Financial Safety Nets for Asia

Lee Jong-Wha

NOV 12, 2013

Newsart for Financial Safety Nets for Asia

SEOULEmerging economies are facing significant uncertainty and serious downside risks. One major source of instability is the looming reversal of the US Federal Reserve’s expansionary monetary policy – the prospect of which is generating volatility in global financial markets and threatening to disrupt emerging-economy growth.
The Fed has signaled that its federal funds rate will remain near 0%, at least as long as unemployment exceeds 6.5% and inflation expectations remain well anchored. But when and how the Fed will begin tightening monetary policy remains unclear. What is certain is that, in making its decision, the Fed will not consider its policy’s spillover effects on the rest of the world, leaving affected countries’ policymakers and central bankers to deal with the fallout.
Tighter US monetary policy could intensify the global credit shortage, thereby increasing pressure on Asia’s economic and financial systems. Overreaction and herding behavior by market participants could trigger a sudden reversal of capital inflows, with a severe dollar shortage – as occurred in 1997 and 2008straining Asian banks and corporations.
These risks explain why the Fed’s mere suggestion of a potential move toward reducing its purchases of long-term asset (so-called quantitative easing) caused emerging-market currencies and asset prices to plummet this summer. They also underscore Asian economies’ need for stronger financial safety nets.
The 2008 global financial crisis revealed fundamental flaws in the international monetary system, as the failure to ensure sufficient liquidity weighed heavily on emerging Asian economies. Since then, these countries have taken measures to safeguard the stability of their financial systems against volatile external shocks, strengthen financial supervision and regulation, and develop more effective macroeconomic frameworks, including better macro-prudential regulation and capital-control measures. But their heavy reliance on international trade and capital flows means that they remain vulnerable to severe financial spillovers from the United States.
Moreover, since the 1997 Asian financial crisis, the region’s emerging economies have increased their holdings of foreign-exchange reserves, and now possess more than half of the world’s total. Seven of the world’s top ten reserve-holding economies are in Asia. But hoarding international reserves, mostly in the form of low-yielding short-term US Treasury securities, is expensive and inefficient.
Some Asian economies, especially China, are also attempting to internationalize their currencies. Given China’s expanding global influence, the renminbi’s emergence as a new international currency is inevitable. For smaller economies, however, internationalization will be far more difficult.
In their quest to ensure sufficient liquidity, Asian economies have also actively pursued currency-swap arrangements. Since 2008, China has signed 23 bilateral swap agreements, including one with South Korea. Japan expanded bilateral swap facilities with its Asian neighbors during the global financial crisis. And the ten ASEAN countries, together with China, Japan, and South Korea, have constructed a $240 billion regional reserve pool to provide short-term liquidity to members in an emergency.
Such swaps should help Asian countries to cope with currency turmoil in the wake of a Fed policy reversal. But they remain untested and, given their relatively small volumes, cannot reassure markets or provide adequate emergency support to crisis countries, especially in the event of large-scale systemic shocks.
The Fed, as the de facto global lender of last resort, can improve significantly the effectiveness of Asia’s financial safety nets by establishing currency-swap arrangements with emerging economies’ central banks during the policy-reversal process.
In 2008, the Fed established currency-swap lines with the central banks of ten developed economies, including the eurozone, the United Kingdom, Japan, and Switzerland, and four emerging economies (Brazil, South Korea, Mexico, and Singapore). These arrangements, most of which ended in 2010, responded to strains in short-term credit markets and improved liquidity conditions during the crisis. The South Korean central bank’s $30 billion swap, though limited, averted a run on the won.
Reestablishing the Fed’s swap arrangements with emerging economies would minimize negative spillovers during the coming monetary-policy reversal. Even an announcement by the Fed stating its willingness to do so would go a long way toward reassuring markets that emerging economies can avert a liquidity crisis.
The swap lines would also serve American interests. After all, trouble in emerging economies would destabilize the entire global economy, threatening the fragile recoveries of advanced economies, including the US. And, given China’s rise, it is clearly in America’s interest to maintain a balance of economic power in Asia.
Critics might cite the moral-hazard risk generated by liquidity support. But a well-designed framework that offers swap lines only to well-qualified emerging economies – and only temporarily – would diminish this risk substantially.
In fact, some experts, such as the economist Edwin Truman, have proposed establishing an institutionalized global swap arrangement as a more effective and robust crisis-prevention mechanism – an idea that G-20 countries should consider. But creating such a system would take time. In the meantime, the Fed should take the initiative by re-establishing swap lines with advanced and emerging economies alike.

