Search

 

 

Friday
Dec092016

Trump’s Big Bait and Switch: How to Swamp Washington and Double-cross Your Supporters 

(This piece originally appeared in Tom Dispatch / December 8, 2016)

Given his cabinet picks so far, it’s reasonable to assume that The Donald finds hanging out with anyone who isn’t a billionaire (or at least a multimillionaire) a drag. What would there be to talk about if you left the Machiavellian class and its exploits for the company of the sort of normal folk you can rouse at a rally?  It’s been a month since the election and here’s what’s clear: crony capitalism, the kind that festers and grows when offered public support in its search for private profits, is the order of the day among Donald Trump’s cabinet picks. Forget his own “conflicts of interest.” Whatever financial, tax, and other policies his administration puts in place, most of his appointees are going to profit like mad from them and, in the end, Trump might not even wind up being the richest member of the crew. 

Only a month has passed since November 8th, but it’s already clear (not that it wasn’t before) that Trump’s anti-establishment campaign rhetoric was the biggest scam of his career, one he pulled off perfectly. As president-elect and the country’s next CEO-in-chief, he’s now doing what many presidents have done: doling out power to like-minded friends and associates, loyalists, and -- think John F. Kennedy, for instance -- possibly family.  

Here, however, is a major historical difference: the magnitude of Trump’s cronyism is off the charts, even for Washington. Of course, he’s never been a man known for doing small and humble. So his cabinet, as yet incomplete, is already the richest one ever. Estimates of how loaded it will be are almost meaningless at this point, given that we don’t even know Trump’s true wealth (and will likely never see his tax returns). Still, with more billionaires at the doorstep, estimates of the wealth of his new cabinet members and of the president-elect range from my own guesstimate of about $12 billion up to $35 billion. Though the process is as yet incomplete, this already reflects at least a quadrupling of the wealth represented by Barack Obama’s cabinet.

Trump’s version of a political and financial establishment, just forming, will be bound together by certain behavioral patterns born of relationships among those of similar status, background, social position, legacy connections, and an assumed allegiance to a dogma of self-aggrandizement that overshadows everything else. In the realm of politico-financial power and in Trump’s experience and ideology, the one with the most toys always wins. So it’s hardly a surprise that his money- and power-centric cabinet won’t be focused on public service or patriotism or civic duty, but on the consolidation of corporate and private gain at the expense of the citizenry.

It’s already obvious that, to Trump, “draining the swamp” means filling it with new layers of golden sludge, similar in color to the decorations that adorn buildings with his name, including the new Trump International Hotelon Pennsylvania Avenue near the White House where foreign diplomats are already flocking to curry favor and even the toilet paper holders in the lobby bathrooms are faux-gold-plated.

The rarified world of his cabinet choices is certainly a universe away from the struggling working class folks he bamboozled with promises of bringing back American “greatness.” And yet the soaring value of his cabinet should be seen as merely a departure point for our four-year (or more) leap into what is guaranteed to be an abyss of inequality and instability. Forget their wealth. What their business conflicts, relationships, and ideological stances indicate about what they’ll do to America is far more worrisome. And though Trump promised (and tweeted) that he’d be “completely out of business operations,” the possibility of such a full exit for him (or any of his crew) is about as likely as a full reveal of those tax returns.

Trumping History

There is, in fact, some historical precedent for a president surrounding himself with such a group of self-interested power-grabbers, but you’d have to return to Warren G. Harding’s administration in the early 1920s to find it. The “Roaring Twenties” that ended explosively in a stock market collapse in 1929 began, ominously enough, with a presidency filled with similar figures, as well as policies remarkably similar to those now being promised under Trump, including major tax cuts and giveaways for corporations and the deregulation of Wall Street. 

A notably weak figure, Harding liberally delegated policymaking to the group of senior Republicans he chose to oversee his administration who were dubbed “the Ohio gang” (though they were not all from Ohio). Scandal soon followed, above all the notorious Teapot Dome incident in which Secretary of the Interior Albert Fall leased petroleum reserves owned by the Navy in Wyoming and California to two private oil companies without competitive bidding, receiving millions of dollars in kickbacks in return. That scandal and the attention it received darkened Harding’s administration. Until the Enron scandal of 2001-2002, it would serve as the poster child for money (and oil) in politics gone bad. Given Donald Trump’s predisposition for green-lighting pipelines and promoting fossil fuel development, a modern reenactment of Teapot Dome is hardly beyond imagining.

