compiled two charts from Bloomberg that illustrate the falling ruble and the Russia's foreign exchange reserves, which includes gold.

By looking at these Bloomberg charts, we can see that Russia's ruble has weakened from around 36 Russian rubles to one US dollar to about 41 to 1. There is sharp drop in the value of their currency, coupled with the sustained drop in their official foreign exchange and gold reserves from $500 billion dollars to about 450. While these official estimates might not be realistic, especially due to Russia's resurgent gold bullion purchases, they mark a country mired in recession due to Western sanctions and the costly war with Ukraine. Russia has emerged as officially the country with the 5th largest currency reserve in the world, which fuels speculation of their real motives. Along with China, Russia has been purchasing gold bullion at record amounts, could they be underestimating their real gold bullion numbers? We do know that their $13 billion worth of currency interventions this month shows real weakness in the value of their currency, but does this indicate that Russia is in a free-falling economy or does it have to do with Western sanctions? I think it has more to do with strongly falling oil prices since the ruble is, in my opinion, more or less a petro-ruble, similar to other petroleum-based currencies. This could change if they continue with their gold reserve purchases and changes in central bank policies. Could this be a gold-backed ruble?

By looking at the sudden drop oil prices, which reached a peak of about $105 (WTI) and $115 (Brent), oil has taken a sharp dive and prices hover around $82 (WTI) and $86 (Brent). This sharp correction has also influenced Russia's currency reserves and the price of its currency, which means sharp economic and budget problems for the Kremlin to handle. If this slide continues and coupled with more debt downgrades by S&P and Moody's, we could see Russia's currency sink further and will require more further currency interventions. Could we see Russia's central bankers make more aggressive monetary decisions regarding the state of its falling currency? In the future, there is very much reason to believe that they might discard SOME if not ALL of their US dollar-denominated assets. Could this also lead to a more politically and militarily belligerent Russia? We will have to wait and see what unfolds...

China's Growing Debt Since the Financial Crisis

An interesting article came up today when I was reading my usual couple of websites, which includes the Economist. This article concerned China's growing debt to GDP ratio that seemed to accelerate ever since the 2008 Financial Crisis. The growing debt seemed to be fueled by the growing credit boom, which has been further fueled by continued speculative construction. As the Chinese economy slows, most of this debt then increases to dangerously high levels, which is currently reaching at a level of above 200% of GDP. This number should be something to watch in the years down the road. The article doesn't mention much about the possible global implications for a possible meltdown, but if it does, I predict it could be worse than the 2008 Financial Crisis.

In another article that is connected to the other article, the piece gives us an idea of what the Chinese authorities could do to mitigate the inevitable. By looking at the chart that the article provided, most of this recent debt boom is from the credit-fueled continued construction bubble that is undertaken in China. The International Monetary Fund has warned repeatedly about the discerning possibility of a sharp and eventual Japan-style property meltdown. There could be many policies implemented in fixing this looming problem, but one of the main things that the international community and China could do is rein in the deep obsession with GDP growth and focus on other more important issues.

2014 IMF October 10-12 Meeting

The IMF held their annual meeting in October 10-12, 2014, the link to the meeting could be found here. On the opening day, the Managing Director of the IMF, Ms. Christine Lagarde talked about 3 key important factors that effected the world economy:

1. Acceleration  and Stagnation
2. Stability or Fragility
3. Solidarity or Seclusion

Overall, her speech made a good point about how the member countries needed to come together like in 1944, not bicker over things like in 1914.

Other interesting speakers throughout the week included the World Bank President, Jim Yong Kim, Paul Krugman and other speakers. It also included a CNN Debate at the George Washington University. Overall, it featured excellent speakers on the issues that effected individual regions around the world. There are many critical issues which the world faces, but most importantly, the great thing about the Fund is that it helps to coordinate action among the 188 member countries.

Asia's Development and Clean Coal Technology

In my last blog entry, I talked about the article I had read in the New York Times concerning current developments over China's new competitive banks. In this entry, I want to explore one specific part of that article, which concerns the application of coal and of possible usage of clean coal technology that would make a difference in these developing regions. Due to the cheap costs of coal and the usage of clean coal technology, it could prove to be a big difference in the region.

