The admonitions being sounded are not those of fringe critics or perennial gold bugs. Greenspan and Lagarde are pillars of the international monetary elite. They are forewarning that the system is nonsustainable, that a reset is coming, with gold possibly part of a reset discussion even if gold is unlikely to be an elite’s first choice. The call for a new international monetary conference was also limned by prominent economist Judy Shelton in her 2018 article, “The Case for a New International Monetary System,” in which she wrote, “Today there are compelling reasons—political, economic, and strategic—for Trump to initiate the establishment of a new international monetary system.”4 Again, the only issue is whether a proactive convening power, possibly Trump, takes the lead, or whether a new hysteria emerges and forces the elites’ hands under highly adverse conditions.
If Trump were to take the initiative to convene a new international monetary conference, his venue is ready-made—the Mar-a-Lago resort in Palm Beach, Florida, built by Marjorie Merriweather Post in 1927, now a National Historic Landmark owned by Trump. There would be some irony in the selection of Mar-a-Lago, since the Mount Washington Hotel in New Hampshire, site of the Bretton Woods Conference in 1944, is also a U.S. National Historic Landmark and was owned at the time of the conference by New Hampshire senator Charles Tobey, a personal friend of Franklin Roosevelt. Before the Bretton Woods location was decided, John Maynard Keynes implored his U.S. counterpart, Harry Dexter White, not to have the conference in Washington, because Keynes had a bad heart and in an age before air-conditioning the summer heat in Washington was insufferable. Keynes’s request was accommodated by the selection of a site in the cool White Mountains of New Hampshire. If Keynes were alive today he would no doubt approve of the cool sea breezes of Mar-a-Lago as well. The ornate gilded halls of Mar-a-Lago also bear a passing if ersatz resemblance to Italy’s thirteenth-century Palazzo di San Giorgio, site of the Genoa Conference in 1922.
Views of the Monetary Elites
To argue that no global monetary reset is in the cards is to argue that the global elites have achieved a permanent state of monetary nirvana. This is false. The international monetary system today is a patchwork of floating exchange rates, hard pegs, dirty pegs, currency wars, open and closed capital accounts, with world money waiting in the wings. It is unanchored. It is incoherent.
“Incoherent” is the exact word used by both former Fed chair Ben Bernanke and John Lipsky, former acting managing director of the IMF, in separate conversations with me. I spoke to Bernanke in Seoul, South Korea, on May 27, 2015, and to Lipsky just a few months later in New York City. Each used the word to describe the international monetary system. I’ve never heard either one of them use the word publicly. I’m also sure the word was neither rehearsed nor coincidental. The fact that two of the top monetary elites used the same word in this context shows that view is a live topic of discussion in elite circles.
By incoherent, both Bernanke and Lipsky meant that there was no anchor for the system, no universally agreed reference point or metric by which to judge currency values. You can judge every currency in relation to another currency, yet there’s no way to judge any currency by an objective standard under current rules.
The problem of an anchor or objective standard for valuing currencies was solved centuries ago by the gold standard. Prior to the seventeenth century, gold and silver were money and there was no need to reference paper currencies (except for ancient Chinese paper money regimes, which failed catastrophically). Beginning in the seventeenth century, paper money backed by gold and gold coins circulated side by side. Eventually the gold backing was withdrawn. As we’ve seen, this happened in stages between 1914 and 1971, so that everyday citizens barely noticed. Private gold was made illegal in the United States for citizens in 1933 and commercial banks were forced by law to hand over their gold to the central bank in 1934. Yet the United States remained on a gold standard with its foreign trading partners, and the Federal Reserve was required to back the currency with at least 40 percent gold. Gold backing, called “cover,” was reduced to 25 percent in 1945. In 1965, the gold backing was eliminated entirely for Fed deposits, and in 1968 the gold cover was reduced to zero for Federal Reserve notes. Finally, in 1971, Nixon ended gold convertibility of dollars by foreign trading partners.
