READER THOUGHTS ON “THE SDR PURPOSE OF BRICS” BY JC COLLINS
Rick Shade DECEMBER 17, 2014 AT 1:55 AM Expecting a dollar devaluation vs other currencies….. though gold and silver may drop…premiums may rise. if silver goes to 12, the premiums may be 5-7 an ounce.
I see deflation, but when USD de-couples as reserve currency, will there be war? or just rumors?
what will silver be then? same as now…… silver. and a decent supply of it and or gold should help to mitigate the purchasing power of the dollar, which mathematically has to decline
thswarrior DECEMBER 18, 2014 AT 2:06 PM Using the previous ratio (gold worth 27 times silver) when silver goes to 12 gold will be 324, both out which apprear reasonable.
Gustavsaure DECEMBER 17, 2014 AT 1:59 AM Merci JC.
Matt McBride (@MattMhmmcbride) DECEMBER 17, 2014 AT 2:21 AM Thanks for the post JC.
Things are definitely picking up speed and moving in the direction you have been calling the last 12 months. Any reason why you would see the Aussie and/or Canadian dollars included in the SDR?
I agree that all assets including gold and silver will drop.
However, I expect that when it is announced that the US loses its veto in January 2015 under Plan B, the USD will be replaced by Gold (and to a lesser extent silver) as the safe haven bid until the SDR reliquification program is announced in July 2015.
JC Collins DECEMBER 17, 2014 AT 2:45 AM The IMF has started reporting on the Aussie and Canadian dollars in its official reserves, and central banks have been quietly increasing their accumulation of both.
If added they will be small weights, but will offer further stability as the commodity and mining markets come back to life between next year and 2018. Gold and silver are definitely wild cards.
Matt McBride (@MattMhmmcbride) DECEMBER 17, 2014 AT 3:57 AM Good pick up re AUD and CAD accumulation.
Both are legally stable commodity based countries which would give the SDR basket further hedging and strength.
Both also share a nightmarish property bubble and over leveraged middle class population.
Im from Sydney Australia. There will be tremendous pain in the deflationary wash out of our residential property market. Sadly our happy go lucky middle class will be wiped out. Dark times on the horizon.
Daneackerman DECEMBER 17, 2014 AT 1:59 PM Man Matt losing the middle class is horrible. Unfortunately many more countries will most likely suffer a similar fate.
Which is probably why they want to capture as much off shore taxes as they can. Here in the US they have been saying that we haven’t had a middle class for some time now. Should be interesting seeing how it will play out here.
There seems to be a property bubble here as well. Housing costs have nearly matched what they where back in 2008 already.
My house value dropped close to 70% in the crash back then and has already rebounded….or has it? Seems like a false assessed value to me, which would seem to mirror a housing bubble similar to what you are talking about happening in Australia.
On another level my parents retire this Friday so there livelihood or should I say survival is nearly completely reliant on there pension which is all invested in the stock market and well it doesn’t look good.
Surely I will be effected as well but on top of that I will feel the moral responsibility to help my family and friends as much as I can.
Which actually picks me up because at that point I see a coming together of people. Unfortunately in my lifetime anyways it seems to take a catastrophe of some sort to get peoples hearts to melt together to form unity. Best wishes for all of mankind.
Matt McBride (@MattMhmmcbride) DECEMBER 17, 2014 AT 8:24 PM Hi Dane Thanks for the response.
It will be sad to watch the carnage. You are correct. Tragedy and hardship does unite humans and bring out the best in people. I wish you and your family safety at the apex of the chao.
Cramley DECEMBER 17, 2014 AT 3:35 AM There’s misplaced angst about how gold will perform in real deflation which we haven’t had yet. Gold will not drop, not nominally and not in real terms in a deflation.
chuc1997 DECEMBER 17, 2014 AT 2:24 AM I still get lost here: If I am an oil producer, reliant on depleting oil fields for my income, why do I agree to swap the promises of a bankrupt US gov’t for the promises of bankrupt US, UK, Euro and Japanese gov’ts b/c they are in a basket altogether with a new name?
These nations cannot possibly make me whole in the future on a “real basis” for any oil I sell them today…so why not just leave the oil in the ground?