Harding’s other main contributions to American history involved two choices he made. He offered businessman Herbert Hoover the job of secretary of commerce and so put him in play to become president in the years just preceding the Great Depression.  And in a fashion that now looks Trumpian, he also appointed one of the richest men on Earth, billionaire Andrew Mellon, as his treasury secretary.  Mellon, a Pittsburgh industrialist-financier, was head of the Mellon National Bank; he founded both the Aluminum Company of America (Alcoa), for which he’d be accused of unethicalbehavior while treasury secretary (as he still owned stock in the company and his brother was a close associate), and the Gulf Oil Company; and with Henry Clay Frick, he co-founded the Union Steel Company.  

He promptly set to work -- and this will sound familiar today -- cutting taxes on the wealthy and corporations. At the same time, he essentially left Wall Street free to concoct the shadowy “trusts” that would use borrowed money to purchase collections of shares in companies and real estate, igniting the 1929 stock market crash. After Mellon, who had served three presidents, left Herbert Hoover’s administration, he fell under investigation for unpaid federal taxes and tax-related conflicts of interest.

Modernizing Warren G.

Within the political-financial establishment, the more things change, the more, it seems, they stay the same. As Trump moves ahead with his cabinet picks, several of them already stand out in a Mellon-esque fashion for their staggering wealth, their legal entanglements, and the policies they seem ready to support that sound like eerie throwbacks to the age of Harding.  Of course, you can’t tell the players without a scorecard, so here are the top four of the moment (with more on the way).

Secretary of Commerce Wilbur Ross (net worth $2.9 billion)

Shades of Andrew Mellon, Ross, a registered Democrat until Trump scooped him up, made his fortune as a corporate vulture (sporting the nickname “the king of bankruptcy”).  He was notorious for devouring the carcasses of dying companies, spitting them out, and pocketing the profits.  He bought bankrupt steel companies, while moving $6.4 billion of their employee pension benefits to the rescue fund of the government’s Pension Benefit Guaranty Corporation so he could make company financials look better. In the early 2000s, his steel industry deals bagged him an impressive $267 millionStripped of health-care benefits, retired steelworkers at his companies didn’t fare as well.   

Trump, of course, has promised the world to the sinking coal industry and out-of-work coal miners. His new commerce secretary, however, owned a coal mine in West Virginia, notoriously cited for hundreds of violations, where 12 miners subsequently died in an explosion.  

Ross also made money running Rothschild Inc.’s bankruptcy-restructuring group for nearly two-and-a-half decades. A member (and once leader) of a secret Wall Street fraternity, Kappa Beta Phi, in 2014 he remarked that “the one percent is being picked on for political reasons.” He has an art collection valued conservatively at $150 million, or 3,000 times the average American’s income of $51,000. In addition, he happens to own a Florida estate only miles down the road from Trump’s Mar-a-Lago private club.

While Trump has lambasted China for stealing American jobs, Ross (like Trump) has made money from China. In 2010, one of that country’s state-owned enterprises, China Investment Corporation, put $500 million in Ross’s private equity fund, WL Ross & Company. Ross has not disclosed whether these investments remain in his fund, though he told the New York Post that if Trump believes there are conflicts of interest among any of his investments, he would divest himself of them. In August 2016, his company had to pay a $2.3 million fine to the Securities and Exchange Commission to settle charges for not properly disclosing $10.4 million in management fees charged to his investors in the decade leading up to 2011.

In October, Ross assured Bloomberg that China will continue to be an investment opportunity.  As secretary of commerce, the world will become his personal business venture and boardroom, while U.S. taxpayers will be his funders. He is an ardent crusader for corporate tax cuts (wanting to slash them from 35% to 15%). As head of the commerce department, the man the Economist dubbed “Mr. Protectionism” in 2004 will be in charge of any protectionist policies the administration implements.

Secretary of Education Betsy DeVos (family wealth $5.1 billion)

DeVos, the daughter of a billionaire and daughter-in-law of the cofounder of the multilevel marketing empire Amway, has had no actual experience with public schools. Unlike most of the rest of America (myself included), she never attended a public school, nor have any of her children. (Neither did Trump.) But she and her family have excelled at the arithmetic of campaign contributions. They are estimated to have contributed at least $200 million to shaping the conservative movement and various right-wing causes over the last half-century.  As she wrote in the Capitol Hill newspaper Roll Call in 1997, “My family is the biggest contributor of soft money to the Republican National Committee.” That trend only continued in the years that followed. According to the Center for Responsive Politics, since 1989 she and her relatives have given at least $20.2 million to Republican candidates, party committees, PACs, and super PACs. 

