Markets Insight

February 27, 2013 12:34 pm
Sell currencies of serial QE offenders
Fighting central banks is dangerous, writes Bill Gross

Big Macs are out, horsemeat is in ... not in burgers perhaps, but at least in the latest headlines. What is rather evident, though, is that my favourite valuation metric for currencies – the relative pricing of Big Macs in individual countries – is being subordinated to the willingness and ability of central banks to print money.

But I get ahead of myself. Why do currencies go up and down relative to each other? Economists would argue that ever since President Richard Nixon took the dollar off the gold standard in 1971 – and certainly even before – a currency’s price was a function of several factors.

First, but not necessarily foremost, was its purchasing power parity (PPP), or its price in terms of what it could buy. Big Macs, for instance. Today, a Big Mac costs $7.84 in Norway while only $1.67 in India. If Big Macs were all the world produced or consumed, the krone should go down and the rupee should go up in order to rectify the imbalance.

Second, and third, however, are trade and investment flows between countries. Real growth, fiscal surpluses or deficits, return on investment, haven status and other factors combine to produce a flow of money into and out of a country, changing its price in the process. Add to that a speculative component, typified by George Soros’s bet against the pound in the early 1990s, and you have a decent head start in determining the value of an individual country’s currency.

Now, however, much of that is subordinated to policy makers in the form of capital controls, policy rates, and the biggest bazooka of them allquantitative easing policies that surreptitiously increase the quantity of dollars, euros or yen relative to each other.

Newspapers, and even G20 summary statements, refer to this development as “currency wars”. The global economy, the phrase suggests, is using QE policies as currency bullets, with the central bank that can print the fastest being the ultimate winner in a race to the currency bottom.
The insinuation is undoubtedly true, although the assumption that any individual country or currency can win this war is rife with historical refutation.

Granted, in the 1930s the countries that devalued against gold first and by the most escaped the depths of depression before any of the others. Similarly, the devaluations by Asian countries against the dollar in the late 1990s rather successfully shifted growth in their favour for years to come, relative to developed countries.

But today’s quantitative easing policiesat least in G-10 countries – are not really currency wars against each other. Instead, they are rather uniform expressions of artificial asset pricing and financial repression in a rather obvious attempt to reflate their respective economies.

The “war”, if it can be labelled that, is a war against stagnant growth and high unemployment. The weapons, instead of early 20th century machine guns and devaluations against a continuing gold standard, are central bank purchases of sovereign debtmodern-day drones whose target is an artificially low interest rate that hopefully will lead to asset market appreciation and real growth in quick order.

How should an investor respond? Respect the drone, I suppose, and don’t fight the central bank in the immediate term.

In currency terms, one has only to observe the 15 per cent depreciation of the yen against the dollar and its 20 per cent depreciation versus the euro without a shot even being fired. Japan’s Prime Minister Shinzo Abe has one-upped Federal Reserve Chairman Ben Bernanke simply with a promise to print.

Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.

The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.

Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.

Unless there is a white flag or an ultimate ceasefire, money printing lowers the value of all global currencies – much like horsemeat lowers the value of any burger or shepherd’s pie.

Bill Gross is founder and co-chief investment officer of Pimco

Copyright The Financial Times Limited 2013.

February 28, 2013 6:24 pm

Italy exposes wider crisis of democracy
The turmoil produced by the Italian elections has directed attention back to where it should have been all along – to the politics of the eurozone crisis. We have had six months of complacency, rising stock markets and wishful thinking. The conventional wisdom was that the crisis had been contained, with Ireland recovering and the risk of a Greek exit from the eurozone reduced. But this view always ignored the politics.

Greece, in particular, showed that even if capital flows might be going in the right direction, the democratic deficit was widening. No one has much cared outside Greece that a neo-Nazi party could shoot to above 10 per cent in the polls. But it is a warning of what can happen to other eurozone members.

There is, fortunately, no parallel to the rise of Golden Dawn in Italy. But the crisis of democratic legitimacy has been shown to be equally deep there. As in Greece, the voters have a reasonably clear view: they want to remain in Europe and – knowing the defects of their own economic system – they may even accept some measure of austerity.

But the Rome-based political class has lost all credibility in their eyes – they were creators of the mess, and of the corruption that accompanied it. They cannot be trusted to clear it up. Those who have made no sacrifice themselves lack the moral credibility to ask them of others.

