Notes From Underground: The IMF Lies and Other Myths

The news out of the Crimea places the vote on the referendum at 95.5 percent in favor Russian control. The outcome was predetermined but one would think that the pro-Russian faction would have at least fixed the results to make it appear somewhat legit. Why, it makes me wonder if the Chicago boys had been secretly brought into the Crimea to garner such a ridiculous outcome. Now the EU and the U.S. are going to find sanctions to make the oligarchs and other hoarders of Russian wealth suffer the consequences of Vladimir Putin’s 19th century actions. But this will not be a one-sided affair as Russia will be able to invoke counter measures of its own. There are many things to ponder:

1. Every analyst speaks about the ability to affect the oligarchs by the crushing effect of global money leaving the Russian equity market. The financial media savors the 25 percent drop in equity prices on the MICEX (Moscow Exchange). But if Russia retaliates with further military action and/or the shutting down of energy exports, the hit to western capital markets will be much greater than the losses in Russia. The U.S. total equity markets have a value of $18 TRILLION and the European markets also have values in the trillions of euros. The Russian market has a net value of $850 BILLION so any major selloff due to the increased geo-political tensions will have a greater impact on the West.

It is doubtful that the Western European markets could absorb a steep drop with the fragile state of their economies. Also, many of the German and Austrian banks have large outstanding credits to Russian businesses, as well as to other Eastern European governments and corporations. A 50 percent drop in the Russian stock market would pale in comparison to a 15 percent drop in the Western equity markets. The continued call for sanctions and more sanctions needs to be carefully thought as not all situations are similar to Iran and other targets of sanctions. One size does not fit all.

2. The U.S. and IMF are trying to use the Ukrainian situation to embarrass the U.S. Congress to provide increased funds that had been “promised” to enhance the ability of the IMF to bail out distressed nation-states. I SAY NOT A DIME MORE TO THE IMF UNTIL THE IMF TAKES ACTION TO MONETIZE ITS GOLD HOARD. I have continually pushed for the IMF to issue IMF GOLD-BACKED BONDS in an effort to take a dormant asset and put it to use. In today’s world global investors would love to purchase bonds backed by some gold–maybe a five- or 10-to-one ratio–it would be a very low interest rate bearing note in turn for having gold as collateral. This would not violate the IMF charter as the gold would not be sold but only surrendered on the inability of the IMF to repay the bonds. This is from the IMF fact sheet:

“The IMF held 90.5 million ounces (2,814 metric tons) of gold at designated depositories as of mid-September 2013. The IMF’s total gold holdings are valued on its balance sheet at SDR 3.2 billion (about $4.8 billion) on the basis of historical cost. As of September 17, the IMF’s holdings amounted to $118.7 billion at current market prices.”

A conservative gold-bond derivative backed by 20 percent gold would create almost $600 billion in liquidity to throw at global problems and easily support the needs of the Ukrainian government without the U.S. Congress having to contribute another round of financing. It is interesting that a Keynesian-dominated institution cannot find some way to put the barbarous relic to work. If not GOLD-BACKED BONDS, maybe IMF Director Lagarde can work a swap with the Russians to raise the capital for the Ukraine (Russia will swap euros and dollars for gold).

3. In calling for sanctions, the U.S. is going to undermine the world financial system. The targeting of Russia’s wealthy will become a template for dealing with any “global pariah” and thus result in many global actors not wishing to be paid in dollars or other currency but in a more non-partisan medium of exchange like GOLD or SILVER. The low global interest rates result in surrendering little interest earnings and precious metals can easily be used as collateral in any financial transaction (see number two). Any nation threatened with sanctions would be much more comfortable in a respected store of value rather than being held hostage  to the “TYRANNY “ of politically inspired sanctions.

The media was in a frenzy over the report of a $105 billion draw down of Treasuries at the FED. Speculation was that it was Russia removing assets from the U.S. There’s nothing certain but it does raise questions about the need for foreign entities to escape the grasp of U.S. sanctions. I only raise this issue in terms of pundits who readily cite the recent rally in GOLD to the threat of war. My years of experience have taught me that buying GOLD on the fears of war is a “fool’s game” for as soon as the conflict begins or diplomacy succeeds the GOLD is immediately sold. Gold is first and foremost a monetary phenomena as it the ultimate store of value or what Jim Grant beautifully said: “Gold is nature’s Bitcoin.”

***On Friday, the Financial Times editorial board a piece, “Germany Loses Its Faith in Ostpolitik.” The FT applauds the recent assertive remarks by Chancellor Merkel as a very positive step forward for Europe.

“Germany’s tough new stance towards Russia is to be welcomed. There is now a better chance of EU nations supporting tough sanctions if Mr. Putin’s aggression escalates. After all, if Germany, the European superpower, makes the sacrifices necessary to block trade with Russia, others cannot resist. Ms. Merkel’s  stance also indicates that Germany is willing to be a more assertive security player, casting aside its traditional reticence. In recent months a number of German leaders–including the head of state and foreign defence ministers–have said the country cannot sit on the sidelines when security challenges arise. Ms. Merkel’s speech reflects her determination to respond to this lead.”

The FT’s editorial board ought to be more careful in cheering a resurrected German powerhouse from the sidelines. Maybe Mr.Putin is also sensing a revitalized Germany and is seeking to enhance the buffer zones on its western borders. Nothing is as it seems and even Secretary of State Kerry said on Friday that the U.S. acknowledges that Russia has legitimate interests in its immediate vicinity. And, one of the best Russian analysts I know (h/t KM) surmises that the corrupt leadership in the Ukraine may be trying to heighten tensions in the hope of better financial terms and more aid from the West. Nothing is as it seems.