Environmentalists might not like the idea of using coal energy, but it can help these developing economies kickstart their economies. Coal is dirty, pollutes the environment and requires stripping the mountaintops, but the economic benefits to it are enormous. It can enable these economies to get started before transitioning to more cleaner kinds of energy at a later time. To weigh the pros and cons of coal energy, here's an article on this topic.

China, Global Institutions and US Opposition

In a New York Times article that I had read 2 days ago, it described an interesting situation developing between China and the United States over the role of global and regional organizations. President Xi Jinping and the Chinese government had proposed and had pledged a new development bank that targets its neighbors and Asia. This is the latest manifestation of US-China competition within the great Asia-Pacific rim area, especially in the realm of global financial institutions.

Towards the end of World War 2, the Bretton Woods Conference had set up international financial institutions such as the International Monetary Fund, the World Bank and other associated agencies, such as the Asia Development Bank. With the surfeit of money that these agencies had, they have been doing good work around in the arena of global development. They had promoted doing good work in its provisions of global financial management, but now with the rise of China as a major financial player in the world, I believe there are needs to be addressed in this arena.

The US government has been worried that the founding of China's new development bank will severely undercut the Bretton Woods institutions that had been set up many years ago. I think this is a good opportunity for the institutions to work with each other. They can use the World Bank's experience and expertise coupled with China's newly minted financial strength in order to mitigate any misunderstanding, which could lead to mutually cooperative and constructive policies, versus mutually destructive competition. In the New York Times article, the Asian Development Bank had estimated that over 8 trillion dollars is needed in just transportation infrastructure, which is an amount that both the A.D.P. and the World Bank cannot afford to lend to these regions. I think it's time for the Obama administration and the US government to step up to the plate and to put a bigger commitment in mutually cooperative and beneficial policies.

Aging Demographics and Possible Solutions

As I was rummaging through the many articles today, I stumbled upon a particularly interesting article in the Economist. The article deals with changing demographics and creating employment challenges. I think this is more and more relevant as time goes on, especially when it comes to changing labor demographics, especially in OECD countries such as the United States.

An interesting chart to compare the differences in demographics between the United State, China and Japan: here

What this chart does not illustrate is that Japan has already aged versus the United States! While China's economy is growing robustly now, the Chinese economy will not go much further with its current growth models without fundamental changes to the structure and to the health of its economy. When shifts in change of demographics happens, it will turn many of American entitlement programs that are taxpayer funded into even bigger behemoths of debt than before! Altering such programs seem impossible currently with the deadlock in Congress...

There are real solutions to this problem, which include policies that might upset populist or nativist groups such as lax border policies and immigration. What these people need to remember is that some of them came here "illegally" on Ellis Island! Here are some possible tips that can be used to fix the current debt problems and generating potential growth opportunities in the economy:

1. Promote MORE Immigration (Both Skilled and Unskilled) to fix the demographics program.
2. Promote Math and Science in schools as a fundamental way to promote new innovation and growth.
3. Robust ALMPs (Active labor market policies) in placing people into high-tech, new-growth industries.
4. Cutting Corporate Taxes.

While these certain policies will not generate the much needed revenue the federal government needs in order to sustain these life-saving programs for many, I think it is necessary for these policies to be effectively implemented to change the structure of the US economy in congruence with the aforementioned changing demographics. The specifics of these particular policies might differ in how they could be implemented, but I believe they could be very effective in targeting specific problems.

China's Anbang Buys New York's World Famous Waldorf-Astoria

10/9/2014

I don't think it's new news, but earlier this week, a small firm from China bought New York's world famous Waldorf Astoria Hotel.

Link to the news is here

What's interesting is that during the beginning of the liberal economic reforms is that the mastermind behind the opening up stayed at the Waldorf Astoria Hotel. It's also reminiscent of Japan's buying up of another Art Deco building design, The Rockefeller Center. It brings up back to the idea of the unsustainable housing bubble, which is somewhat connected to this article. How long will China be able to sustain such high asset prices on property? It looks like the Chinese government can definitely do so, with a high demand for housing and a growing GDP, which creates further demand for housing. The International Monetary Fund has just listed it as surpassing the US in their annual Purchasing Power Parity Calculations for this year. Not surprising at all, as it is all over the media.