JC Collins DECEMBER 17, 2014 AT 2:50 AM Because GDP will collapse and access to liquidity will dry up. It is, after all,a multilateral system, not a “you go that way”and “I’ll go this way” system.
Oil can never be a unit of accountant,for obvious reasons. Oil producers will need to sell their product for something. The trade is done in SDR and than exchanged back into the domestic currency.
irrelevant111 DECEMBER 17, 2014 AT 3:45 AM Mr. Collins, Now for something important as we discern… Merry Christmas My Distinguished Friend
chuc1997 DECEMBER 17, 2014 AT 2:17 PM Agreed, but I am talking about the store of value.
Oil producers might agree to use SDR’s as their unit of account but they cannot agree to SDR bonds as their store of value, at least not at interest rates that appropriately compensate them for the risk of holding them.
JC Collins DECEMBER 17, 2014 AT 3:04 PM Which is what is being explained in the post and linked IMF paper.
Thswarrior DECEMBER 18, 2014 AT 2:09 PM Because there is no depletion allowance for sitting on oil.
b.klausen DECEMBER 17, 2014 AT 2:45 AM hey JC, you’ve written about Vietnam before, was wondering with the event of China stepping away from the USD, would there be an immediate effect on the Vietnamese economy / currency?
JC Collins DECEMBER 17, 2014 AT 3:01 AM The Pan Asian FX Trading center is already established so both currencies can be directly traded.
As things shift away from the USD the Vietnamese will seek to peg their currency elsewhere, as they stated earlier this year. At the same time they referenced pegging the dong to their largest trading partner, which is China, or a basket of currencies, a likely reference to the SDR or some temporary regional basket.
Whether the effect is immediate or drawn out over a period of time is difficult to discern, but one thing is certain, the current exchange rate system is going to change, and we may see a fixed exchange rate system like was originally intended with Bretton Woods.
Parity between the majors is beginning to look likely, but the minors, like the dong, will revalue differently. Either way, holding some dong is a cheap and entertaining hedge.
tristero888 DECEMBER 17, 2014 AT 4:03 AM Malaysian rupiah ain’t bad either, especially if you like Balinese coffee :)
tristero888 DECEMBER 17, 2014 AT 4:13 AM after reading Chris’ comment in the last thread, i’m beginning to think that “Plan B” was Plan A all along, and “Plan A” was just a ruse to buy for time in the blame game. if so, it was a pretty well-played jiu-jitsu move actually. question is: against who?
Danielbradford DECEMBER 17, 2014 AT 5:56 AM JC, Whether the Canadian dollar is added to the basket or not, it sounds as though you believe it will gain ground by mid-2015? Is it’s current low value against the USD just part of the script? Will the fact that the USD is Canada’s reserve currency pose any problems here at home?
Mark Green DECEMBER 17, 2014 AT 2:05 PM I wouldn’t bet on a bunch of psychotic, greedy, criminals sticking to a “plan.” Each is lusting for power and will go along only as far as it services their agenda…
Black swan: https://www.youtube.com/watch?v=vkWOse70Oyk
Thefourthobserver DECEMBER 17, 2014 AT 5:34 AM JC, May I ask what we can expect during the transition? For example down here in the Sydney CBD I see that almost the whole city is a derivative of the banking system(firstly finance or supplying services to finance).
What level of carnage would you be anticipating in terms of market disruptions? Something 2008 like, where there is streamlining but BAU picks up again, or far worse?
See, with our property bubble as it is (Possibly 50% overvalued based on the old average house value = 5 times average income) I think the whole banking system here is toast if the market tanks. 70% of most banks loan books is residential property and they tend to self insure loans where borrowing exceeds 80%.
I understand a certain level of pain will accompany a transition to pave the way for acceptance, but the environment here is fragile enough that breaking the property market will break the whole CBD.
The property market is supported by the banking system (both loans and economically), but the real estate is supporting the banking system. Many thanks, Chris
JC Collins DECEMBER 18, 2014 AT 2:21 AM Chris, it’s hard to say how bad it could get. I certainly hope not any worse than 2008 and 2009. The real estate markets in both our countries are likely to be the catalyst for broader systemic risks.
Thefourthobserver DECEMBER 18, 2014 AT 4:59 AM Kind thanks for replying specifically to me. Some backstory on one of your readers if interested:
I sold out of most of my RE in 2009 anticipating Sydney to fall back in line with global markets. I also sold all my stock at the very peak of the GFC (at the time my microcaps were returning 55%YoY).