The center further noted that, “Betsy herself, along with her husband, Dick DeVos, Jr., has contributed more than $7.7 million to federal candidates, committees, and parties since 1990, including almost $4.8 million to super PACs.”  Her brother, ex-Navy SEAL Erik Prince, foundedthe controversial private security contractor Blackwater (now known as Academi). He also made two considerable donations to Make America Number 1, a super PAC that first backed Senator Ted Cruz and then Trump.

So whatever you do, don’t expect Betsy De Vos’s help in allocating additional federal funds to elevate the education of citizens who actually do attend public schools, or rather what Donald Trump now likes to call “failing government schools.” Instead, she’s undoubtedly going to promote privatizing school voucher programs and charter schools across the country and let those failing government schools go down the tubes as part of a Republican war on public education.  

Transportation Secretary Elaine Chao (net worth $25 million)

As the daughter of a wealthy shipping magnate, a former labor secretary for George W. Bush, and the wife of Senate Majority Leader Mitch McConnell, Chao’s establishment connections are overwhelming. They include board positions at Rupert Murdoch’s News Corp and at Wells Fargo Bank.  While Chao was on its board, Wells Fargo scammed its customers to the tune of $2.4 million, and incurred billions of dollars of fines for other crimes. She was silent when its former CEO John Stumpf resigned in a blaze of contriteness.   

In 2008, Chao ranked 8th in Bush’s executive branch in terms of net worth at  $16.9 million. In 2009, Politico reported that, in memory of her mother who passed away in 2007, she and her husband received a “personal gift” from the Chao family worth between $5 million and $25 million. In 2014, the Center for Responsive Politics ranked McConnell, with an estimated net worth somewhere around $22 million, as the 11th richest senator. As with all things wealth related, the truth is a moving target but the one thing Chao’s not (which may make her a rarity in this cabinet) is a billionaire.

Treasury Secretary Steven Mnuchin (net worth between $46 million and $1 billion)

Hedge fund mogul and Hollywood producer Steven Mnuchin is the third installment on Goldman Sachs’s claim to own the position of Treasury secretary. In fact, when it comes to the stewardship of the country’s economy,Goldman continues to reign supreme.  Bill Clinton appointed the company’s former co-chairman Robert Rubin to Treasury in gratitude for his ability to bestow on him Wall Street cred and the contributions that went with it. George W. Bush appointed former Goldman Sachs Chairman and CEO Hank Paulson as his final Treasury secretary, just in time for the “too big to fail” economic meltdown of 2007-2008.

Now, Trump, who swore he’d drain “the swamp” in Washington, is carrying on the tradition. The difference? While Rubin and Paulson pushed for the deregulation of the financial industry that led to the Great Recession and then used federal funds to bail out their friends, Mnuchin, who spent 17 years with Goldman Sachs, eventually made an even bigger fortune by being on the predatory receiving end of federal support while scarfing up a failed bank.

In 2008, the Federal Deposit Insurance Corporation (FDIC), formed in 1934to insure the deposits of citizens at commercial banks, closed 25 banks, including the Pasadena-based IndyMac Bank. In early January 2009, the FDIC agreed to sell failed lender IndyMac to IMB HoldCo LLC, a company owned by a pack of private equity investors led by former Goldman Sachs partner Mnuchin of Dune Capital Management LP for about $13.9 billion. (They only had to put up $1.3 billion in cash for it, however.)

When the deal closed on March 19, 2009, IMB formed a new federally chartered savings bank, OneWest Bank (also run by Mnuchin), to complete the purchase. The FDIC took a $10.7 billion loss in the process. OneWest then set about foreclosing on IndyMac’s properties, the cost of which was fronted by the FDIC, as was most of the loss that was incurred from hemorrhaging mortgages. In other words, the government backed Mnuchin’s private deal big time and so helped give him his nickname, the “foreclosure king,” as he became an even wealthier man.

