The New Monetary Accord No One’s Talking About- Passing along Jim Rickards 4-25-16
Darien, Connecticut
April 25, 2016
Dear Reader,
Two
miles from the White House, behind closed doors, the “Godfather” of
global finance gathered central bankers, ministers, deputies and leading
economists to coordinate a massive shift in the currency wars.
And it could knock king dollar from its throne this year…
Like
Don Corleone in the film The Godfather, the IMF can make countries
“offers they can’t refuse.” In other words, it wasn’t really an offer;
it was a threat. And it is about to affect the international monetary
system in a big way.
Behind her Hermès scarf, Chanel suits and
French accent, Madame Christine Lagarde, managing director of the
International Monetary Fund (IMF), is as ruthless as Don Corleone when
it comes to threatening members who step out of line with her global
plan. The IMF plan is designed to enrich the elites at the expense of
everyday investors like you.
Christine Lagarde is the Godfather
of global finance. As capital markets gyrate in the coming months, there
will be just as much financial drama and violence as there was Mafia
violence in the Godfather films.
The IMF financial back story is
even more complex than Corleone family dynamics. We’ll lay out the plot
here and now so you can preserve your wealth before the bloodbath at the
end.
In the Godfather films, there were five families who
controlled the rackets. They were originally based in New York and later
expanded nationally (Las Vegas) and internationally (Havana). The
families were the Corleones, the Barzinis, the Tattaglias, the Cuneos
and the Straccis.
These fictitious names were based on real-life
Mafia organized crime families, the Gambinos, the Colombos, the
Bonannos, the Genoveses and the Luccheses.
In the day-to-day
conduct of rackets, the families were equal and each had their own
territories. In practice, one of the families tended to dominate the
others and broker peace treaties in case wars broke out.
In the
Godfather films, the most powerful family were the Corleones. In real
life, the most powerful Mafia family were the Gambinos; past bosses of
the Gambino family include Carlo Gambino, Paul Castellano and John
Gotti.
The head of each crime family was called the capofamiglia
(boss of the family). The head of the most powerful crime family was
called the capo di tutti capi (boss of all bosses).
The global
financial system also has five families. These are the U.S., China,
Japan, Europe and the IMF. Together these five families control
two-thirds of global GDP and over two-thirds of all the official gold.
Like
the Mafia, these five families all have their own territories and
specialized rackets in the form of money printing, negative interest
rates and deficit finance.
These rackets are designed to extract
wealth from citizens and divert it to elites such as the heads of major
banks, hedge fund insiders, private equity barons and tech billionaires.
In exchange, the elites pay taxes and make campaign contributions that
keep the five families going.
As a result of policies pursued by
these five families, income inequality in the U.S. is worse than it has
been since the late 1920s. It’s even worse in China.
The everyday
citizen is victimized by this system just like the small shopkeeper who
gets his windows broken (or worse) if he doesn’t pay tribute to
organized crime.
The everyday citizen is victimized by this
system just like the small shopkeeper who gets his windows broken (or
worse) if he doesn’t pay tribute to organized crime.
Occasionally,
wars break out among the five families. In the past, these were highly
destructive world wars. But the major powers have not fought each other
directly since Chinese and U.S. troops clashed in the Korean War.
Instead, kinetic wars between great powers are fought indirectly through
proxies and in places such as Vietnam, Iraq and Syria.
Today,
when the major powers fight wars, they are financial. Iran and the U.S.
fought a financial war in 2012–2013 (the U.S. was winning until
President Obama called a truce in December 2013 as a way to start
nuclear negotiations). Russia and the U.S. are in a financial war today.
This is being fought with sanctions because of Russian invasions of
Georgia, Crimea and eastern Ukraine.
Sometimes the line between
financial war and kinetic war gets blurred. We see this in recent
Russian efforts to buzz and harass U.S. naval vessels and surveillance
aircraft in the Baltic and Black Seas.
The most dangerous kind of
financial war among the five families is a currency war. A new currency
war started in 2010 and continues today.
Rapid shifts in foreign
exchange rates can have devastating effects on stocks, bonds,
commodities and real estate. Understanding the dynamics of currency wars
and financial warfare in general is the key to avoiding losses and
making gains in markets today.