Technocrat prime minsters, such as Italy’s Mario Monti or Greece’s Lucas Papademos, are no alternative: they may have clean hands because they remained outside party politics. But they are creatures of banking and economics. While they may understand money, that no longer recommends them to the voters who would rather have someone who understands them.

The result is dangerous. It is but a short step from writing off the political class to writing off the institutions of democracy. So far most voters have not done this in either Italy or Greece. But some have and the temptation is there for more to do so, whether by drifting towards the far right, towards an anti-capitalism that is the prisoner of its own revolutionary rhetoric, or towards a kind of anarchic alternative to party politics – the direct democracy espoused by Beppe Grillo’s Five Star Movement in Italy.

The response from Brussels and the creditor north to all this has been robotically unimaginative – to insist that the debtors, like the little fish in Finding Nemo, must just keep on going. And so they may – for a while. It is possible that southern Europe will give the Germans until the autumn to come around to a new approach. But toleration for austerity is unlikely to last much beyond then.

A moment of truth is surely approaching. Joachim Gauck, the German president, has called for a new debate on Europe, and suggested that its future lies in reviving the idea of a commonwealth of nations. But if such a debate is to go anywhere, it will have to confront the question of monetary union. For Europe may be approaching a stark choice: giving up the euro; or keeping it and seeing the political crisis spin out of control.

As Mr Gauck noted, the original European idea saw supranational policy making not as something that would suffocate individual member nation-states but rather as a means to help them out of the existential crisis that had beset them during the second world war, to restore their prestige and their ability to govern.

European co-operation emerged alongside economic planning, exchange controls, Keynesianism and corporatist management of industrial relations. The whole approach was discredited by the stagflation of the 1970s. Under the leadership of Jacques Delors, European Commission president from 1985 to 1994, and his successors, the EU went in a different direction. It emphasised monetary co-ordination, free capital flows, privatisation and a soft touch in financial regulation.

The older vision was abandoned, but it produced higher growth rates than the model that succeeded it. It also nurtured domestic political institutions rather than undermining them: credibility was painstakingly restored to parliaments and parties.

So, from today’s perspective, the 1950s and 1960s look like a golden age. Its achievement now looks in danger of being undone. For it is not written in stone that Europe will always be identified in the minds of its citizens with growth and democracy. A different future may lie ahead in which Europe is identified instead with stagnation, unemployment and tyranny.

Those preaching austerity probably do not see themselves as contributing to a crisis of democracy, but they are. The Italian elections should remind eurozone leaders to pay attention to their voters. Economic fixes have failed to staunch a political crisis that has the capacity to harm not only EU integration, but the legitimacy of the continent’s democratic order itself.

The writer is a professor of history at Columbia university and author of ‘Governing the World: The History of an Idea’

Copyright The Financial Times Limited 2013.

The Federal Reserve’s not-so-golden rule

By George F. Will

Feb 28, 2013 12:55 AM EST

A display case in the lobby of the Federal Reserve Bank here might express humility. The case holds a 99.9 percent pure gold bar weighing 401.75 troy ounces. 

Minted in 1952, when the price of gold was $35 an ounce, the bar was worth about $14,000. In 1978, when this bank acquired the bar, the average price of gold was $193.40 an ounce and the bar was worth about $78,000.

Today, with gold selling for around $1,600 an ounce, it is worth about $642,800. If the Federal Reserve’s primary mission is to preserve the currency as a store of value, displaying the gold bar is an almost droll declaration: “Mission unaccomplished."

Today the Fed’s second mission is to maximize employment, and Chairman Ben Bernanke construes the dual mandate as a single, capacious assignment — “promoting a healthy economy.” But the Fed’s hubris ignores the fact that it anticipated neither the Great Depression that began in 1929 nor the Great Recession that began five years ago. The Fed failed to cure the former, and today’s unprecedentedly anemic recovery — approximately 3 million fewer people are working than were five years ago — has failed to cure the latter: If the workforce participation rate were as high as it was when Barack Obama was first inaugurated, the unemployment rate would be 10.8 percent.

