Remarks by Secretary of the Treasury Janet L. Yellen at the Open Session of the meeting of the Financial Stability Oversight Council

Editorial: The Financial Stability Oversight Council was Established in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council provides comprehensive monitoring of the stability of our nation’s financial system.

This council is charged by statute with identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging threats to the stability of the U.S. financial system.

This council may be monitoring and identifying but they aren’t doing anything to reduce excessive government spending which has resulted in a $2.5T annual U.S. budget deficit, a 40 year high inflation rate, and a U.S. National Debt approaching $34T? This is just more of the same nonsensical approach of creating more layers of bureaucracy expense and resolving nothing.

November 3, 2023

As Prepared for Delivery

Our first agenda item is to discuss and vote on the Financial Stability Oversight Council’s analytic framework for financial stability risk identification, assessment, and response, and on the Council’s interpretive guidance on nonbank financial company designations. Before we turn to the presentation, I’d like to explain why I believe it is so important for the Council to achieve greater public transparency and analytic rigor and how these two documents will help the Council do so. 

Financial stability is a public good. The U.S. financial system enables people to make payments, build businesses, save, and manage risks. To fill our needs, it has evolved to be complex, diverse, and interconnected. We rely on it every day, and it has succeeded in supporting American families and businesses, enabling wealth creation and economic growth over generations. But, when it falters, we can experience financial crises that can devastate households and businesses for years afterwards.  

This is where the Council, or FSOC, comes in. Congress created FSOC after the global financial crisis to identify and respond to risks to financial stability. To maintain the strength of the financial sector, we need a nimble but robust structure to monitor and address the build-up of risks that could threaten the system. In the lead-up to the global financial crisis, inadequate oversight led to reckless risk-taking. When large, interconnected financial companies failed in 2007 and 2008, stress spread through the financial system and then to the real economy. The reforms implemented after that crisis substantially strengthened the financial system. And the banking system as a whole remains strong. But recent stresses in some financial sectors arising from the onset of the pandemic and the sudden failures of some regional banks underscore the continuing need to remain vigilant to threats to ensure the resilience of the financial system and our economic strength.  

This is the purpose of the Council, and our two votes today go to the heart of FSOC fulfilling its critical mission. 

Our first vote will be on approving the Council’s analytic framework for financial stability risks. This framework will help the public better understand how the Council goes about its work and how it draws on its various statutory tools to respond to risks. For the first time, it provides a clear explanation of how the Council monitors, evaluates, and responds to potential risks to financial stability, regardless of whether they come from activities, individual firms, or other sources. Under the framework, the Council’s response to a particular risk to financial stability will depend on the nature of the risk. Often, risks emanate from widely conducted activities and can be effectively addressed through action by an existing regulator or interagency coordination. Other times, risks are instead concentrated in one or more specific nonbank financial companies. 

This brings me to the Council’s guidance on nonbank financial company designations. Among the tools Congress gave the Council is the authority to designate a nonbank financial company for Federal Reserve supervision and prudential standards if the company’s distress or activities could pose a threat to financial stability. The guidance we are voting on today will help ensure that the Council is able to use this authority as needed. It describes in detail the procedural steps for the Council’s review of nonbank financial companies for potential designation. These involve rigorous analysis and transparency. The guidance maintains strong procedural protections for companies under review, including significant Council engagement and communication, and provides them with opportunities to be heard. The guidance also affirms that the Council will engage extensively with companies’ primary financial regulators. The guidance also eliminates several prerequisites to designation in place under the current guidance that were not contemplated by the Dodd-Frank Act and that are based on a flawed view of how financial risks develop and spread. And, again, designation is only one of the Council’s tools and is not being prioritized over other approaches to addressing financial stability risks. 

In voting to adopt the analytic framework and guidance, we will increase the transparency of the Council’s work and establish a durable process for the Council’s use of its designation authority, strengthening the Council’s ability to promote a resilient financial system that supports all Americans.  

With that, let me turn to Sandra Lee, Treasury’s Deputy Assistant Secretary for the Council, for the presentation.

