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Authored by James Rickards via The Daily Reckoning,

Since Federal Reserve resources were barely able to prevent complete collapse in 2008, it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet.

That’s exactly the situation we’re facing right now.

The specter of a global debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide. The logic leads quickly to one currency for the planet.

The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency.

The Federal Reserve has a printing press, they can print dollars. The IMF also has a printing press and can print SDRs. It’s just world money that could be handed out.

The IMF could function like a central bank through more frequent issuance of SDRs and by encouraging the use of “private SDRs” by banks and borrowers.

What exactly is an SDR?

The SDR is a form of world money printed by the IMF. It was created in 1969 as the realization of an earlier idea for world money called the “bancor,” proposed by John Maynard Keynes at the Bretton Woods conference in 1944.

The bancor was never adopted, but the SDR has been going strong for 50 years. I am often asked, “If I had 100 SDRs how many dollars would that be worth? How many euros would that be worth?”

There’s a formula for determining that, and as of today there are five currencies in the formula: dollars, sterling, yen, euros and yuan. Those are the five currencies that comprise in the SDR calculation.

The important thing to realize that the SDR is a source of potentially unlimited global liquidity. That’s why SDRs were invented in 1969 (when the world was seeking alternatives to the dollar), and that’s why they will be used in the imminent future.

At the previous rate of progress, it may have taken decades for the SDR to pose a serious challenge to the dollar. But as I’ve said for years, that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalized their balance sheets from the last crisis.

“In that case,” I’ve argued previously, “the replacement of the dollar could happen almost overnight.”

Well, guess what?

We’re facing a global financial crisis worse even than 2008. That’s because each crisis is larger than the previous one. The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

This means a market panic far larger than the Panic of 2008.

SDRs have been used before. They were issued in several tranches during the monetary turmoil between 1971 and 1981 before they were put back on the shelf. In 2009 (also in a time of financial crisis). A new issue of SDRs was distributed to IMF members to provide liquidity after the panic of 2008.

The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. With no issuance of SDRs for 28 years, from 1981–2009, the IMF wanted to rehearse the governance, computational and legal processes for issuing SDRs.

The purpose was partly to alleviate liquidity concerns at the time, but also partly to make sure the system works in case a large new issuance was needed on short notice. The 2009 experience showed the system worked fine.

Since 2009, the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.

On Jan. 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs. This included the creation of an SDR bond market, SDR dealers, and ancillary facilities such as repos, derivatives, settlement and clearance channels, and the entire apparatus of a liquid bond market. A liquid bond market is critical.

The IMF study recommended that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.

In November 2015, the Executive Committee of the IMF formally voted to admit the Chinese yuan into the basket of currencies into which an SDR is convertible.

In July 2016, the IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called “M-SDRs” (for market SDRs) in contrast to “O-SDRs” (for official SDRs).

In August 2016, the World Bank announced that it would issue SDR-denominated bonds to private purchasers. Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal.

In September 2016, the IMF included the Chinese yuan in the SDR basket, giving China seat at the monetary table.

Over the next several years, we will see the issuance of SDRs to transnational organizations, such as the U.N. and World Bank, to be spent on climate change infrastructure and other elite pet projects outside the supervision of any democratically elected bodies. (I call this the New Blueprint for Worldwide Inflation.)

The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing and the financial accounts of the world’s largest corporations, such as Exxon Mobil, Toyota and Royal Dutch Shell.

So the international monetary elite has been awaiting the global liquidity crisis that we’re facing right now. In the not-too-distant future, there will be massive issuances of SDRs to return liquidity to the world. The result will be the end of the dollar as the leading global reserve currency.

SDRs will perhaps never be issued in bank note form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites.

But monetary resets have happened three times before, in 1914, 1939 and 1971. On average, it happens about every 30 or 40 years. We’re going on 50.

So we’re long overdue.

You’ll still have dollars, but they’ll be local currency like the Mexican peso, for example. But its global dominance will end.

Based on past practice, we can expect that the dollar will be devalued by 50–80% in the coming years.

A devaluation of this magnitude will wipe out the value of your life’s savings. You’ll still have just as many dollars, but they won’t be worth nearly as much.

Individuals will not be allowed to own SDRs, but you can still protect your wealth by buying gold — if you can find any.

Andrew Cuomo and the federal government are battling it out over 20,000 ventilators believed to be idling in a federal stockpile, ventilators that the governor – who is enjoying a moment of celebrity thanks to his swift and reassuring response to the crisis, even as New York has emerged as the epicenter, and one of the few places where hospitals are truly overwhelmed by the crisis – badly needs.