By October 2011, protesters were marching outside Mnuchin’s Los Angeles mansion with “Stop taking our homes” signs. OneWest soon became mired in lawsuits and on multiple occasions settled for millions of dollars. Nonetheless, Mnuchin sold the bank for a cool $3.4 billion in August 2015. Shades of the president-elect, he also left another beleaguered company, Relativity Media, where he had been co-chairman, two months before it filed for Chapter 11 bankruptcy in 2015.

Mnuchin’s policy priorities include an overhaul of the federal tax code (aimed mainly at helping his elite buddies), financial deregulation (including making the Dodd-Frank Act of 2010 significantly more lenient for hedge funds), and a review of existing trade agreements. He has indicated no support for reinstating the Glass-Steagall Act of 1933, which separated commercial banks that held citizens’ deposits and loans from the speculative practices of investment banks until it was repealed in 1999 under the Clinton administration.

Gilded Government

Hillary Clinton certainly cashed in big time on her Wall Street connections during her career and her presidential campaign. And yet her approach already seems modest compared to Trump’s new open-door policy to any billionaire willing to come on board his ship. His new incarnation of the old establishment largely consists of billionaires and multimillionaires with less than appetizing nicknames from their previous predatory careers. They favor government support for their private gain as well as deregulation, several of them having already specialized in making money off the collateral damage from such policies.

Trump offered Americans this promise: "I'm going to surround myself only with the best and most serious people." In his world, best means rich, and serious means seriously shielded from the way much of the rest of the country lives. Once upon a time, I, too, worked for Goldman Sachs. I left in 2002, the same year that Steven Mnuchin did.  I did not go on to construct deals that hurt citizens. He did. Public spirit is a choice.

Aspiring to run government as a business (something President Calvin Coolidge tried out in the 1920s with dismal results for America), Trump is now surrounding himself with a crew of crony capitalists who understand boardroom speak, but have nothing in common with most Americans.  So give him credit: his administration is already one of the great political bait-and-switch productions in our history and it hasn’t even begun.  Count on one thing: in his presidency he’ll only double down on that “promise.”

 

Sunday
Oct162016

My Letter to ND State Attorney, Ladd Erickson on Dropping Charge Against Amy Goodman

October 16, 2016

From: Nomi Prins, Author, investigative Journalist, Concerned American Citizen

To: North Dakota State Attorney Ladd R. Erickson, McLean County, lrerickson@nd.gov

Subject: Riot Charge Against Prize-Winning Independent Journalist, Amy Goodman

Dear North Dakota State Attorney Ladd R. Erickson:

Since you were first elected North Dakota’s State Attorney in 2002, and subsequently re-elected in 2006, 2010 and 2014, you have prosecuted numerous cases based on a multitude of charges. 

The case you are attempting to bring against Democracy Now! host, and award-winning veteran independent journalist, Amy Goodman is simply a miscarriage of the justice that you have been elected to uphold.  It is a case unworthy of your stated responsibilities to protect the public. It is a case that flies in the face of the critical freedoms that we Americans hold dear.

Levying a riot charge against an experienced, professional journalist for the act of doing her job of informing the public about unfolding facts is not justice. As you know, it is legally immaterial whether you interpret those facts about the Dakota Access Pipeline as indicative of your own personal views or not. In addition, in light of the video that Amy Goodman shot, and that was distributed throughout global media platforms, it is simply illogical to conclude she wasn’t conducting on-the-ground reporting, the very essence and definition of journalism.

Further, your riot charge against her violates the intent and stated purpose of the first amendment of the Constitution of the United States of America. "Congress shall make no law...abridging the freedom of speech, or of the press.”  

Freedom of the press and of free speech is a core value, principle and governing law of our country. Amy Goodman has committed no crime. You, sir, have the opportunity to do the honorable thing and to uphold that law. Thus, I urge you to reconsider dropping the charge.

I further urge you, District Judge John W. Grinsteiner, to dismiss the riot charge.

Sincerely,

Nomi Prins  

CC: District Judge John W. Grinsteiner, jgrinsteiner@ndcourts.gov

 

Wednesday
Sep282016

The Central Bank Power Shift from West to East, Game of Thrones Style

(This piece is a version of my article appearing in Jim Rickard's Strategic Intelligence newsletter this month. It gives you an idea of what's to come in Artisans of Money (abent the Game of Thrones comp.)) Enjoy.