2021 To 2024: From “Revenge” Splurging To Forced Frugality

TUESDAY, AUG 15, 2023 – 11:05 AM

Authored by Charles Hugh Smith via OfTwoMinds blog,

After all, “they can always print more money.” That’s always the solution until it becomes the problem.

What we call economics is best understood as:

1. A mechanism that distributes resources asymmetrically: some benefit more than others.

2. The running of the herd: humans are a social-herd species.

3. Everyone seeks a windfall: something for nothing, or grabbing more while doing less.

4. Everyone seeks to make windfalls permanent by rigging the mechanism to favor their interests.

5. The mechanism is a system of self-reinforcing feedback loops that generate diminishing returnsblowback and unintended consequences.

This perspective helps us understand the progression of the economy from 2021 to 2024. In a nutshell:

  • 2021: massive stimulus, “meme stock” bubble
  • 2022: “Revenge” splurging, inflation
  • 2023: AI stock bubble, “soft landing”
  • 2024: Forced Frugality

So massive stimulus initially triggers the locked-down herd into meme stocks, inflating a bubble. Once the lockdowns end, this massive stimulus unleashes “revenge spending” where price no longer matters, we need a vacation, a new wardrobe, etc., never mind the cost.

Unsurprisingly, this tsunami of price-insensitive spending while the distribution mechanism was still struggling to reconnect disrupted global supply chains leads to 1) rampant price gouging / profiteering and 2) rampant inflation as costs are passed up the food chain.

Many costs are “sticky” and rarely decrease: taxes, fees, wages and benefits, healthcare, rent, insurance, childcare, etc. typically only ratchet higher. Any ratchet lower is rare and modest, and eventually reversed.

The net result is self-reinforcing inflation, as stimulus never really stops: windfalls are rigged to be permanent, even as broad-based stimulus dries up.

Two things happen when windfalls are rigged to be permanent: 

  • 1) the distribution of resources (“money,” entitlements, tax breaks, subsidies, goodies of all kinds) becomes increasingly asymmetric (the already-rich get much richer at the expense of those barely holding their ground) and
  • 2) the source of the supposedly permanent windfall generates self-reinforcing feedback loops that lead to diminishing returnsblowback and unintended consequences.

In other words, the asymmetric distribution either self-corrects or enters run to failure feedback. Either way, the sources of the windfall cease functioning, and the result is forced frugality. Windfalls that were presumed to be permanent are revealed as temporary asymmetries whose own dynamics generate decay, diminishing returns, blowback and run-to-failure.

And always, of course, the gravy train ending is “impossible” because recency bias encourages us to think the distribution mechanism has god-like powers and permanence. Bur frugality ends up being forced one way or another, even if the stimulus appears to increase. Bubbles deflate and windfalls shrink and then reverse into doing more to get less.

After all, “they can always print more money.” That’s always the solution until it becomes the problem.

  *  *

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Fitch Warns Big Banks Face Downgrades


TUESDAY, AUG 15, 2023 – 08:30 AM | ZeroHedge

At the start of August, Fitch Ratings downgraded the US government’s top credit rating. Last week, Moody’s cut the credit ratings of small and midsized US banks because of higher funding costs, potential regulatory capital weaknesses, and rising risks tied to commercial real estate loans. Now, another week, another possible downgrade, this time of major banks.

Fitch analyst Chris Wolfe told CNBC another round of turmoil could be nearing for the banking industry. He said the ratings agency is mulling over sweeping rating downgrades for dozens of banks, including ones as big as JPMorgan Chase. 

“Another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 US banks it covers,” Wolfe told CNBC at the firm’s New York headquarters. 

He continued, “If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions.” 

Wolfe said lowering of the operating environment score for US banks to ‘aa-‘from ‘aa,’ reflecting downward pressure on the US sovereign rating, gaps in the regulatory framework and structural uncertainty around the normalization of monetary policy, went “largely unnoticed because it didn’t trigger downgrades on banks.” 