Jeffrey M. Lacker has become the Fed’s resident dissenter. As a voting member of the Federal Open Market Committee, Lacker, president of the regional bank here, has cast one-third of the dissents recorded during Bernanke’s seven years as chairman. Lacker, who has dissented at more than half the policy meetings where he has been a voting member, has done so in the name of institutional humility.

he told the New York Times, “We’re at the limits of our understanding of how monetary policy affects the economy,” he was too polite. We are increasingly understanding the deleterious effectspolitical as well as economic — of very low interest rates for a very long time.

While Lacker says “a vigorous monetary policy response can be necessary at times to prevent a contraction from becoming a deflationary spiral,” the Fed continues its vigorous pursuit of growth through cheap credit more than four years after the moment of crisis.

Bernanke says using monetary policy to try to influence the political debate on the budget would be highly inappropriate” and “it is important to keep politics out of monetary policy decisions.” But monetary decisions powerfully and predictably influence political debates.

Will Rogers said, “Be thankful we’re not getting all the government we’re paying for.” Today we are not paying for all the government we are getting, and the political class benefiting from this practice should be thankful for the Fed’s low interest rate policy, which makes running deficits inexpensive.

In addition to making big government cheap, this causes a flight of investors from interest-paying assets into equities — the rising stock market primarily benefits the wealthy — and commodities, rather than job-creating investments.

Fed policy, which has failed so far, can also fail by succeeding. If strong economic growth begins, interest rates will rise substantially, and the cost of debt service will cause the deficit to explode.
The Fed’s policy regarding the safety net it weaves beneath large — “systemically important” — financial institutions deemed too big to fail is called “constructive ambiguity.”
Lacker believes the policy is not constructive because it is not really ambiguous. Although bailing out too-big-to-fail firms is discretionary, market participantsdraw inferences for future policy from our past actions.”

Ambiguity, he says, breeds expectations that the Fed will act as rescuer, and these expectations are incentives for risk-taking that can compel the Fed to act. Constructive ambiguity,”
says Lacker, “became increasingly hopeless in the face of accumulating instances of intervention.”

The Fed, born in 1913, is now the
largest buyer of 30-year Treasury securities. And it, not Congress, which supposedly controls the government’s purse strings, funds the $447.7 million Consumer Financial Protection Bureau, which is headed by a person not lawfully in office. (Richard Cordray was installed by Obama by a process that a court has recently ruled amounts to a spuriousrecessappointment made to vitiate the Senate’s power to advise and consent to presidential appointments.) So before blowing out the 100 candles on the Fed’s birthday cake, consider the perverse result of current Fed policy: Although money is promiscuously printed to keep interest rates low, credit is tight as money flows toward high-return assets. Such as gold.

February 27, 2013

A Vatican Spring?



THE Arab Spring has shaken a whole series of autocratic regimes. With the resignation of Pope Benedict XVI, might not something like that be possible in the Roman Catholic Church as well — a Vatican Spring?

Of course, the system of the Catholic Church doesn’t resemble Tunisia or Egypt so much as an absolute monarchy like Saudi Arabia. In both places there are no genuine reforms, just minor concessions. In both, tradition is invoked to oppose reform. In Saudi Arabia tradition goes back only two centuries; in the case of the papacy, 20 centuries.

Yet is that tradition true? In fact, the church got along for a millennium without a monarchist-absolutist papacy of the kind we’re familiar with today.

It was not until the 11th century that a “revolution from above,” the “Gregorian Reform” started by Pope Gregory VII, left us with the three enduring features of the Roman system: a centralist-absolutist papacy, compulsory clericalism and the obligation of celibacy for priests and other secular clergy.

The efforts of the reform councils in the 15th century, the reformers in the 16th century, the Enlightenment and the French Revolution in the 17th and 18th centuries and the liberalism of the 19th century met with only partial success. Even the Second Vatican Council, from 1962 to 1965, while addressing many concerns of the reformers and modern critics, was thwarted by the power of the Curia, the church’s governing body, and managed to implement only some of the demanded changes.

To this day the Curia, which in its current form is likewise a product of the 11th century, is the chief obstacle to any thorough reform of the Catholic Church, to any honest ecumenical understanding with the other Christian churches and world religions, and to any critical, constructive attitude toward the modern world.

Under the two most recent popes, John Paul II and Benedict XVI, there has been a fatal return to the church’s old monarchical habits.

In 2005, in one of Benedict’s few bold actions, he held an amicable four-hour conversation with me at his summer residence in Castel Gandolfo in Rome. I had been his colleague at the University of Tübingen and also his harshest critic. For 22 years, thanks to the revocation of my ecclesiastical teaching license for having criticized papal infallibility, we hadn’t had the slightest private contact.