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16 Responses to “Notes From Underground: The IMF Lies and Other Myths”

  1. asherz Says:

    Re gold backed IMF bonds, when was the last time the purported 2800 ton gold hoard was audited? In the U.S. the 8100 ton holdings at Fort Knox and Maiden Lane was last audited in 1953. Could much of western gold have been leased, hypothecated and rehypothrcated…orsold? Does t5he emperor have clothes?

  2. CHT Says:

    Yra – perhaps you underestimate the power of the Russian oligarchs. I think trade sanctions would be enough to have them lean quite forcefully on Putin to the point of ousting him.
    Surely they wouldn’t give up their Florida summers!?!

  3. yra Says:

    CHT–evidently others in the U.S. foreign policy establishment believe the same.I believe that the rational actor model is nice as a way to bracket international affairs but fails as a decision making tool.The oligarchs are very beholden to Vladimir and the Ukrainian oligarchs are probably more reprehensible

  4. yra Says:

    CHT–also think about the flaws of this policy when it comes to how the U.S. will deal with China when the issue of the Senkakus arises between Japan and China in a more heated way

  5. CHT Says:

    Valid points Yra – indeed from what I understand particular individuals among the Ukrainian oligarchs are more odious, though I do not recommend enabling them but that’s perhaps easier said than done. I am hoping Klitschko might be able to do so.

    Don’t you think that comparing Ukraine/Russia with the Senkakus is like suggesting we have no horse in this race? I’d postulate that our horse here is defense of the rule of law and that we are advocating it on behalf of the well-educated Ukrainian youth with a future less bright than it should be. i.e. we have a moral obligation.

    Maybe it’s just the stubbornness/righteousness in me, but folding here seems to show the West as hypocrites… If we are going to attempt to enforce international law, it can’t be selectively it must be universal.

  6. Shocked to Find Gambling Says:

    Yra- I don’t see the attraction of 20% Gold-backed bonds. From the investors’ standpoint, either the % needs to be higher OR the investor needs to benefit from any gold appreciation.

    The dynamic playing out for the USA in Ukraine is extremely dangerous. If we appear unable to respond effectively (which is how it looks to me, so far) we may push Germany (and therefore the EU) into the Russian sphere of influence……they need Russia’s energy resources.

    Not sure what the strength of Russia’s army is, but they still have a lot of nukes, and their army will probably be a lot stronger in 5 years, and we are sharply cutting the size of our army.

    If we don’t make an effective stand here, we may quickly lose our status as a Superpower. I guess that wouldn’t bother me so much if there weren’t so many nut job extremists around the world.

  7. c Says:

    Putin’s greatest weakness is his desire to be relevant. Russia, blessed with a wasted trove of natural resources, has only oil to back up their bluster. An energy deal between the US and Europe would be the best way to emasculate an already second rate economy.

  8. yra Says:

    Shocked–where I disagree is that a 20% collateralized bond in a world of central bank repression which has made investors take on huge risks in the high yield and other debt markets ,in my opinion makes any type of gold backed bonds with a yield extremely attractive

  9. yra Says:

    c—Russia is relevant and 2500 nuclear warheads insures its continued importance as well as being well endowed with massive natural resources.The point is that the rise of a supranational EU is causing a rise in Russian angst and that is not to be understated,for European history says so—an energy deal between Europe and the U.S. will take years to put into place which may prompt Putin to move quickly and I will ask again—where is Gerhard Schroeder in all this

  10. asherz Says:

    A gold collateralized bond will require an audit of the collateral. That isn’t going to happen for reason stated above,

  11. Shocked to Find Gambling Says:

    Doubt this got on Russian TV without the approval of the government.

    “Gee, I wish we had one of them doomsday machines.”

  12. Shocked to Find Gambling Says:

    I meant this video.

  13. Arthur Says:

    GEOPOLITICS 101… US/EU sanctions on Russia: Talk loudly, carry small stick. New Russia sanctions big on symbolism, small on economic impact. Marginal in Putin decisionmaking.

  14. Fools Rush In Says:

    You still think of wealth in terms of paper assets. The world is changing and I doubt the russian oligarchs care if their paper assets fall or rise like the US. Its all paper in the end, euro or dollar based. Both are being printed willy nilly. Russia still has its oil and gas. US has its dollars. I would rather have the oil and gas.

  15. farang Says:

    “The news out of the Crimea places the vote on the referendum at 95.5 percent in favor Russian control. The outcome was predetermined but one would think that the pro-Russian faction would have at least fixed the results to make it appear somewhat legit…..Now the EU and the U.S. are going to find sanctions to make the oligarchs and other hoarders of Russian wealth suffer the consequences of Vladimir Putin’s 19th century actions.”

    Nuland and Chohen-Kerry: 5000 B.C. actions?

    Interesting opening paragraph there, because that is not what the International Observers (including German) stated they witnessed. The voting was without fraud, the voters were under no duress or pressure. You have some opposing evidence we all are in the dark about? Please share it.

  16. Chicken Says:

    Does this sound bizarre? Thinking of this sanction issue, more than likely there will be little deviation from overall theme thus they will be of token status. My suspicion is the entire Crimean dog and pony show is simply a mechanism for allowing Russia into the fold, nothing to see here, carry on!

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