This comes one week after a triple whammy of factors of regional banks: Higher funding costs, potential regulatory capital weaknesses, and rising risks tied to CRE loans prompted Moody’s to lower credit ratings for ten small and midsize US banks; and noted in a slew of notes that it may downgrade major banks.

“Collectively, these three developments have lowered the credit profile of a number of US banks, though not all banks equally,” the ratings agency wrote in some of the assessments.

Perhaps Fitch is sending out trial balloons for Wall Street to inform them that the potential for another round of bank downgrades is a real risk for the market. 

More from CNBC on the conversation with Wolfe:

The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America , would likely be cut to A+ from AA- in this scenario, since banks can’t be rated higher than the environment in which they operate. 

And if top institutions like JPMorgan are cut, then Fitch would be forced to at least consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some weaker lenders closer to non-investment grade status.

The timing of the next round of bank downgrades wasn’t disclosed but serves as a warning for more banking turmoil as the Federal Reserve has hiked interest rates to 22-year highs. 

“What we don’t know is, where does the Fed stop? Because that is going to be a very important input into what it means for the banking system,” he said.

Rates on swap contracts referencing future Fed policy meetings suggest the rate hikes might be peaking with the potential for cuts to begin in the second half of 2024. 

The interview continued:

A related issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, said Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan defaults on smaller banks.

“That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding [normalized losses], that’s what maybe tips us over.”

Meanwhile, days ago, we quoted a note from Vishwanath Tirupattur, a strategist at Morgan Stanley, who said, “We are skeptical that the turmoil in the regional banking sector which came to the fore in March is behind us.” 

… and this all comes after Fitch downgraded the US credit rating from AAA to AA+ earlier this month. Of course, the Biden administration blamed Trump

Shares of big banks are already sliding premarket on the CNBC report. 

Clearly banking turmoil is not over. 

Argentina Considers Dollarization


Commentary: You know when your country has implemented terrible monetary policy when your fellow citizens consider the U.S. Dollar a safe haven… Could this be a pre-cursor to the United States currency?

The value of Argentina’s currency is being decimated by spiraling inflation.
The value of Argentina’s currency is being decimated by spiraling inflation.

The publication Central Banking reported on April 27 that Argentina was importing its bank notes from several countries. On May 22 The Guardian newspaper reported Argentina’s newest and highest denomination bank note, the 2,000 peso, was worth $4 U.S. in international exchange markets. On June 20 a New York Times newspaper headline read: “In Argentina, Inflation Passes 100 percent (and the Restaurants Are Packed).”

Javier Milei is an Argentine congressman and economist who is the front runner running for president. Milei has been vocal, saying if he wins he will make the U.S. dollar the official currency and “blow up” the Banco Central de la República Argentina or Central Bank of Argentina.

What’s going on here? The peso has suffered the humiliation of being named the worst-performing currency in emerging markets. Since 1970 Argentina has gone through one inflationary crisis to the next one.

The so-called dollar blue is the informal name given to U.S. currency circulating at a rate of exchange significantly higher than that of the official Argentine peso. Argentina removed exchange restrictions on the U.S. dollar in December 2015, resulting in the official exchange rate and the unofficial “blue” rate converging at that time. On April 1, 2016 the exchange rate was 14.4 pesos to the dollar. By July 29, 2022 the official exchange rate was 131.22 pesos to the dollar while the “blue” rate had morphed to 298 pesos to the dollar—an increase of 127 percent.

According to a May 22 Reuters news report, “Argentina’s new 2,000-peso bill, the largest denomination note, went into circulation on Monday, though due to fast depreciation of the currency it is worth only $8.50 at the official exchange rate and just over $4 in commonly used parallel markets. The peso has shed around a quarter of its value against the dollar this year despite strict capital controls that slow its fall. Most Argentines buy dollars in unofficial markets where they trade at over 480 pesos versus the official rate of 235.”

The June 20 New York Times article explains, “Argentina’s financial crisis has a surprising side effect: a flourishing dining scene in Buenos Aires, as residents rush to spend pesos before they lose more value.” This sounds more like a headline you would read in post-World War One Germany than in 21st century Argentina.