Neither Lipsky nor Bernanke favor a return to the gold standard. In fact, there’s scarcely a mainstream economist in the world today who favors a gold standard. This begs the question, If you’re not using gold, yet you want an anchor for major reserve currencies, then what anchor do you propose? This is where the discussion breaks down. Those who criticize incoherence have no answer to the conundrum of how to invent a suitable anchor for the international monetary system.
On February 15, 2017, I met privately with former Treasury secretary Tim Geithner at a small gathering in New York City. I asked him directly about the game plan for the next monetary crisis, including aspects of a possible global monetary reset. I suggested the Fed had done little to reduce its balance sheet after the last crisis in 2008; the balance sheet in early 2017 was still around the $4.2 trillion level reached in late 2014. I expressed doubt the Fed would be able to quadruple its balance sheet in a new crisis as it did after the 2008 crisis. I asked Geithner point-blank if he believed the IMF would print trillions of special drawing rights, or SDRs, to reliquefy the international monetary system if needed. That would require consensus by major members of the IMF, a process that could itself constitute a version of an international monetary conference.
To my surprise, Geithner poured cold water on the idea of the IMF saving the world. He said, “We tried that after 2008 and it didn’t work very well.” Geithner was right. In August and September 2009, almost a year after the most acute phase of the 2008 panic, the IMF issued SDR182.7 billion (worth $255 billion at today’s SDR/USD exchange rate). Most market participants barely noticed the issuance and it did little to stimulate world economic growth. Part of the problem was that the issuance came long after the panic subsided, and even after the U.S. recovery commenced. Also, the amounts involved were small relative to $10 trillion of currency swaps arranged between the Fed and the ECB and other central banks, and the $1 trillion of money printing the Fed commenced under QE1 and later QE2. Still, this did not mean that SDRs could not be effective, merely that the timing had been slow and the amounts insufficient.
I pressed Geithner further. I asked, “Well, if the Fed can’t expand its balance sheet and IMF issuance of SDRs is ineffective, how will the Fed and other central banks deal with a new global liquidity crisis?” Geithner paused, looked at me, and said, “Guarantees.” In other words, Geithner expected that in a new crisis the Treasury or Fed would stop a run on the banks and money market funds by guaranteeing deposits and account balances.
Geithner was forthcoming, yet I was highly skeptical of his proposal. Guarantees worked in 2008 because there was a run on private credit and the government was able to use public credit and guarantees to backstop private credit. The next crisis will be different. The investing public and market participants take it for granted today that the government will bail out banks (even if it means using new “bail-in” rules to convert deposits to equity). But who bails out the government? The next crisis will feature a loss of confidence in government itself, central banks, and fiat currencies. How can the government guarantee itself when the government’s own credit is called into question?
Finally, on May 31, 2018, I enjoyed an hour-long one-on-one discussion in Hong Kong with John Lipsky, the only American ever to lead the IMF. This was my third meeting with Lipsky after my 2015 conversation in New York and a later occasion in Washington, D.C., and it was by far my most in-depth discussion. Lipsky is not as well known as Geithner, yet he was arguably more powerful than Geithner because for a time he controlled the IMF’s world money printing press, which produces SDRs.
Lipsky is a Ph.D. economist from Stanford University. He began his career in 1974 at the IMF and spent t
en years there, where he became the IMF’s top expert on exchange rate surveillance. In 1984, he moved to Salomon Brothers (today part of Citi), where he worked with the legendary Henry Kaufman, known as “Dr. Doom,” eventually becoming chief economist. In 1997, he left Salomon to become chief economist of JPMorgan. In 2006, he returned to the IMF to serve a five-year term as the first deputy managing director.
The first deputy’s role is the result of an unwritten power-sharing agreement between Europe and the United States, arrived at during the Bretton Woods Conference in 1944. The Bretton Woods institutions and arrangements, including the IMF and World Bank, were structured along lines desired by the United States. The belief was the United States had too much economic power and needed to share that power with Europe. The informal agreement was that an American would run the World Bank, but an American would never head the IMF. The top job at the IMF, managing director, was reserved for Europeans. A second-in-command position, first deputy managing director, was created to be held by an American. In effect, the first deputy was America’s eyes and ears at the IMF, while the top job went to a European. In his role as first deputy, Lipsky was an important part in the issuance of the SDR182.7 billion of world money in 2009.