“When you play the Game of Thrones, you win or you die.” – Cersei Lannister

I was late to Season 6 of Game of Thrones (while buried in writing my next book Artisans of Money.)  If you have never watched Game of Thrones, a) do so immediately and b) here’s the nutshell. The show, based on the book series, depicts a land in which several kingdoms are duking it out for the Iron Throne, the symbol of absolute power.  Think the board game “Risk” except with dragons, magic, an army of the dead, and lots of blood.

While I was watching, I couldn’t help noticing that its backdrop is a dead ringer for central banks’ strategy.  The Fed clings to status quo. Other central banks are vying to knock it down, or at least loosen its grip on them. But the Fed behaves as if it has no idea there are other powerful central banks that want to grab and harness its power. It carries on refusing to acknowledge that there may come a time, sooner rather than later, where its power is attacked.

The ramifications of such an attack will impact the standing of the U.S. in the world.  The Fed can carry on being oblivious, but Game of Thrones illustrates the struggles playing out right now.

In the Game of Thrones world, emerging queen, Daenerys Targaryen is biding her time and building her army. She is creating alliances in Meereen, an ancient country in the East (her awesome fire-breathing dragons in tow).  She’s playing the long game, strategically planning when to elevate the fight against the ruling queen in the West, Cersei Lannister.

The most important part of Daenerys’ story is not that she is determined to rule the seven kingdoms and take possession of the Iron Throne. It’s that she knows she can’t do it alone. So she aligns reinforcements, smaller power bases.

These smaller partners may or may not have allegiance to her based on the legitimacy of her claim to power — but they have all been wronged by the Lannister’s. This family, currently led by Cersei Lannister, is extremely wealthy and powerful, but hasn’t managed to lead the western kingdom, Westeros, to wealth and power. In fact, the people in Westeros are becoming increasingly frustrated and scared of their rulers.  (You see the similarities?)

Not only has Cersei managed to create enemies out of the smaller families that surround her, she recently massacred a large portion of the city she rules to protect her own interests. She is losing her power domestically and globally, but continues to think and act as if she will rule forever. We’ll see what happens next season.

The Fed’s State

In this situation, the Lannisters are representing the U.S. and the Fed specifically. The Fed remains in denial about the true state of the domestic and global economies. In its realm of hubris, it has no idea of the steps other central banks are taking, or want to take, to reduce their exposure and reliance on not just the U.S. dollar, but on U.S. political, monetary, financial and regulatory policy in general.

Case in point. After the Dow dropped 250 points on September 9th, on September 12th, Asian markets nose-dived on the possibility that the Fed might raise rates (though it said nothing of the sort — the “rate tease” is a manifestation of deliberate Fed obfuscation and media boredom).  This is a pattern that plays out every month, with varying degrees of intensity, or volatility.

Enter three of the Fed’s giants, led by Lael Brainnard. During her speech at the Chicago Council on Global Affairs, she backtracked on any tightening talk saying, “the case to tighten policy preemptively is less compelling.”

That calmed markets. That day. It reminded them nothing is changing any time soon. U.S. stock markets rejoiced. Bubble-baiters bought. The Dow soared 1.3%. Elsewhere in the world though, no one wants their market whipsawed by Fed speak.  Certainly not the People’s Bank of China.

The PBoC’s approach has been to send out anti-Fed policy sound-bites through elite officials. These clips are picked up by national and international media and then spread to the general public.  
On September 13th, for instance, Yi Gang, a deputy governor from the PBoC, told a central banking conference in Vienna, “We’re still very cautious on this (zero-interest rate) monetary policy." He warned, "We have to be very careful and look at the limitations and uncertainty of a zero-interest rate policy, because in China we still have a decent growth rate.” What he basically said was “the Fed’s policy is a joke and we’re not laughing.” (I’ll have more quotes like this in Artisans of Money.)

In the Game of Monetary Policy, the Fed whacked the idea of “free markets” in the face. (For the record, I don’t believe they ever existed, because the theoretical implication is full information transparency and equal access, and that’s just not been the reality – ever.) The ECB chucked an arrow in its heart. The BOJ sliced off its head. Markets are sustained artificially. The Fed has become, as you’ll read more about in my book, the chief Artisan of Money. Central banks are bankrupt of new ideas to keep the system afloat.