I was right to sell stocks, but for RE I was dead wrong. The house I sold in 2009 is now valued at double the 2003 price. Since then I have noticed increased risk taking in the RE finance sector and adverts like low or no deposit mortgages on new houses have returned.
A friend works at a large prestigious RE agency. She told me that the only cash buyers left in our market are Chinese flyin’s. Most local buyers are in price shock. “If I don’t buy now we will never own a house.” and will leverage up as higher as they can.
With all the systemic risks building on all sides I decided to become a weekend farmer and build a retirement house. Buying 30ac with cash last year, building my own buildings and planting the first 1000 hazelnut trees recently.
My observation is that rural leverage here tops out at a LVR of 50-60%, compared to an average of 90% in Sydney. So, diversifying my businesses in to City\Country seemed prudent.
Further it gave me options for all those potentially really bad risks perpetually on the horizon. If I’m wrong, then I have a debt free farm which could earn a decent return and a nice weekend \ holiday home.
Maintaining a life as a ‘lightweight doomer’ is not so bad, there are plenty of fun things to try out and life is richer now than when we all just played computer games to pass the time.
We literally went from “Hey dad, how do you craft a bow in Minecraft and how many wheat squares do you need to make bread?” to literally making my own workbench buildings and grinding our own wheat to make pizza with tomato, basil from the garden, and homemade cheese. Soon I’ll be carving a bow, just for fun.
However as anyone who has ever planned for contingencies knows, you are always plagued with doubt. Did I do enough? vs Did I take things too far?
Toknowyourenemy DECEMBER 17, 2014 AT 5:21 PM Mr. Collins, what may I ask have you done to ….forgive the word, ‘prep’?
JC Collins DECEMBER 17, 2014 AT 5:57 PM A little bit of gold, a little bit of silver, a little bit of dong, and a whole lot of patience. Along with savings in CAD and other physical assets.
he biggest thing is to deleverage and not carry a lot of debt. Things will come back if you can weather the storm and not personally default. The problem is personal debt loads are too high and most will have a challenging time managing that debt in a deflationary period.
Gustavsaure DECEMBER 18, 2014 AT 1:05 AM Credit deflation, right? Bond price deflation. Real estate deflation. However for the US, inflation through the currency as USD is sold, to which the central bank will respond by jacking rates which will just feed into inflation unless they get way out in front of it like Volcker did which would be catastrophic at these debt levels.
And the Fed doesn’t have foreign currency to defend the dollar. You’ve said SDR bonds will serve to suck that inflation out of the US, but I don’t see how that happens. The more SDR that are bought, the weaker the dollar against commodities.
The USD will be one of many currencies interacting within a fixed exchange rate structure, with the SDR as the reserve asset, or unit of account. Based on GDP and other metrics, countries will be given quota amounts and will be debtor nations or lender nations.
Study the Turkey model and how it implemented tax reform, along with other “forced measures” to pay back its IMF loan. It is now a lender nation. Read the post The Ottoman Multilateral. The framework will change, as such the old way of viewing things will need to be adjusted.
Gustavsaure DECEMBER 18, 2014 AT 2:36 AM I guess what I’m asking concerns the XDR/USD exchange rate. If dollars are buying SDR this would devalue the exchange rate, no?
en that we expect oil and other commodities to be priced in SDR, there would be currency-induced inflation, or if you prefer stagflation.
JC Collins DECEMBER 18, 2014 AT 2:42 AM By “currency-induced inflation” I assume you are referring to cost-push inflation. http://en.wikipedia.org/wiki/Cost-push_inflation
If the fixed exchange rate system is based on purchasing power parity we would not likely see this type of inflation.
Toknowyourenemy DECEMBER 17, 2014 AT 6:54 PM Do you worry about things such as civil unrest/etc.?
JC Collins DECEMBER 17, 2014 AT 7:55 PM I’m in Canada dude.
Gustavsaure DECEMBER 18, 2014 AT 1:04 AM Lol.
nanook73 DECEMBER 18, 2014 AT 2:39 PM Ohhhh JC – remember what happens to Vancouver when they don’t win the cup? Remember this?