Lee Jong-Wha, Professor of Economics and Director of the Asiatic Research Institute at Korea University, served as Chief Economist and Head of the Office of Regional Economic Integration at the Asian Development Bank and was a senior adviser for international economic affairs to former President Lee Myung-bak of South Korea.

November 12, 2013 7:18 pm

Why Draghi was right to cut rates
National divisions undermine the legitimacy of the monetary union
Ingram Pinn illustration©Ingram Pinn
The monetary policy of the European Central Bank has been too tight. This is shown in the fall of core annual inflation to just 0.8 per cent in the year to October 2013. The case for the monetary easing undertaken last week was overwhelming. Indeed, it was long overdue.
Yet, it has been leaked, the decision to cut the refinancing rate from ½ per cent to ¼ per cent split the council. Both German representativesJörg Asmussen, a member of the ECB’s board, and Jens Weidmann, head of the Bundesbank – as well as the heads of the central banks of the Netherlands and Austria voted against this move.

State of the unión

Open splits on national lines have emerged previously, but only over controversial programmes such as the Securities Markets Programme, launched under Jean-Claude Trichet, Mario Draghi’s predecessor as president of the ECB, and the Outright Monetary Transactions programme, launched by Mr Draghi in the summer of 2012. Both of these initiatives were intended to relieve market pressure on sovereign bonds. That was bound to be controversial, given German hostility to monetary financing of governments. But such splits over standard monetary policy decisions are new. This matters: they endanger the legitimacy of the ECB – and so of the monetary union.
Some have accused Mr Draghi of acting in the interests of Italy – and the objections of German representatives to the easing are bound to stimulate such suspicions. Yet the case for a cut in the ECB’s standard policy rate is, in truth, overwhelming: core inflation is now less than half the ECB’s target of “below, but close to, 2 per cent”.
As Mr Draghi argued, there are compelling reasons for not putting up with inflation below that level. First, an inflation rate recorded at 2 per cent might, in truth, be close to zero: inflation is almost certainly exaggerated at the moment in conventional measurements.

Second, needed changes in competitiveness inside the eurozone would be difficult even if average inflation were 2 per cent. They would be far harder at close to zero, given the resistance of workers to nominal wage cuts.

Third, monetary policy tends to be more ineffective the closer inflation comes to zero, partly because depressed economies may well need negative real interest rates – which are much easier to implement when inflation rates are positive.

To these I would add a fourth: the eurozone risks falling into deflation, given excess capacity and high unemployment. The ECB says that inflation expectations are anchored. That might be overconfident.

It is easy to identify other reasons why policy has been too tight. Between the first quarter of 2008 and the second quarter of 2013, nominal eurozone demand expanded by just 1 per cent. Nominal gross domestic product grew by a mere 3.4 per cent. Moreover, so-called M3 money – a measure of the “broadmoney supply – has been virtually stagnant since late 2008. (See charts.)

What, then, are the arguments against the last Thursday’s decision? One was that the decision could well be postponed. But it has already been postponed too long: the longer the delay, the greater the danger. A second concern is that this move brings unconventional measures even closer. But the less promptly the ECB uses conventional measures, the greater the likelihood that extreme ones will be needed. If the ECB had moved rates decisively towards zero in 2010, it might have avoided at least some of today’s difficulties.

Another complaint is that interest rates on German savings are too low. As Benoît Cœuré, a member of the ECB Board, has argued, this is just wrong. First, savings have little value during a deep slump, such as that in the eurozone.
Second, the principal determinant of the return on German savings is the long-term yield on German Bunds, which is now 1.8 per cent on 10-year debt. But it is the slump, plus Germany’s role as a safe haven, that creates such low rates. The less effective is the support provided to the eurozone economy, the more Bunds will stay a safe haven and the lower the return on German savings.
A final concern is that the monetary policy of the ECB is unsuitable for Germany and might even cause asset price bubbles. This is surely true, just as the monetary policy pursued before 2007 was unsuitable for Ireland and Spain and did indeed drive asset price bubbles. A central bank called upon to deliver a target rate of inflation in a union of diverse economies will destabilise nearly all the members at some time. But that is what joining a currency union entails for all members, including even the largest.