Or are they? While the Fed cut rates to zero, bloated its book to $4.5 trillion, and pressed the rest of the developed world to follow, global skepticism bubbled over. First the Chinese, then Latin America. Then the IMF. Then the Chinese again. Central bank elite took turns bashing Fed policy, mostly under media radar,  and calling for an alternative to the U.S. dollar associated with it. This is the equivalent of financial warfare. The U.S. and Fed struck first.  It will take time, but the blowback is in motion.

The U.S. dollar was attached to a financial crisis fueled by big bank recklessness and Fed apathy, followed by a Fed policy that devalued money itself.  Many other countries had no choice but to follow the Fed’s lead and directives, but that doesn’t mean they were happy about it. As in Game of Thrones, the smart choice is to forge strategic alliances with other houses or be slaughtered.

The IMF is one of the houses that will be a crucial player in the new power constructs.

The IMF Power Play

The IMF, created by the U.S. and Europe, has been seeking a broader role in the monetary politics wars. For all the media dissection of every word Janet Yellen utters about rates, the IMF knows the Fed is lost. Its policy hasn’t worked. The Fed ignored this and raised rates last December, despite warnings from managing director, Christine Lagarde. Market punishment was swift and the damage was global. The move caused renewed fear and anger from nations that had already suffered at the hands of the Fed and the big U.S. banks it sustains.

The U.S. has the largest voting block within the IMF, which is located blocks away from the White House, but IMF leadership understands how the winds of change are blowing. If the BRICS and a few more developed states were to act as a voting block (or increase their voting power, as they’re attempting), they could potentially dislodge the strong influence that the U.S. has within the IMF.  

It was the U.S. voting block that gave Lagarde her job in 2011, and allowed Europe to maintain its 70-year stronghold on the IMF. As a result, Lagarde’s opposition, Augustin Carstens, head of the Central Bank of Mexico, lost that country’s first bid for the role.

In Game of Thrones, this is the story of Tyrion Lannister. He’s Cersei’s brother, but has been loudly critical of her leadership. Originally, he tried to guide his sister towards better practices. She didn’t listen to him. Now, he has joined forces with Daenerys and is helping her rise to power. His loyal alliance with Daenerys has led him to ascend the ranks again, from another angle. He is well-connected throughout the seven kingdoms. He is strategic. He knows the strengths and weaknesses of all the players. He is formidable despite his size (or in central bank terms, the volume of reserves). 

This is the Fed and the IMF.  That entity was spawned to augment U.S. central bank and government power in the wake of WWII. Powerful, but not as powerful. Since the financial crisis, the IMF has been strategically chipping away at the Fed’s power base. Like the PBoC, the IMF has been both criticizing and warning about the impact of Fed policy on other nations. By disparaging the Fed, it is amassing its own power. Its international influence has never been higher.

Under Lagarde, the IMF is doing more than funding development projects and supplying overall currency directives to the world, as was its original mandate.  It is reconstructing new alliances amongst countries not involved in its creation. In doing so, it is building its own power by elevating their allies.

On October 1, for the first time in 43 years, the IMF will add China’s currency, the Renminbi (denominated in yuan), into its Special Drawing Rights basket (SDR).  In doing so, the IMF, at the zenith of its own power, has tipped the scales away from the U.S. and the Bretton Woods crew that created the SDR in 1969.  The expanding SDR basket is as much a political power play as it is about increasing the number of reserve currencies for central banks for financial purposes.

The SDR Factor

China’s power ambitions go well beyond the SDR. They include international diplomacy, sustainable energy dominance, and becoming a focal point for alliances through Europe,  Russia and the ASEAN states.  The ASEAN–China Free Trade Area (ACFTA) is a prime example of why the SDR for China and the region is important as China expands its influence. So are new trade and financial pacts with Russia where the yuan and ruble exchange in deals without involving U.S. dollars. In addition, Russia and China are both starting to amass gold which could return as the 6th component of the SDR someday.

When the SDR was created as a global reserve asset, it was to supplement the international supply of gold and the U.S. dollar. Once the gold standard was demolished and countries began accumulating international reserves, there was less of a need for this global reserve asset.  It lay dormant, along with the power of the IMF. But in the wake of the financial crisis, it sprang back to life as another liquidity source for member countries.  The IMF sprang back to power as well.

The SDR was initially defined relative to gold (0.888671 grams of fine gold — the equivalent of one U.S. dollar.) After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a weighted basket of four currencies — the U.S. dollar, euro, Japanese yen, and pound sterling.