Without them, the state could see dozens of unnecessary deaths, something that would reflect poorly on the national mortality rate, and an easily preventable tragedy.

As deaths spiked on Wednesday and Thursday, Cuomo proclaimed that he had given hospitals permission to split ventilators between two patients, something that can be accomplished with a minor modification, but is said to be a practice of last resort, as it greatly diminishes the quality of care, according to professional medical groups.

During his Thursday press conference, Cuomo revealed that the need for ventilators is on track to be even greater than he initially anticipated, as the state is finding that patients with severe cases are staying on the ventilators longer than expected. Typically, serious respiratory illnesses requiring ventilation will have a patient hooked up for 3-4 days. For COVID-19, the range expands to 11-21 days, with some cases lasting as long as 30 days.

The longer a patient is ventilated, the lower their odds of survival, Cuomo added. Because of this, the state needs three times as many ventilators as it would for other respiratory illnesses.

New York Gov. Andrew Cuomo on Tuesday made an impassioned plea for thousands of ventilators to be sent to his state within the next 14 days to deal with an expected severe shortage given the wave of patients expected to be infected with the coronavirus. He urged the Trump administration to use the Defense Production Act to get corporations to produce the equipment. And the government should also send the state the 20,000 ventilators now in a federal stockpile, he said.

VP Pence later promised Cuomo 4,000 out of the stockpile (surely, the ventilators must be divided up based on need, and regardless, the federal stockpile still leaves states well short of their ideal numbers). But at least Cuomo is getting the national guard building an overflow COVID-19 hospital at the Javits Center and doctors and nurses and flowing in to volunteer.

Earlier this week, during a Fox News Town Hall, Trump slammed Cuomo for not stocking up on more ventilators in accordance with a report by the state Department of Health which found the state would be short by roughly 15,000 ventilators.

“He had a chance to buy – in 2015 – 16,000 ventilators at a very low price and he turned it down. I’m not blaming him or anything else. But he shouldn’t be talking about us. He’s supposed to be buying his own ventilators. We are going to help,” Trump said.

Cuomo accused Trump of lying, and although Trump seemed to get some key details wrong, his mistakes are understandable. Really, what this report said, was that the state should depend on federal support if something like the Spanish Flu ever happened. But really, there was no adequate preparation for this on the federal or state level.

“In the event of an overwhelming burden on the health care system, New York will not have sufficient ventilators to meet critical care needs despite its emergency stockpile. If the most severe forecast becomes a reality, New York State and the rest of the country will need to allocate ventilators and other scarce resources,” the report read.

Which is why, Cuomo said Thursday, he believes Trump should use his newly authorized executive authority to order companies to start manufacturing more ventilators, which will be needed by all states, something that Trump has also inexplicably refused to do.

Calling the technique “not ideal, but workable,” Cuomo said ventilator splitting may be necessary given some projections that suggest the state may need as many as 30,000 ventilators in the coming weeks, compared to the 6,000 to 7,000 that it has on hand. At this point, there’s no way New York will be able to “flatten the curve” enough to compensate for this gulf.

Cuomo’s announcement drew immediate criticism in a joint statement issued by several medical associations advising clinicians “that sharing mechanical ventilators should not be attempted because it cannot be done safely with current equipment.”

But with the country facing a potential shortage of hundreds of thousands of ventilators, according to some projections, the technique could soon be replicated in hospitals nationwide, unless hundreds of thousands of ventilators are added to the US supply in the coming months – something that doesn’t look likely.

Authored by Nassim Nicholas Taleb and Mark Spitznagel via Medium.com,

The U.S. government is enacting measures to save the airlines, Boeing, and similarly affected corporations. While we clearly insist that these companies must be saved, there may be ethical, economic, and structural problems associated with the details of the execution.

As a matter of fact, if you study the history of bailouts, there will be.

Saving Those on the Medusa

The bailouts of 2008–9 saved the banks (but mostly the bankers), thanks to the execution by then-treasury secretary Timothy Geithner who fought for bank executives against both Congress and some other members of the Obama administration. Bankers who lost more money than ever earned in the history of banking, received the largest bonus pool in the history of banking less than two years later, in 2010.

And, suspiciously, only a few years later, Geithner received a highly paid position in the finance industry.