In a recent campaign speech presidential candidate Milei said, “The peso melts like ice in the Sahara Desert.” He has proposed closing the Argentine central bank, replacing the nation’s domestic currency exclusively with the U.S. dollar.

According to the publication El País, Argentina has contracts to import bank notes with Brazil, China, France, Malta, and Spain. El Pais reported shipments of 360 pallets of notes from France, and more than 800 pallets of note from Malta, where security bank note producer De La Rue has a plant. El Pais estimates these shipments will amount to 260 million pieces of currency.

For practical purposes coins don’t circulate, so importing more isn’t even on the table. Coins in denominations of 1, 5, 10, 25, and 50 centavos were introduced in 1992. The 1 peso was added in 1994, followed by the 2 peso in 2010. The 1-centavos denomination ceased production in 2001. The last gasp for coins came in 2017 when a new series of 1- and 5-peso coins were issued. Due to inflation a 2- and 10-peso coin were introduced the following year.

In 1970 peso moneda nacional bank notes were replaced with the peso ley at a rate of 100 peso moneda nacional to one peso ley. In 1983 the currency system exchanged at a rate of 10,000 pesos ley to one peso argentine. The austral replaced the peso argentine at a rate of 1,000 PA to one austral in 1985. This was followed by the peso convertible in 1992 at a rate of 10,000 austral to the peso convertible. Until 2001 bank notes carried the legend “Convertibles de curso legal,” indicating the value of the Argentine bank notes was fixed to the same amount in U.S. dollars. These notes no longer circulate.

The 1992 peso convertible was initially comprised of coins as explained earlier and bank notes in denominations of 1, 2, 5, 10, 20, 50 and 100 pesos. A coin replaced the 1-peso bank note in 1994. The peso convertible is still in use, but the latest series of notes introduced in May 2022 is comprised of denominations of 100, 200, 500, and 1,000 pesos. In March 2023 the 2,000-peso denomination was added, using the printing plates meant to be used for a proposed 5,000-peso note.

For now Argentine citizens are coping with inflation through the strategies of buying now while paying later, bartering, bulk buying, hoarding U.S. dollars, or spending as fast as you get it.

More than 65 countries currently peg their currency to the U.S. dollar. Five U.S. territories use the dollar as their official currency. Bonaire, the British Virgin Islands, Ecuador, El Salvador, Marshall Islands, Micronesia, Palau, Panama, Timor-Leste, Turks and Caicos, and Zimbabwe are each independent countries that also use U.S. currency exclusively.

Challenging the Dominance of the US Dollar: BRICS and the Gold-Backed Currency

What’s fast becoming the largest economic union in the world has just announced a new gold-backed currency aimed deliberately at replacing the US dollar. We are going to find out what’s happening, why it’s happening, and what it all means for a rising and very real new world order.

– The upcoming BRICS summit in South Africa will focus on creating a new gold-backed currency, further accelerating de-dollarization.

– BRICS has emerged as a powerful economic bloc, attracting numerous countries seeking to join.

– De-dollarization may impact US government spending, potentially leading to living within means and prioritizing domestic interests.

Following the end of World War 2, the world outside of the Soviet bloc began to be led by a single super economic and militaristic superpower, namely the United States and most particularly its dollar. This accelerated in the 1970s when the United States struck a deal with Saudi Arabia to standardize oil prices in terms of the US dollar. In many ways, this deal elevated the US dollar to the world’s reserve currency since you could buy oil and gas directly without going through some kind of exchange rate. Moreover, nations buying and selling in US dollars in turn inordinately purchase US Treasury bonds with their surplus dollars to lose money in the exchange process back to their currencies.