In 2015, when the yuan was approved, a new weighting formula was adopted. It assigns equal shares to the currency issuer’s exports plus a composite financial indicator. That means the more prevalent the currency in the world, the bigger its weight. If more Yuan are used in the world, its position in the SDR grows. In another crisis, it could take on the U.S. dollar and Euro, and by extension the Fed.

The SDR weight of the yuan is just 10.92 percent compared to 41.73 percent for the U.S. dollar and 10.92 percent for the Euro.1  That’s not a bad opening gambit. The next official weights review is in September 30, 2021. But in a crisis, there is latitude for this to happen much sooner.

As China continues to play host to global events (Olympics, G20, etc.) it also is in pursuit of greater regional influence. With the largest economy, and now showing its capability as having a globally recognized reserve currency, China is adding another layer of strength to its position.  While the associated confidence measure will not be the death of the dollar, it indicates that the dollar is not the only option to turn to in times of panic, or increased trade or financial growth.  The intrinsic power of that position attacks not only the dollar but the overall power of the U.S.

Competing Central Bank Kingdoms and their Power Bases

Currencies reflect both political and economic clout. Even if SDR’s themselves aren’t that voluminous yet, the shift in the make-up is meaningful. The Fed has already lost ground in the process. The IMF and PBoC have gained it. In the middle, there is an increasingly shaky, EU.

The ECB was established after the creation of the Euro in 1998 to oversee other member European central banks. It has more power than any of them because it sets rates for the EU, which dictates the cost of their money and how it flows.

Former Goldman Sachs executive and former Bank of Italy Governor, Mario Draghi is the current President of the ECB. He has followed the Fed’s policy to a letter — despite grumblings from other EU power brokers (and reality) that negative interest rates have solved nothing and instead aided to the fractiousness of the EU experiment itself.  In 2012, facing an acute European debt crisis, he promised, “the ECB is ready to do whatever it takes to preserve the Euro.” The Euro has fallen precipitously since.

If Draghi’s words are weak, his actions are weaker. The ECB is offering to pay banks that borrow money from it, plus, giving them 85 billion Euro each month through its ongoing QE program to purchase their debt. From a battleground standpoint, that smacks of desperation.

The ECB just announced it would give banks three years to write off bad loans — meaning they have lots of bad loans. Deutsche Bank is just one mega example. The ECB has failed to mitigate any risk. Its alliance with the Fed hasn't helped Draghi build his power, just retain it, and it certainly hasn’t helped the EU as a whole.   

Within the wider European Area, the Bank of England, under governor Mark Carney, retains legacy power. That power has waned though, and increasingly so since the Brexit vote. If Britain leaves the EU for real, then the Bank of England’s actions are less relevant to the EU.  This elevates the power of the ECB and the Euro. But as noted, those are already weak to begin with.

If the Bank of England follows the course that Brexit has laid out, the SDR could see a further reduction of the pound weighting, and Euro weighting, which would push up the weighting of the yuan by sheer math. This shift is symbolic now, but power can start in that realm.

The Bank of Japan, before governor Haruhiko Kuroda took the helm, had run-ins with the Japanese minister of finance over its negative rate policy and bond-buying programs. The Japanese stock market lies in a constant state of tension. Because the BOJ is on the same monetary policy plane as the Fed, Japan’s markets have similarly become used to monetary adrenalin shots. Globally, this has led capital, seeking a fix in times of instability, to Japan and to the yen.

But lately Japan’s markets have also been reacting more viciously whenever the possibility of a Fed tightening hits, or lack of fresh BOJ easing measures, emerge.  The alliance of the BOJ and PBoC has not been fleshed out yet, but I believe that’s only a matter of time. Old fights might be discarded if economic or financial survival is imperiled, which is what these sharper market moves foreshadow. (There have already been new trade and lending deals emerging between the two.)

People’s Bank of China: Dragon Rising

This dragon’s about to take flight. The People’s Bank of China governor is Zhou Xiaochuan, who has held that post longer than any other G20 central bank leader. The PBoC holds more U.S. treasuries than any other central bank and is ready for battle. Zhou understands global paradigm shifts. He’s the only Chinese person on the G30 and on the board of the BIS.  He’s been the leading figure pushing the yuan into the SDR basket by slowly allowing it to float with the market, despite allegations of ongoing currency manipulation. He has a good personal relationship with Lagarde.