That was a blatant case of corporate socialism and a reward to an industry whose managers are stopped out by the taxpayer. The asymmetry (moral hazard) and what we call optionality for the bankers can be expressed as follows: heads and the bankers win, tails and the taxpayer loses. Furthermore, this does not count the policy of quantitative easing that went to inflate asset values and increased inequality by benefiting the super rich. Remember that bailouts come with printed money, which effectively deflate the wages of the middle class in relation to asset values such as ultra-luxury apartments in New York City.

The Generalized Bob Rubin Trade: Keep the profits, transfer losses to taxpayers. Named after Bob Rubin who pocketed 120 million dollars from Citi but claimed uncertainty and kept past bonuses. This encourages anyone to never be insured for such eventualities since the government will pick up the tab.

If It’s Bailed Out, It’s a Utility

First, we must not conflate airlines as a physical company with the financial structure involved. Nor should we conflate the fate of the employees of the airlines with the unemployment of our fellow citizens, which can be directly compensated rather than indirectly via leftovers of corporate subsidies. We should learn from the Geithner episode that bailing out individuals based on their needs is not the same as bailing out corporations based on our need for them.

Saving an airline, therefore, should not equate to subsidizing their shareholders and highly compensated managers and promote additional moral hazard in society. For the very fact that we are saving airlines indicates their role as utility. And if as such they are necessary for society, then why do their managers have optionality? Are civil servants on a bonus scheme? The same argument must also be made, by extension, against indirectly bailing out the pools of capital, like hedge funds and endless investment strategies, that are so exposed to these assets; they have no honest risk mitigation strategy, other than a trained naïve reliance on bailouts or what’s called in the industry the “government put”.

Second, these corporations are lobbying for bailouts, which they will eventually get thanks to the pressure they can exert on the government via lobby units. But how about the small corner restaurant ? The independent tour guide ? The personal trainer? The massage professional? The barber? The hotdog vendor living from tourists near the Met Museum ? These groups cannot afford lobbyists and will be ignored.

Buffers Not Debt

Third, as we have been warning since 2006, companies need buffers to face uncertainty –not debt (an inverse buffer), but buffers. Mother nature gave us two kidneys when we only need about a portion of a single one. Why? Because of contingency. We do not need to predict specific adverse events to know that a buffer is a must. Which brings us to the buyback problem. Why should we spend taxpayer money to bailout companies who spent their cash (and often even borrowed to generate that cash) to buy their own stock (so the CEO gets optionality), instead of building a rainy day buffer? Such bailouts punish those who acted conservatively and harms them in the long run, favoring the fool and the rent-seeker.

Not a Black Swan

Furthermore, some people claim that the pandemic is a “Black Swan”, hence something unexpected so not planning for it is excusable. The book they commonly cite is The Black Swan (by one of us). Had they read that book, they would have known that such a global pandemic is explicitly presented there as a white swan: something that would eventually take place with great certainty. Such acute pandemic is unavoidable, the result of the structure of the modern world; and its economic consequences would be compounded because of the increased connectivity and overoptimization.

As a matter of fact, the government of Singapore, whom we advised in the past, was prepared for such an eventuality with a precise plan since as early as 2010.

In what some may call the ‘worst’ affirmation of a ‘AAA’ rating, Fitch has published a somewhat damning set of reasons why that AAA-rating may not last due to soaring debt, shrinking GDP, and the “helicopter-money” anti-virus actions.

Notably, the sovereign credit risk of USA has been notably rising since ‘helicopter money’ began to make the mainstream two weeks ago…

Full Fitch Statement: Key Rating Drivers

The U.S. sovereign rating is supported by structural strengths that include the size of the economy, high per capita income and a dynamic business environment. The U.S. benefits from issuing the U.S. dollar, the world’s pre-eminent reserve currency, and from the associated extraordinary financing flexibility. Fitch considers U.S. debt tolerance to be higher than that of other ‘AAA’ sovereigns. However, high fiscal deficits and debt — which were already rising even before the onset of the huge economic shock precipitated by the coronavirus — are starting to erode these credit strengths.

The risk of a near-term negative rating action has risen given the magnitude of the shock to the economy and public finances from the coronavirus and the commensurate and necessary fiscal policy response, particularly in the absence of a credible consolidation plan for the country’s pre-existing, longer-term public finance and government debt challenges.