This in turn allows the US government to print as much money as they want. They assume that plenty of foreign nations using the US dollar will purchase up all the debt in the form of US Treasuries. All of that changed on Thursday, February 24th, 2022. That’s when Russian forces launched a special military operation into Ukraine. In mere hours, two sanctions were unleashed on Russia from the United States and the European Union, using the US currency against Russia and kicking them off SWIFT, the international financial transaction platform which is inordinately controlled by US banks. Suddenly, in the eyes of many around the world, the dollar transformed from a free international currency into a very powerful and effective weapon that more nations feared would eventually be used against them.

The weaponization of the dollar has escalated the need for many countries to deliberately begin the process of de-dollarization. A few months ago, Brazil and China reached an agreement to ditch the dollar and conduct their cross-border trade with the Yuan, the Chinese currency. Around the same time, China and Saudi Arabia began talks to price Saudi Arabia’s oil sales in the Yuan rather than dollars. Similarly, both the UAE and Qatar have been trading with China using the Yuan in direct payments. Even France just completed their first Yuan-settled liquified natural gas trade with China.

The rise of BRICS is being called the hottest ticket in geopolitics. BRICS stands for Brazil, Russia, India, China, and South Africa, the five foundational nations that have formed a new and powerful economic bloc. Since its formation in the 2000s, the economic bloc has grown exponentially, with dozens of countries seeking to join. Nations such as Saudi Arabia, the UAE, Egypt, Algeria, Argentina, Mexico, and Nigeria are all lining up and applying for membership, making up over 40% of the world’s population. All eyes are fixed on their upcoming summit in August in South Africa because it’s just been announced that the agenda there will center on the creation of a new gold-backed currency that would have at least 20 nations all joining in.

This development is considered by many to be key in accelerating the trend of de-dollarization. More nations are moving away from the US dollar as the dominant global reserve currency. As we saw earlier, de-dollarization is already well underway. The international return to the gold standard appears key here. China, Russia, and India hold substantial gold reserves, with China alone possessing over 50,000 tons. The Shanghai Gold Exchange allows for the conversion of currencies into gold, and this mechanism will likely play a role in the new BRICS currency.

The gold-backed currency used among BRICS nations aims to further erode the dollar and establish a multi-polar world, a world where political and economic power is decentralized away from a single dominant power and shared instead among a variety of political and economic centers. Scholars have argued that the age of a unipolar world, a world with a single superpower, the United States, governing the rules by which all other nations have to live by, is dead. We have already been seeing a multipolar world rising for the last couple of decades.

The gold-backed currency represents a rising new geopolitical world order. It is going to take time before the economics of that world order changes substantially, and that’s because the US dollar remains, by far, the single most dominant currency. There has been significant de-dollarization. In 2001, 73% of global reserves were held in dollars, but that percentage has now decreased to 58%. It is important to distinguish between how much a currency is kept as a share of the reserves of central banks around the globe versus how much it continues to be used in everyday global financial transactions. While nations are seeking alternatives to the dollar, it still overwhelmingly dominates as the currency by which people lend, borrow, and save. It remains the dominant currency by which most nations measure their assets and debt.

The dollar is and will remain very strong for the foreseeable future, even though it’s going to have some major competitors. As more nations de-dollarize, fewer will be buying up US debt, which means that the Treasury can no longer continue to print money at the pace it’s been printing over the last few decades. This means that our government can possibly begin living within our means, stop the endless funding of foreign wars, and prioritize the interests of the people over against the interests of a financial class led by an out-of-control Federal Reserve. If that happens, de-dollarization may not just benefit the international community, it may have extraordinary benefits here at home as well.

Copyright, 2023.

Surge in China’s Demand for Gold Is Slowing as Economy Stumbles

The jitters affecting the world’s second-biggest economy are starting to feed through into China’s gold market.

Source: Bloomberg: Published Jun 19, 2023  •  2 minute read

(Bloomberg) — The jitters affecting the world’s second-biggest economy are starting to feed through into China’s gold market.

Article content

A surge in purchases by Chinese residents, driven by pent-up demand after three years of pandemic restrictions and optimism that the economy would quickly rebound, is starting to slow — yet another sign that the recovery is losing momentum.