Before the meeting, we decided to set aside our differences and discuss topics on which we might find agreement: the positive relationship between Christian faith and science, the dialogue among religions and civilizations, and the ethical consensus across faiths and ideologies.

For me, and indeed for the whole Catholic world, the meeting was a sign of hope. But sadly Benedict’s pontificate was marked by breakdowns and bad decisions. He irritated the Protestant churches, Jews, Muslims, the Indians of Latin America, women, reform-minded theologians and all pro-reform Catholics.

The major scandals during his papacy are known: there was Benedict’s recognition of Archbishop Marcel Lefebvre’s arch-conservative Society of St. Pius X, which is bitterly opposed to the Second Vatican Council, as well as of a Holocaust denier, Bishop Richard Williamson.

There was the widespread sexual abuse of children and youths by clergymen, which the pope was largely responsible for covering up when he was Cardinal Joseph Ratzinger. And there was the “Vatileaks affair, which revealed a horrendous amount of intrigue, power struggles, corruption and sexual lapses in the Curia, and which seems to be a main reason Benedict has decided to resign.

This first papal resignation in nearly 600 years makes clear the fundamental crisis that has long been looming over a coldly ossified church. And now the whole world is asking: might the next pope, despite everything, inaugurate a new spring for the Catholic Church?    

There’s no way to ignore the church’s desperate needs. There is a catastrophic shortage of priests, in Europe and in Latin America and Africa. Huge numbers of people have left the church or gone into “internal emigration,” especially in the industrialized countries. There has been an unmistakable loss of respect for bishops and priests, alienation, particularly on the part of younger women, and a failure to integrate young people into the church.

One shouldn’t be misled by the media hype of grandly staged papal mass events or by the wild applause of conservative Catholic youth groups. Behind the facade, the whole house is crumbling.

In this dramatic situation the church needs a pope who’s not living intellectually in the Middle Ages, who doesn’t champion any kind of medieval theology, liturgy or church constitution. It needs a pope who is open to the concerns of the Reformation, to modernity. A pope who stands up for the freedom of the church in the world not just by giving sermons but by fighting with words and deeds for freedom and human rights within the church, for theologians, for women, for all Catholics who want to speak the truth openly. A pope who no longer forces the bishops to toe a reactionary party line, who puts into practice an appropriate democracy in the church, one shaped on the model of primitive Christianity. A pope who doesn’t let himself be influenced by a Vatican-basedshadow pope” like Benedict and his loyal followers.

Where the new pope comes from should not play a crucial role. The College of Cardinals must simply elect the best man.

Unfortunately, since the time of Pope John Paul II, a questionnaire has been used to make all bishops follow official Roman Catholic doctrine on controversial issues, a process sealed by a vow of unconditional obedience to the pope. That’s why there have so far been no public dissenters among the bishops.

Yet the Catholic hierarchy has been warned of the gap between itself and lay people on important reform questions. A recent poll in Germany shows 85 percent of Catholics in favor of letting priests marry, 79 percent in favor of letting divorced persons remarry in church and 75 percent in favor of ordaining women. Similar figures would most likely turn up in many other countries.

Might we get a cardinal or bishop who doesn’t simply want to continue in the same old rut? Someone who, first, knows how deep the church’s crisis goes and, second, knows paths that lead out of it? 

These questions must be openly discussed before and during the conclave, without the cardinals being muzzled, as they were at the last conclave, in 2005, to keep them in line.

As the last active theologian to have participated in the Second Vatican Council (along with Benedict), I wonder whether there might not be, at the beginning of the conclave, as there was at the beginning of the council, a group of brave cardinals who could tackle the Roman Catholic hard-liners head-on and demand a candidate who is ready to venture in new directions. Might this be brought about by a new reforming council or, better yet, a representative assembly of bishops, priests and lay people?

If the next conclave were to elect a pope who goes down the same old road, the church will never experience a new spring, but fall into a new ice age and run the danger of shrinking into an increasingly irrelevant sect.


Hans Küng is a professor emeritus of ecumenical theology at the University of Tübingen and the author of the forthcoming book “Can the Church Still Be Saved?” This essay was translated by Peter Heinegg from the German.