Between 2001 and 2007, the average core inflation rate of the eurozone was 1.8 per cent, with Germany on 1.1 per cent and Ireland, Greece, Portugal and Spain close to 3 per cent. If the overall inflation rate is to remain close to 2 per cent, while the inflation rates of the latter four countries, plus Italy, are to be well below this average, that of Germany and other surplus countries needs to be well above 2 per cent. Otherwise, overall inflation will be far too low.

Moreover, real short-term interest rates are likely to be negative in these higher-inflation countries, just as they were for those now in difficulty, before 2008. Efforts to resist such adjustments guarantee a persistent crisis and so the low interest rates the critics detest.

Many in Germany might conclude that they would be better off outside the eurozone. I sympathise, But they should be careful what they wish for. In the absence of a currency union, a putative D-Mark would soar. The impact of a large real appreciation of the new currency would be similar to what has befallen Japan: large parts of German manufacturing output would shift into neighbouring countries; the economy would surely be pushed into a recession; and domestic prices would probably fall.

Without heroic unconventional measures, to which the Bundesbank is fiercely opposed, the deflationary spiral might be steep. Some Germans would benefit. But the dislocations could be huge.

Compared to that, the costs associated with a successful eurozone adjustment, including a period of, say, 3 per cent inflation in Germany, would hardly be excessive.

Yes, the ECB cannot deliver optimal monetary policy for Germany: it is not supposed to do so. But it might still be far better tan alternatives.

Copyright The Financial Times Limited 2013.

The Myth of Organic Agriculture

Henry I. Miller

NOV 11, 2013  .Newsart for The Myth of Organic Agriculture  

STANFORDOrganic products – from food to skin-care nostrums to cigarettes – are very much in vogue, with the global market for organic food alone now reportedly exceeding $60 billion annually. The views of organic devotees seem to be shared by the European Commission, whose official view of organic farming and foods is, “Good for nature, good for you.” But there is no persuasive evidence of either.


A 2012 meta-analysis of data from 240 studies concluded that organic fruits and vegetables were, on average, no more nutritious than their cheaper conventional counterparts; nor were they less likely to be contaminated by pathogenic bacteria like E. coli or salmonella – a finding that surprised even the researchers. When we began this project,” said Dena Bravata, one of the researchers, “we thought that there would likely be some findings that would support the superiority of organics over conventional food.”

Many people purchase organic foods in order to avoid exposure to harmful levels of pesticides. But that is a poor rationale. While non-organic fruits and vegetables had more pesticide residue, the levels in more than 99% of cases did not cross the conservative safety thresholds set by regulators.
Moreover, the vast majority of the pesticidal substances found on produce occur “naturally” in people’s diets, through organic and conventional foods. The biochemist Bruce Ames and his colleagues have found that99.99% (by weight) of the pesticides in the American diet are chemicals that plants produce to defend themselves. Only 52 natural pesticides have been tested in high-dose animal cancer tests, and about half (27) are rodent carcinogens; these 27 are shown to be present in many common foods.”
The bottom line is that natural chemicals are just as likely as synthetic versions to test positive in animal cancer studies, and “at the low doses of most human exposures, the comparative hazards of synthetic pesticide residues are insignificant.” In other words, consumers who buy expensive organic foods in order to avoid pesticide exposure are focusing their attention on 0.01% of the pesticides that they consume.
Ironically, in both Europe and North America, the designation organic” is itself a synthetic bureaucratic construct – and it makes little sense. It prohibits the use of synthetic chemical pesticides, with some pragmatic exceptions. For example, the EU’s policy notes that “foreseen flexibility rules” can compensate for “local climatic, cultural, or structural differences.” When suitable alternatives are lacking, some (strictly enumerated) synthetic chemicals are allowed.
Similarly, in the US, there is a lengthy list of specific exceptions to the prohibitions. But most naturalpesticides – as well as pathogen-laden animal excreta, for use as fertilizer – are permitted.
Another rationale for buying organic is that it is supposedly better for the natural environment. But the low yields of organic agriculture in real-world settingstypically 20-50% below yields from conventional agricultureimpose various stresses on farmland and increase water consumption substantially.