This arrangement remained in place until IMF managing director Dominique Strauss-Kahn was arrested by the NYPD in New York City on May 14, 2011, on sexual assault and attempted rape charges. Strauss-Kahn resigned as managing director a few days later, on May 18. As Strauss-Kahn’s departure was so abrupt, the IMF’s Executive Committee did not have time properly to consider a successor. Instead, John Lipsky was elevated from first deputy to acting managing director, becoming the first and only American ever to run the IMF. Lipsky retired from the IMF at the end of August 2011, and continued his career in academia.
My May 2018 meeting with Lipsky in Hong Kong was fascinating. No one in the world knew more of the IMF’s inner workings and use of SDRs to provide global liquidity in a global monetary reset. I was getting the reset playbook from the source.
Prior to 2009, the IMF had not issued SDRs since 1981, despite severe emerging-markets crises in 1982, 1994, and 1997. A cynic might suggest the IMF never issued SDRs to save emerging markets, yet issued SDRs to save developed markets in 2009. Lipsky emphasized the difficulty of achieving consensus inside the IMF on SDR-related matters. SDR issuance as part of a global monetary reset was unlikely except in a crisis. In other words, the IMF would not proactively push for a reset at a new monetary conference, but might reactively orchestrate a reset in the midst of a new panic.
I asked Lipsky about Geithner’s critique of the 2009 SDR issuance and his dismissal of the IMF’s ability to be useful in a crisis. John practically shouted, “Have you read his book?” Lipsky added, “Geithner was at the IMF between his time at the Treasury and when he moved to the Fed. I’m not sure what happened, but he had a bad experience and has nothing good to say about the IMF.”
Geithner was president of the Federal Reserve Bank of New York from 2003 to 2009 and became Treasury secretary on January 26, 2009. He served a prior stint at Treasury as under secretary for International Affairs from 1998 to 2001. From 2001 to 2003, Geithner was at the IMF. That period at the IMF was the one Lipsky referred to.
Lipsky was right. Geithner’s book Stress Test (2014) includes this excerpt:
The IMF was a more formal and less fun place to work than Treasury.5 The meetings were endless, with crushing bureaucracy, an intrusive and fractious executive board, an appalling amount of paper, and a lot of factional conflict among various fiefdoms …. The pace was much slower than I was used to …. The IMF was full of smart and dedicated people, but not many had experienced the burden of making policy decisions as government officials. There was a lot of paper and bureaucracy and talking.
That’s just a small sample of Geithner’s scathing critiques of the IMF, going back to the 1997–1998 emerging-markets crisis during his time at Treasury.
It’s never enough to study documents and theorize on the future of the SDR. When speaking one-on-one with policymakers like Ben Bernanke, Tim Geithner, and John Lipsky, the picture they paint privately is unsettling in its implications for how a global monetary reset will evolve. Given Trump’s self-proclaimed nationalist, America First views, it is unlikely that he has any higher opinion of the IMF than Geithner; he almost certainly has a lower opinion and would be disinclined to provide emergency funding to the IMF in a liquidity crunch or to partner with the IMF in a global financial crisis. If Trump were to convene a new international monetary conference, it seems more likely he would appeal directly to global leaders rather than working through institutional channels at the IMF. This approach is more in keeping with Trump’s ad hoc personal style, which abjures red tape and elevates the personal over process.
What my conversations with global monetary elites revealed is that institutions like the Treasury, Fed, and IMF are powerful on paper, yet they are dysfunctional and slow in practice. None of the leaders I spoke with sees a global monetary reset coming. At the height of a new global financial panic, no one will be in charge. Solutions that emerge in that environment are more likely to be ad hoc than thoughtful.