China vies with India as the world’s biggest consumer of gold bars, coins and jewelry. Its central bank has also been a recent buyer, adding to its reserves for seven straight months after a three-year pause. Although most gold trades as a financial asset — notably as a haven for investors during risky times or as a hedge against inflation — China’s physical demand for the precious metal has helped underpin its ascent this year to over $2,000 an ounce.

The rapid expansion in retail sales of gold and silver jewelry looks to have topped out, rising 24% year-on-year in May to 26.6 billion yuan ($3.7 billion). That’s slower than the 44% and 37% growth recorded in the previous two months. The same period last year included the extended lockdown of Shanghai, when demand for goods and services cratered across the economy.

Gold appealing to younger family office investors amid market volatility

Source: CRAIN CURRENCY | Marcus Baram

Jun 15, 2023


For centuries, gold has retained an allure as a safe-haven asset, especially during times of turbulence and market volatility. 

Family offices and ultra-high-net-worth investors — using gold as part of their asset diversification strategy — have recently helped boost its price, which has increased 35% in the past five years. Traditionally favored by older investors, this time it’s attracting next-gen family office members, gold market analysts say.

“Since late 2022, investors appear to have gravitated toward the precious metal as a way to preserve their wealth and hedge against the risk of a recession later this year,” said Han Tan, chief market analyst at Exinity Group in Abu Dhabi.

Gold is often favored during times of crisis for several reasons. Despite its high price volatility, it is a relatively secure investment and extremely stable in value. Because it often goes against market and interest-rate changes, gold can serve as insurance against economic downturns. That’s partly due to its rarity and limited supply. 

As a tangible asset, the precious metal — in the form of gold coins, gold bars or jewelry  —  protects investors against inflation, said Joseph Cavatoni, North American market strategist for the World Gold Council.

That protection appeals to family offices, which use gold to diversity their assets and as a “shock absorber in their portfolio” during these times of inflation and high interest rates, Cavatoni said. He’s seeing more interest from European family offices versus the U.S. market, though retail sales to consumers have slowed in India and China due to pandemic-related lockdowns. 

“We’re seeing ultra-high-net-worth individuals come on the scene and make big purchases,” said Bill Voss, founder of Bullion Box, a subscription service that sends a curated box of precious metals every month. One favored strategy for investors, he said, involves building a portfolio that is one-third bullion, one-third semirare numismatic coins and one-third rare coins. 

“Secondarily,” Voss said, “we’re being approached by family offices and other groups about acquisition opportunities in the sector.” 

A major reason for gold’s recent price increase is that it’s being snapped up by more central banks around the world as part of their reserves portfolio, and it’s being used to manufacture electronics and many consumer products like cellphones, Cavatoni said.

Younger wealthy investors who may have been burned by the collapse of the crypto market also are increasingly turning to precious metals — including gold, silver and platinum. 

“We’re getting so many requests from younger generations for precious metals,” Voss said. “It used to always be 50-something-and-older customers, but now it’s skewing much lower.”

Part of gold’s appeal is its tangible quality as a beautiful physical asset, Cavatoni said. For many people, it’s about “I can get a little bling and have it earn at the same time,” he said.

People who don’t necessarily trust the banks right now “want to hold something in their hands,” Voss said. “If more banks crash, they know they have something to go to and put their hands on.”

So far, the outlook for gold looks positive. Spot gold has advanced by more than 7% so far this year, said Exinity Group’s Tan, “on hopes that the Fed is approaching the end of the current rate-hike cycle.” 

All that glitters for now just may be gold. 

AUTHOR Marcus Baram

Marcus Baram is a contributing editor at Crain Currency, where he covers the intersection of finance and politics. Prior to joining Crain Currency, Baram was a staff writer at Fast Company and an editor at Huff Post. He has also written for outlets such as The New York Times, The Atlantic, and Vice. Baram is an expert on economic policy and has a deep understanding of the ways in which politics shapes the global financial system. In his role at Crain Currency, he brings a unique perspective to the complex and ever-evolving world of finance. With his keen analysis and clear writing, Baram helps readers make sense of the important issues impacting the economy today.