The coronavirus has inflicted an unprecedented shock on financial markets and economic activity, with policymakers struggling to avert a longer-lasting downturn. In common with other advanced countries, the U.S. has shut down parts of its economy to slow the spread of the disease, which will cause a deep contraction centered on second-quarter 2020 (2Q20) and a massive rise in unemployment. In its baseline, Fitch assumes containment measures can be unwound in the second half of 2020 (2H20), allowing for recovery in sequential growth and labor markets. With so much depending on the progress of the virus, there is a large degree of uncertainty around our economic forecasts.

In Fitch’s evolving baseline forecast, U.S. GDP would shrink by around 3% in 2020 (although this could be subject to further revision), an unprecedented occurrence in peacetime and a deeper contraction than in 2009. In the event of the virus being contained during 2H20, Fitch assumes that real GDP growth will recover strongly in 2021, reflecting a sharp bounce-back. A plausible downside case, including a second wave of infections and longer lockdown periods across parts of the country, would see an even larger decline in output in 2020 and a weaker recovery in 2021.

The U.S. will use its full range of policy tools to combat the crisis, including the USD2 trillion fiscal stimulus package and the Federal Reserve’s commitment to purchase unlimited quantities of treasuries and mortgage-backed securities, underpinning a huge coordinated policy response. U.S. reserve currency status (the U.S. dollar accounts for over 60% of global foreign exchange reserves) and policy credibility have underwritten the aggressive monetary policy response designed to keep financial markets functioning. The Federal Reserve cut interest rates to zero on March 15, re-opened the discount window for banks, bolstered U.S. swap lines with foreign central banks, announced massive Treasury and agency bond-buying, and subsequently received 13(3) authority from the Treasury Secretary to buy up to USD1 trillion in commercial paper. A Primary Dealer Credit Facility will accept a wide range of collateral. Banks are stronger than in 2008 and Federal Reserve actions appear to have headed off risks to the core of the financial system, but leverage in parts of the corporate sector increases vulnerabilities.

As fiscal and monetary policy effectively merge, government will spend in order to cushion the income losses suffered by households and businesses and lessen the destruction of potential output. Congress is set to pass a USD2 trillion stimulus package of revenue and spending measures, including increases in unemployment assistance, cash transfers to individuals, transfers to states and more money for the public health system.

The degree to which the economy recovers and the extent to which the fiscal stimulus is eventually unwound will be key rating considerations for Fitch. A previous round of crisis stimulus via discretionary spending in 2008-2009 was subsequently reversed (at the cost of slowing the economic recovery) with the federal deficit falling to 2.4% of GDP in 2015, but, despite this, the upward trajectory of the government debt ratio has not been arrested and deficits have grown again since then. The prospect of permanently higher budget deficits will weigh increasingly heavily on sovereign creditworthiness, as no political consensus has emerged over the difficult decisions about the path of future public spending and debt.

The stimulus package has yet to be officially assessed for its budget impact, but at a conservative estimate, the federal fiscal deficit will rise to over 13% of GDP in 2020 from 4.6% of GDP in 2019 (FY 2019). The general government deficit will widen further as states’ and municipalities’ finances will face increased demands, for example to pay unemployment benefits, and will absorb greater federal transfers. General government debt ended 2019 at around 100% of GDP but will rise to 115% of GDP by the end of 2020. This would put the debt ratio, absent consolidation, on course to surpass a level Fitch has previously considered inconsistent with ‘AAA’ status.

Fitch sees deteriorating debt dynamics as a growing risk to sovereign creditworthiness, notwithstanding the active support of the Federal Reserve and the historic fall in U.S. borrowing costs, with the yield on the 10-year Treasury at 1%. Even at very low interest rates, recurrent deficits will still drive an increase in debt/GDP. Over the next decade, government debt/GDP was already set to trend upward, driven by higher spending on social security and especially healthcare spending. A recession will likely bring forward the point at which federal programs’ trust funds are exhausted and, absent reform, federal budget allocations go to shore up these programs.

Fitch believes that recent dislocations and illiquidity in the market for U.S. Treasuries reflect changes in the structure of the market and exceptional conditions, and do not signal heightened perceptions of U.S. credit risk on the part of investors. The U.S.’s safe haven properties may nevertheless be tarnished, particularly if it emerges from the crisis economically weakened and with much higher debt. Moreover, a squeeze on U.S. dollar liquidity around the world, characterized by dollar appreciation, has again highlighted weaknesses in the global financial architecture and could hasten a shift toward financing in other currencies.