As China’s position has grown, so has Zhou’s voice, albeit without giving too much away, (something for which the U.S. has been critical.) Keeping some card close to his chest is a strategy. “The central bank has a clear and strong desire to improve its communication with the public and market," he told Caixin, a major publication in China. "At the same time, it's not easy to do a good job in communication.”

China wants to keep internal inflation down. This is why it would prefer a strong, not a weak currency. This negates the charge that China is trying to devalue or manipulate the yuan for better trade profits perpetuated by Donald Trump and Hillary Clinton. This is true to a minor extent due to economic pressures, but barely.  (It was, after all, the Ming Dynasty back in 1455 that ended the printing of paper money in order to control inflation.)  

The stronger the yuan, and the more prevalent it is globally, the more the PBoC challenges the Fed and the more control the China bloc gains over the U.S. In Chinese culture and the Game of Thrones, the Dragon symbolizes life and expansion. (Side note: I confess to having a Dragon obsession.) It’s a fitting symbol for the rising power of China and the yuan.

The Current Central Bank Hierarchy

The Fed is the world’s most powerful central bank. The ECB is a close second. Third, is the Bank of Japan. Fourth, for now, is the People’s Bank of China.  That will change.

The PBoC has crafted its own techniques to support China’s economy through monetary policy. Although, at the recent G20 meeting, Xi Jianping told reporters that the age of monetary and fiscal stimulation is over and new strategies must arise, he did so by claiming the global growth mantel. As he said, “In light of the pronounced issue of lackluster global economic growth, we need to innovate our macroeconomic policies and effectively combine fiscal and monetary policies with structural reform policies.”

The Fed’s power is resting on the dollar’s dominance. That dominance, in turn, was established by political design based on military prowess following two world wars — which were financed by elite U.S. banks. 

The U.S. Treasury market is the world’s largest and most liquid. Central banks holding U.S. dollars are really holding U.S. Treasuries.  They are lending the U.S. money, and we pay them for it with interest. But when rates are zero, we are paying them nothing to lend us more money. This is why growing debt is so easy under current Fed policy.

Just like Cersei Lannister, the Fed thinks it will retain its power simply because it currently has power, even though everyone is wary of her and the house she represents. In contrast, Daenerys is not so disliked. Like China, she is clever and building alliances. They are playing the long game patiently and strategically.

Bad Bad Contagion

The Fed re-assembled in Washington on September 20-21, after a mini-break. Prior to that, they were in “black out” mode. During that time, I discovered a new report while sleuthing around the Fed’s website.  It’s about 45 pages of mathematical equations, beyond which lies some scary thoughts.

In this September 2016 report, to which main stream reporters paid none to minimal attention, Fed economist, Juan M. Londono addresses the notion of “contagion.” The Fed’s own research team is ahead of its management. Bad contagion, Londono notes, is the “confluence of unexpectedly low stock returns across several international stock markets simultaneously.” His findings revealed that, “episodes of bad contagion are followed by significant and meaningful deteriorations to financial stability indicators.”  

If stock markets crumble, so do economies. The elites running central banks in those economies don’t want that happening on their watch. The only way to avoid the collapse is to distance themselves from the Fed and the dollar. Even David Reifschneider, deputy director of research for the Fed, noted, “there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained.” (Translation: The Fed is running out of bullets,. Or losing its power over other central banks.)

This doesn’t mean the dollar will tank like a stone immediately as some people predict — the power base that supports it won’t go down without a fight. (Nor will the Lannister’s—Season 7 will be bloody.)  But once the fight starts in earnest, it will accelerate off its own momentum.

Stock markets have reached historic highs on a steady diet of fabricated money. Contagion is real, because the associated polices are interdependent. Having gone down with the U.S. economic ship in 2008, why would any country want to endure that again?

During the past eight years, the Fed has led a global race to the bottom of responsible monetary policy while exuding bi-polar verbiage as to its effectiveness. This blind continuity of Fed policy is the clearest indication of its lack of success. The inability to articulate an exit strategy is another.

The third, is the denial that other central banks and countries want to distance themselves from the Fed. For the moment, the leader in that regard is the PBoC. The Dragon is re-entering the fight now that the stakes are highest. The swords are drawn. The battles of the East and West are on.