When Mafia wars get out of
control, the capo di tutti capi steps in to broker a peace treaty. The
same is true in the currency wars.
From August 2015 to January
2016, the currency wars were spiraling out of control. U.S. stock
markets crashed both times (only to be rescued in September 2015 and
February 2016 by dovish statements by the Fed).
Currency wars
were getting dangerous for the global financial system. Eventually, a
global panic could result that the Fed won’t be able to stop.
It
was time for Christine Lagarde, capo di tutti capi, to step in and
broker a peace treaty. This happened on Feb. 26, 2016, in Shanghai,
China.
Below, I show you how she did it… and more importantly, why.
Regards,
Jim Rickards
for The Daily Reckoning
The Daily Reckoning Presents: The monetary mafia rescues China before it triggers a global meltdown...
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The New Monetary Accord No One’s Talking About
By Jim Rickards
The
currency wars started in 2010 with the weak Chinese yuan. Barely a week
went by without Treasury Secretary Tim Geithner complaining about
Chinese currency manipulation and the weak yuan.
By 2011, China
was doing better and the U.S. was stuck in a rut of low growth coming
out of the 2008–2009 recession. This necessitated a weak dollar to give
the U.S. economy a lift in the form of higher exports, more jobs in the
export sector and more inflation due to higher import prices.
That’s the basic currency wars formula — lower export prices to create jobs and higher import prices to get inflation.
Currency
wars involve devaluation of your currency as a form of monetary ease.
Devaluation is what you do when you can’t get growth any other way.
The
problem is that not everyone can devalue against everyone else at the
same time. It’s a mathematical impossibility. So you have to take turns.
It was China’s turn in 2010 and the U.S.’s turn in 2011. The dollar hit an all-time low in August 2011.
Right
on cue, real U.S. GDP grew 4.6% in the fourth quarter of 2011 — the
highest quarterly growth rate since the end of the recession in 2009.
This was good news for the U.S., but another one of the five families was suffering — Japan.
Japan
needed help desperately, and set out to get it by continuing the
currency wars. In December 2012, Prime Minister Shinzo Abe announced an
economic program to revive Japanese growth.
This was called
“Abenomics,” and it had three “arrows,” which were monetary policy,
structural reform and fiscal policy. Monetary policy was explicitly
intended to cause a weak yen.
This worked. The yen rapidly fell
from 90 to 124 to the dollar. This gave the Japanese economy a lift in
2013, just as the cheap dollar gave the U.S. a lift in 2011.
While
China, the U.S. and Japan had taken turns with a cheap currency from
2010–2013, Europe was suffering with a strong euro. This was the period
of the recurring Greek sovereign debt crises. Europe also had two
recessions along the way. By 2014, it was time for the cheap euro.
This
was accomplished in two stages. In June 2014, Mario Draghi and the ECB
moved to negative interest rates. Then in January 2015, Draghi
introduced “euro QE” which was an expanded form of money printing.
The euro promptly fell to an interim low of $1.05 in January 2015, and has fallen close to that level several times since.
As
was the case with the other devaluations, the European economy got some
relief. We stopped hearing about the Greek crisis after the summer of
2015.
This history shows that the currency wars from 2010–2015
proceeded in an orderly way. Each one of the five families got some
economic benefit (China in 2010, the U.S. in 2011, Japan in 2013 and
Europe in 2015).
Although the currency wars were ongoing, they
were being managed successfully by the five families. This is how the
Mafia operates when there’s peace; everyone gets along with everyone
else, even with an undertone of mutual distrust.
But in the
summer of 2015, a new war broke out among the five families. China went
rogue and tried to cheapen its currency without consulting the others in
advance. On Aug. 11, 2015, China launched a shock 3% devaluation of the
yuan in one day.
We all know what happened next. U.S. stock markets plunged. By late August, stock investors were staring into an abyss.
The
Federal Reserve immediately backed off its plan to hike rates
(so-called “liftoff”) in September. The rate hike was put on hold, and a
relief rally in U.S. stocks began.