According to a recent British meta-analysis, ammonia emissions, nitrogen leaching, and nitrous-oxide emissions per unit of output were higher in organic systems than in conventional agriculture, as were land use and the potential for eutrophication adverse ecosystem responses to the addition of fertilizers and wastes – and acidification.
An anomaly of howorganic” is defined is that the designation does not actually focus on the food’s quality, composition, or safety. Rather, it comprises a set of acceptable practices and procedures that a farmer intends to use. For example, chemical pesticide or pollen from genetically engineered plants wafting from an adjacent field onto an organic crop does not affect the harvest’s status. EU rules are clear that food may be labeled as organic as long as “the ingredients containing [genetically modified organisms] entered the products unintentionally” and amount to less than 0.9% of their content.
Finally, many who are seduced by the romance of organic farming ignore its human consequences. American farmer Blake Hurst offers this reminder: “Weeds continue to grow, even in polycultures with holistic farming methods, and, without pesticides, hand weeding is the only way to protect a crop.” The backbreaking drudgery of hand weeding often falls to women and children.
Of course, organic products should be available for people who feel that they must have and can afford them. But the simple truth is that buying non-organic is far more cost-effective, more humane, and more environmentally responsable.

Henry I. Miller, a physician and fellow in Scientific Philosophy and Public Policy at Stanford University’s Hoover Institution, was the founding director of the Office of Biotechnology at the US Food and Drug Administration. His most recent book is The Frankenfood Myth.

The Dollar Is Losing Utility As World Reserves Shift - But What Of Gold's Role?

"China's call for 'a de-Americanized world' is a clear sign of growing impatience with Washington's irresponsibility. […] From China, Russia, Europe, and South America voices are rising against Washington's lawlessness and recklessness. This changed attitude toward the U.S. will break up the system of dollar imperialism."

- Dr. Paul Craig Roberts

Between optimism and pessimism lies realism. Always the optimist, today, I find myself forced to be a realist - a realist in a manure field of surreal nature. How high is it piled?

There was a time when traveling to many foreign lands did not require a passport. All anyone needed was a smile and a pile of U.S. dollars to move around. Those greenbacks were good as gold. But, those days are gone for the traveler. And those days are more than numbered for the dollar, more aptly termed the Federal Reserve note.

The purpose of this article is not to ignite a political discussion. Though misguided politics and bad policies are front and center of this problem, rather than point fingers, let's look at factual indicators painting a grim picture for the U.S. dollar's continued world dominance.

Another nail in the coffin

The first and most obvious threat to dollar dominance starts at home with the devaluation of the dollar as it is happening right now in accelerated fashion with piles of currency and debt being poofed into existence by the Federal Reserve and its fractional banking system. That, with wavering trust and faith in U.S. policy makers - exacted by the debt ceiling fiasco and government shutdown, among other reasons - puts another nail in the dollar's coffin.

And U.S. body politic has left the Fed little wiggle room. We'll soon see Bernanke, Yellen and friends having no choice but to pump up the volume as the deficit has widened and the economy has taken another hit.

The Fed is trapped

The Fed is easing itself into an even tighter corner as the rest of the world watches. And as the world monetary system continues to evolve (or devolve), gold remains the foundation asset that balances risks present in all fiat currencies the most important of which is the U.S. dollar and the risks now closely associated with it.