The ideal outcome would be a Mar-a-Lago monetary conference convened by Trump and attended by the ten largest economies (United States, China, Japan, Germany, United Kingdom, France, India, Italy, Brazil, and Canada), who comprise 80 percent of global GDP and about half the world’s population. Additional seats would be available for gold or oil powers, including Russia, Mexico, Nigeria, Indonesia, Netherlands, and Saudi Arabia; these countries add another 700 million to the population represented. A larger group of countries could be invited, but the dialogue would be controlled by the “Gang of Sixteen” listed. The agenda would be to establish an anchor for the global monetary system other than a single currency or group of currencies. This anchor could be gold, SDRs pegged to gold, or a new world currency defined by a commodity basket (the “neobancor”). Reserves could still be held in leading currencies, but world trade and balance of payments obligations would be calculated and settled in anchor units, removing incentives for devaluation and currency wars. Oil would be priced in anchor units, ending the petrodollar arrangement and dollar hegemony more broadly. Numerous technical issues would have to be addressed that might involve several years of research before the effective date of a final plan. This research hiatus would give participating nations time to adjust to a “shadow anchor” before implementation.
The chances for such a conference are slim in the current environment of trade and currency wars. Paradoxically, the futility of trade and currency wars could be the catalyst for a conference nonetheless. Still, a more likely outcome is continued chaos until an acute crisis emerges. Yet a formal monetary conference is not the only path to reset the system. Alternatives include a digital gold standard, an SDR pegged to gold, and a currency pegged to gold without using gold. What makes these and other alternatives intriguing is they can be pursued unilaterally and covertly, at least in the early stages. These alternatives are surveyed below.
Crypto Gold
The two countries in the world that have been most explicit about their desire to overthrow the rule of the U.S. dollar are the same two countries that have acquired more gold than any others in the past ten years: Russia and China. Now, their plans to bury the dollar have moved beyond wishful thinking to active measures.
Their approach is straightforward. Russia and China are each developing proprietary cryptocurrencies on a permissioned, heavily encrypted digital ledger. They are well aware that neither the ruble nor the yuan have the needed elements for reserve currency status, including deep liquid bond markets and good rule of law. But these elements can be leapfrogged by creating a new currency that does. Their plan would work as follows:
Russia and China will pool their official gold (about 5,000 tons, or about 15 percent of all official gold in the world), placing it on deposit in a Swiss non-bank vault governed by Swiss law. Th
ey will invite other participants in the scheme to do likewise. At the same time, Russia and China will launch a new digital currency on their distributed ledger. This new coin (call it a “Putin-coin” or “Xi-coin,” for example) will be pegged at an exchange rate of 1 coin = 1 SDR. Units of the new coin could be expanded based on new deposits of gold or the voluntary creation of credit denominated in the new coin. A board of governors of the distributed ledger would make determinations regarding participation, gold deposits, and money supply.
Trading in goods and services will commence among the members of this pool. As members, North Korea could sell weapons to Iran, China could sell infrastructure to Russia, Iran and Russia could sell oil to China, the Chinese could vacation in Turkey, and so on. These transactions could be billed locally in any currency, but would be converted by the participants’ central banks to the new digital currency for balance of payments purposes. Digital coin balances would be netted out and settled periodically. The net balances would be settled in a weight of physical gold at market prices converted from SDRs, using the IMF’s daily valuations. The gold could either be flown to the holder of the balance due, or reassigned in the Swiss vault without physical transfer. This system would combine both the oldest form of money (gold) with the newest (e-currency on a distributed ledger). Importantly from the perspective of the Russians, Chinese, and other participants, the dollar is not involved at all.
This distributed ledger monetary system is likely to grow quickly as major economic powers such as India and Brazil are attracted by the ease of use and absence of dollars. China and Russia could boost adoption by requiring smaller trading partners to use the new system. Pressure could be applied to major commodity exporters such as Saudi Arabia and Australia to invoice in the new digital currency. Net trade balances could easily be converted into dollars by selling the physical gold balances if desired. By this means, the new digital system could interface with the existing dollar-based system through the medium of gold.
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