The same thing happened from
December 2015 to January 2016. This time, the Fed went ahead with the
liftoff by hiking U.S. interest rates 0.25% on Dec. 16, 2015.
China
used the Fed’s rate hike as air cover to cheapen the yuan again. This
time, they did it not on a shock basis but on a stealth basis. China
moved the yuan lower in small steps day after day. Markets were not
fooled. Market participants could see yuan was going down and
immediately discounted further devaluation.
(there is a graph- China Mafia Chart on the website)
Once
again, U.S. stock markets crashed in response to a Chinese devaluation.
From Jan. 1, 2016 to Feb. 11, 2016, U.S. stocks had their worst start
to any year in history.
And entered full-blown technical correction territory, close to a technical bear market.
The
Fed rode to the rescue again. Officials such as New York Fed President
William Dudley gave a series of dovish speeches, and the Fed took a
March interest rate hike off the table. Once again, U.S. stocks began a
relief rally. From mid-February to mid-April, the damage of the January
meltdown was undone and stocks recovered, thanks to the Fed.
But
the game was getting dangerous. How many times could the Fed bail out
the stock market? How long would the Chinese play with fire by devaluing
the yuan?
In fact, China needed a cheaper yuan. The Chinese
economy is the second largest in the world. It’s coming in for a hard
landing. Years of wasted investment, asset bubbles, debt accumulation
and corruption were coming home to roost.
The Chinese yuan had been getting stronger since 2011 as the U.S., Japan and Europe took turns cheapening their currencies.
It was China’s turn for a weak yuan. Enter the Secret “Shanghai Accord”...
This
was the state of play as the heads of the five families gathered in
Shanghai, China, on Feb. 26 of this year. Technically, this was a G-20
meeting of finance ministers and central bank officials.
But
formal G-20 and IMF meetings are used to conduct informal private
meetings on the sidelines. The G-20 meeting in Shanghai was the perfect
cover for a “sit-down” of the five families, led by the boss of bosses —
Christine Lagarde.
The U.S., China, Japan, Europe and IMF all
agreed that China needed some relief. The world’s second-largest economy
cannot go down without taking most of the world with it.
For that matter, the U.S. was weakening also. Real GDP growth in the fourth quarter of 2015 was an anemic 1.4%.
The
estimate for the first quarter of 2016 from the Federal Reserve Bank of
Atlanta is 0.3%, close to recession levels. Not only are both quarters
extremely weak, but the trend is downward.
The U.S. looks like it
is heading into a recession. Even if a technical recession is avoided,
this weak growth in the world’s largest economy has ripple effects that
will drag down the global economy.
With China and the U.S. both weakening, it was time for another change in the currency wars.
The
problem was how to weaken the Chinese currency without crashing global
stock markets. Lagarde did not want a repetition of what had happened in
August 2015 and January 2016.
The purpose of the sit-down in Shanghai was to come up with a plan to give China relief without causing a global panic.
The
“GDPNow” real-time forecast from the Federal Reserve Bank of Atlanta
shows U.S. growth in the first quarter of 2016 at 0.3%, very close to
recession levels.
Traders were obsessively focused on the
yuan/dollar cross rate (the ticker symbol for this is CNY/USD). If
CNY/USD could somehow be left undisturbed, markets might not notice
immediately what was being done.
The solution was to take action
in the U.S., Europe and Japan while China did nothing. This was the
heart of the Shanghai Accord.
Europe and Japan would both tighten
policy and strengthen their currencies. The U.S. would ease policy and
weaken the dollar. China would maintain their dollar peg so CNY/USD
would be unchanged.
A stronger euro and yen is the same thing as a
weaker yuan, from China’s perspective. China has a larger combined
trading relationship with Europe and Japan than it does with the U.S.
Relief
for China from a strong euro and strong yen is significant. At the same
time, a weaker dollar means a weaker yuan if the peg is maintained.
China is just “along for the ride” as the Fed trashed the dollar.
That’s
the essence of the Shanghai Accord. China does nothing but gets a major
devaluation in the currency wars, and no one notices because CNY/USD is
steady. Voilà .
Regards,
Jim Rickards
for The Daily Reckoning