Doctor Paul Craig Roberts, the former U.S. Assistant Treasury Secretary who is credited with co-creating Reaganomics, today keeps a keen eye on the macroeconomic landscape. Dr. Roberts has an astute opinion on what he sees, saying in a recent interview:

"The October 2013 U.S. government partial shutdown and debt default threat resulted in the unprecedented currency swap agreements between the Chinese central bank and the European central bank and between the Chinese central bank and the Bank of England. The reason given for these currency swaps was necessary precaution against dollar disruption. In other words, U.S. instability was seen as a threat to the international payments system. The dollar's role of reserve currency is not compatible with the view that precautions must be taken against the dollar's possible failure or disruption."
There couldn't be more clear an indicator of trouble ahead than the Bank of England and European Central Bank agreeing with China to swap currencies. They're U.S. allies, right? Like Australia, right? Why has London vowed to be the western hub for yuan distribution? Could it have anything to do with the recently reported mass tonnage of gold migrating from vaults in London to Switzerland and then on to Hong Kong and Shanghai?

It may be of interest to note that 77% of the gold imported by the United Kingdom and Switzerland combined comes from the B in BRICS, Brazil - the 13th largest gold producer in the world.

Gold bars from Brazil, Photo:

The petro-dollar bypass

Already nations that are not U.S. allies are settling their own trade differences in their own currencies as faith and trust in USD is lost. Deputy Governor of the South African Reserve Bank, Daniel Mminele is already on record saying South Africa will be diversifying into new asset classes (read gold) and new currencies outside of the USD not only because they believe asset purchases by the Fed have significantly elevated prices for U.S. Treasuries, but to lessen the impact that a possible Fed tapering could have on the their economy. With more than 60% of South African foreign exchange reserves held in USDs, (consistent with U.S. holdings in many other nations) they have a lot to lose.

But what's the real scoop on a Fed taper, Dr. Roberts?

"… central banks and some investors have realized that the Federal Reserve is locked into the policy of supporting bond prices. If the Federal Reserve ceases to support bond prices, interest rates will rise, the prices of debt-related derivatives on the banks' balance sheets will fall, and the stock and bond markets would collapse. Therefore, a tapering off of quantitative easing risks a financial panic."

But, then, what if the Fed continues QE, sir?

"… continuing the policy of supporting bond prices [QE] further erodes confidence in the U.S. dollar. Vast amounts of dollars and dollar-denominated financial instruments are held all over the world. Holders of dollars are watching the Federal Reserve dilute their holdings by creating 1,000 billion new dollars per year. The natural result of this experience is to lighten up on dollar holdings and to look for different ways in which to hold reserves. The Federal Reserve can print money with which to purchase bonds, but it cannot print foreign currencies with which to purchase dollars."
South Africa is not alone in looking for different ways to hold reserves. The entire BRICS block of companions (Brazil, Russia, India and China among them) are all doing the same thing and are already settling their own bills with each other in their own currencies, completely circumventing USD, while it's reported some are using gold and infrastructure construction to barter with Iran.

Brazil is the latest emerging economy to buy gold, doubling its central bank holdings to 2.16 million ounces since August according to, as concerns about quantitative easing and competitive devaluation by the U.S. Federal Reserve drives reserve managers toward hard assets.

Central banks in Latin America have recently joined those in Asia and the Middle East in adding to their gold reserves: in addition to Brazil, others including Mexico, Colombia, Paraguay and Argentina have recently bought bullion.

In total, central banks have purchased 500 tons of gold this year, the most since 2008, according to Bullion Week.

What's the plan?

It appears China is a driving force in dethroning the dollar, which should not surprise anyone given China's insatiable appetite for stock piling gold as many suspect the People's Republic plans to one day back its yuan (renminbi) with gold.

Chinese gold consumption has doubled in the past year with the Federal Reserve's price suppression helping the nation to accumulate gold at reasonable cost, according to an article in China is buying the only money with a fixed supply, according to the article, at a time of massive money printing by global central banks.

And the People's Republic of China is taking full advantage of the new private gold vault opened in Shanghai's "free trade zone" by storing its gold unofficially among the inventories of other nations as China's gold demand alone may rise by as much as 30% this year.

Private bullion vault, Shanghai Free Trade Zone. Photo:

Down under

But do other U.S. allies figure in to the dollar snub? Yes, the Australian government just reached a direct, bilateral trade agreement with China making the Communist state Australia's newest and biggest trade partner. All commerce is to be settled in their respective national currencies.

But even more interesting is the agreement's rider to openly trade each other's currencies. The Aussie dollar is now the third major world currency along with the dollar and yen to openly trade on the Chinese mainland's currency exchange.