The U.S. is scheduled to hold elections in early November. Former vice president Joe Biden is the presumptive Democrat nominee to run against Donald Trump. Democrats are expected to retain their House majority but fall short of retaking the Senate, while the outcome of the presidential contest is more uncertain. The pandemic threat and the government’s response could change the policy debate in significant ways, possibly in favor of a stronger safety net and more public health spending. Fitch would expect a Democrat administration to pursue higher public spending, partially offset by tax raises.

After years of subpar returns and wrong-way bets, hedge fund manager Paul Tudor Jones, a trader known for his slam-dunk trades during the 1987 crisis, and again during the financial crisis, is once again having a moment. After telling CNBC back in January that he felt like the markets were about to have a “1999”-type moment, he added that he wouldn’t want to be long until the novel coronavirus outbreak had run its course.

Now, PTJ revealed Thursday before another interview with CNBC that his flagship fund is up 1.5% over the last two months, a sign that he skillfully sidestepped the selloff and is positioning himself for the rebound. But unlike Ackman, who clinched a billion-dollar windfall thanks to his decision to spend nearly $30 million on hedges when we were still at the highs, PTJ’s doesn’t have any major winnings to brag about. Instead, he told CNBC and its audience that his daughter had tested positive for COVID-19 and “worked every single day remotely while she had it.”

So, young analysts and associates, next time you’re thinking about slacking off, remember: PTJ’s daughter didn’t let a global pandemic stop her from turning some comments.

And in keeping with our new reality where we rely on hedge fund portfolio managers and sell-side strategists for our epidemiological projections, PTJ warned that if we “extrapolate from what is getting ready to happen in the US”, he expects the outbreak to peak some time in early April, and in that time, stocks will retest lows.

“Well, I think COVID-19 is — listen, it’s unlike anything we’ve obviously ever seen before. If we kind of think about where we are right now, we’re probably — if you look at the Hubei experience and we extrapolate from that what is getting ready to happen in the United States, to New York in particular, we’re probably — we’re probably going to hit our peak somewhere between April 4th and April 10th. My guess is we can have somewhere between 3 and 400,000 cases in the United States. It’s going to be a — that’s going to be a really challenging period, I think, for us as Americans.”

During this time, the virus is “going to throw its best punch”, and it will be up to American workers to not only persevere and get back to normal, but figure out what this “new normal” is going to look like once we “restart America.”

“We’re going to see the worst of Covid-19, it’s going to throw its best punch over the course of the next few weeks and then we’re going to be on the back side of that,” Jones said. “We’ve got to look through these numbers, look through the tragedy of the next few weeks, think about how we’re going to restart our lives, think about how we’re going to deal with the new normal and think about how we’re going to restart America.”

PTJ also tried to put the Fed’s latest easing in perspective from a “purely monetary standpoint.” At this rate, the Fed by May will have purchased as many assets as it did during the six years after the crisis. If this doesn’t give investors some peace of mind, nothing that the central bankers dream up will.

“So, investors can take heart that we’ve counteracted this existential shock with the greatest fiscal monetary bazooka. It’s not even a bazooka. It’s more like a nuclear bomb.”

As we confront the virus, PTJ said people need to be careful not to “mythologize” it. It’s just a slightly more deadly version of the flu, essentially, he said.

“We’ve got to be careful not to mythologize this particular disease,” he said. “We’ve got to be careful not to mythologize this into the pandemic Godzilla. We can beat this thing.”

Echoing comments from President Trump, PTJ said he’s “much more nervous” about the loss of life caused by a 20% unemployment rate than the death caused by the virus.

“What are the human impacts of that? I’m much more nervous about the loss of life that could come with a 15 or 20% unemployment rate than I am about the loss of life that comes with CV-19. CV-19 may cost us – let’s say CV-19, again – I think we’re going to peak out somewhere in the 3 to 400,000 range. Again, if I used a – an overly pessimistic view of 4% mortality rate because our health care system will be overwhelmed in the next two weeks, we’re talking 16,000 people.”

Watch a clip from the interview below:

How do you make sure that an extremely illiquid market trades like a penny stock? By accumulating enough shares to build up a market on close imbalance of over $7 billion, and wait for the exchange to disclose what the MOC was.

Here is a chart of what happened at precisely 3:50pm when we learned that there was a $7 billion market on close imbalance, most likely the result of the previously discussed $850 billion in month and quarter end pension fund rebalance.

And now you know just how much “liquidity” there is in this market.

Will this move stick, or will it be faded once it emerges that this was just a headline-scanning algos sweeping all the offers for 40 ES points? Find out right after the close.