I suppose as long as the beer and smokes flow and we don’t have a team that can make it into the play offs we should be fine…. :-)
Daneackerman DECEMBER 17, 2014 AT 8:54 PM Try not to worry. Worry leads to fear. Fear clouds perception which could accidently create the civil unrest you worry about.
My work takes me into these areas of civil unrest we have been seeing on television and it really doesn’t look or feel like what they show on television.
It seems they are reacting to the very CSI’s discussed here so it’s almost predictable. In fact in the city I live in permits were pulled by the protesters for the protest. So the cops knew when and where to shut down the streets to traffic. News didn’t tell anyone about that.
Toknowyourenemy DECEMBER 17, 2014 AT 8:34 PM True enough that the anchor line is wrapped around your ankles as well….how deep is the water though?
JC Collins DECEMBER 17, 2014 AT 8:45 PM Canadians are a mellow bunch. I’m sure there could be some civil unrest in the bigger cities, but I don’t see much unrest happening.
considering the complete lack of protest against the “bankers” spending bill that passed last week, I’d be surprised if even Americans protest or cause civil unrest, at least not over anything economic. Perhaps over some manufactured race issue. I think apathy runs deeper than anyone fully realizes.
Mark Green DECEMBER 17, 2014 AT 9:41 PM One day, in river guide training while floating under a bridge. Randy, our instructor said, “sometimes, people will dive of the bridge.”
Someone asked, “how deep is the water?”Randy replied, “depends on which rock your standing on…”
Toknowyourenemy DECEMBER 17, 2014 AT 10:06 PM I doubt if anywhere in the world people care much about economic and political values these days.
But when it effect them – that would be the time for caution in my book. If the dollar is to be part of something – now at a much lesser weighting – well, somethings gotta give. Unemployed hungry people with few skills is a formula for trouble don’t you agree?
JC Collins DECEMBER 18, 2014 AT 2:26 AM It hasn’t been in third world countries. Mass populations can presumably find a level of comfort in all manner of socioeconomic structures. You may be right though.
Bgsv DECEMBER 17, 2014 AT 11:53 PM Don’t know if all you read this. Brandon Smith appears to be on the same wavelength as JC. Its a good read:
“…. summary of a dangerous trend I have been concerned about for years; namely the strategy by international financiers to create a dollar-collapse scenario that will be blamed on prepositioned scapegoats.
I have no idea what form these scapegoats will take – there are simply too many possible triggers for fiscal calamity. What I do know, though, is the goal of the endgame: to remove the dollar’s world reserve status and to pressure the American people into conforming or even begging for centralized administration of our economy by the IMF.”
JC Collins DECEMBER 18, 2014 AT 2:27 AM Thanks. Glad to see your still checking in once in a while.
Cramley DECEMBER 18, 2014 AT 12:24 AM Uh-oh! Somebody asking some intelligent questions over at the FOFOA blog today.
Newbie with a brain: “After the transition, I’m confused as to whether this community believes that gold will outperform equities for long-term capital growth. Would we not want to continue investing in equities, and would they not continue to be the best means of long-term growth? ”
Brainwashed goldtard:” As long as you understand that Savings (in physical gold) are simply to preserve purchasing power since the price of gold will rise with inflation and that Investing (in what ever form you think will generate income) is a risk then you are closer to understanding Freegold.”
Notice the common misconception ” gold will rise with inflation.” The real price of gold does not respond to the growth of monetary aggregates. In fact it may actually decline during inflation.
Notice the normal healthy predilections of the newbie with a brain. This is how rational savers think.
Cramley DECEMBER 18, 2014 AT 1:03 http://finance.sina.com.cn/world/20141217/234221101941.shtml
There is no Plan B.
JC Collins DECEMBER 18, 2014 AT 1:27 AM Cramley, I appreciate the link and encourage other readers to use a translation tool and read the material. But how you imply that the link suggests “there is no Plan B” is beyond my imaginings.
The article clearly builds the case for IMF Reform and even supports what I’ve said in this post, mainly that the BRICS institutions are “helping along the way” towards the IMF system which includes a stronger representation by the emerging economies.
Sometimes I feel like you are intentionally promoting false arguments. Don’t be surprised one day if your comments don’t get posted.
Comments may be made at the end of Part 2 Thank You