Australian Prime minister, Jillian Gillard was happy to announce to world media on her trip to China earlier this year that:

"The important Chinese government policy objective of greater internationalization of the Chinese currency will be significantly advanced by these decisions."

But what of oil consumption and the petro-dollar?

Australia is the worlds' largest producer and exporter of uranium with China already importing 22% of its uranium supply from down under and paying with yuan. Together with another BRICS nation, India (paying with rupees) - China and India plan to bring 35 nuclear reactors online over the next two decades. Uranium will become tantamount to not only their mutual growth but, the survival of their populations.

Rising energy demand from the world's most populous countries like China and India will boost Australia's uranium industry, says Australian Resources and Energy Minister Gary Gray as he further reiterated:

"[T]wo important drivers of nuclear power remain unchanged - the rising energy demand from growing populations and the need to reduce greenhouse gas emissions."

Russia is another key uranium target for Australia the Resources and Energy Minister said.

So, with Brazil, Russia, India, China, South Africa, Japan, Australia, England, the Euro Zone among many others finding their own way without the U.S. dollar, what could this mean for the world's super power and its world reserve currency?

And Americans brace for what's to come in January and February in DC.

Dr. Roberts believes there will be serious repercussions felt if the October showdown plays out again in January/February, saying:

"there has been a change in attitudes toward the U.S. dollar and acceptance of U.S. financial hegemony. […] a repeat of the October impasse would further erode confidence in the dollar."

Eroding confidence in the dollar will not just be an international phenomenon, it will soon be as prevalent on Main Street, USA as it is in Tiananmen Square. So, why do some experts feel it important to hold physical silver and gold? Well, would you feel more secure holding USD or another country's paper currency? And why are most of those countries themselves stocking up on the metal?

With China leading the charge for a "de-Americanized" world

What could happen if the U.S. gets ruffled enough to intervene? After all the U.S. invaded Iraq because Saddam Hussein was trying to close a deal to sell Iraqi oil to Europe in exchange for Euros. And the U.S. took exception with Libya when Momar Quadafi tried moving oil to Russia in exchange for gold. What then might happen in an American/Chinese stare-down?

Dr. Roberts thinks:

"China could destabilize the U.S. dollar by converting its holdings into dollar currency and dumping the dollars into the exchange markets. The Federal Reserve would not be able to arrange currency swaps with other countries large enough to buy up the dumped dollars, and the dollar's exchange value would fall. Such an action could be a Chinese response to military encirclement by Washington. 
In the absence of a confrontation, the Chinese government is more likely to gradually convert its dollars into gold..."

What's an investor to do?

How does one play what looks to be an approaching end game? Is there enough time left to make money by playing paper gold, say with options? There are those who swear volatility in itself is a trade. Do you short futures in the SPDR Gold Trust ETF (GLD) and hope to offset calls to hedge? Or do you go long?

Do you short the U.S. dollar because you believe what you've read here? Open a position in the PowerShares DB USD Bear ETF (UDN) and ride it to the end? Or do you go crazy bull and triple bear down with a position in the PowerShares DB 3x Short U.S. Dollar Index Futures ETN (UDNT) because you're that certain?

Or should you do what most central banks, especially those in the east, and some western contrarians are doing and that is buy and hold physical gold and silver?

I might add Mario Draghi, head of the European Central Bank, is on record saying, he never thought it wise to sell gold because for a central bank "it is a reserve of safety." Kudos to Mr. Draghi for his candor, there is no Fed-speak there.

None of us, in our lifetimes in the U.S., have ever seen an end game play-out. And if we do this time around, chances are good we'll never see one again. I have a strong idea for my game plan, but I might be wrong. That's why it's important for each of us think about what is going on in a geo-political, macroeconomic sense and the possible resulting ramifications that may or may not occur and not be caught off guard.

Dr. Paul Craig Roberts is pretty smart.

I get the feeling he might think the window of opportunity to fix this thing passed in 2008 when, he says, the banks should have been allowed to fail. Now he thinks in order to avoid an "immediate crisis", the Federal Reserve has no choice but to continue a policy that will produce a crisis down the road rather than now. He's convinced:

"It is either a financial crisis now or a dollar crisis later."