Re-Empowering the Global Economy

Christine Lagarde

JAN 9, 2014

Newsart for Re-Empowering the Global Economy

WASHINGTON, DCThe global economy in 2013 remained suspended between the poles of hope and uncertainty. While recovery gained momentum, particularly in some advanced economies, the world economy is not yet flying on all engines – and is likely to remain underpowered next year as well.

The International Monetary Fund’s latest forecast puts global GDP growth at 3.6% in 2014, which is decent, but still below potential growth of around 4%. In other words, the world could still generate considerably more jobs without fueling inflationary pressure.

This means that the IMF’s members – whether advanced, emerging-market, or developing economieshave more work to do. A strong and lasting recovery that lifts all countries and all peoples requires policymakers to press ahead on all frontsfiscal, structural, and financial. At the same time, the international community must reinvigorate its efforts to strengthen cooperation through the G-20, the IMF, and other actors. Indeed, only through such collaboration can we overcome the lingering impact of the global crisis.

We have certainly avoided the worst-case scenario (Great Depression II) over the past five years, thanks to the efforts of global policymakersparticularly the determination of central banks to keep global interest rates low and to support the financial system, coupled with fiscal stimulus in some countries. But the time has come to push further, including by using the room created by unconventional monetary policies to implement structural reforms that can jump-start growth and create jobs.

What happens in advanced economies is central to global prospects; and, despite their stronger performance recently, the risks of stagnation and deflation continue to loom large. Central banks should return to more conventional monetary policies only when robust growth is firmly rooted.

The United States has long been the main engine driving the global economy, and private demand there has regained vigor. But key challenges lie ahead. For example, it is vitally important that policymakers follow through on the recent budget agreement and end the political wrangling over the country’s fiscal future. Greater certainty about the direction of policy could restore growth to a level that would lift the entire global economy.

In Japan, recovery has been spurred by the mix of aggressive monetary and fiscal policies known as “Abenomics.” This is an important development. The challenge now is to agree on medium-term fiscal adjustments and implement the structural reforms – including deregulation of product and service markets and measures to boost the share of women in the workplace – that are needed to give growth a firm foundation and finally banish the specter of deflation.

Europe is also at a key juncture. The eurozone is finally showing signs of recovery, but growth is uneven and unbalanced. While many countries are doing well, demand in general remains weak, and unemployment in the periphery remains obstinately high, particularly for young people.

One area of uncertainty for Europe is the health of its banks. The forthcoming stress tests and asset-quality review can help restore confidence and advance financial integration, but only if they are conducted well. Europe also needs to boost demand, strengthen its financial and fiscal architecture, and put in place structural reforms to ensure sustained growth and job creation.

Over the past half-decade, the emerging markets have been in the vanguard of economic recovery: together with developing countries, they have accounted for three-quarters of global GDP growth. But these economies’ momentum slowed in 2013, as uncertainty about the timing of monetary-policy normalization in the US coincided with doubts about the sustainability of their growth path.

While the worst fears have faded, the emerging economies face new policy challenges. In responding to slower demand, policymakers must be wary of financial excess, especially in the form of asset bubbles or rising debt. They should also focus on strengthening financial regulation, in order to manage credit cycles and capital flows more effectively, and on reestablishing fiscal room for maneuver.

Low-income countries have been a bright spot for the global economy over the last five years as well. They proved resilient in the face of crisis, and many – especially in Africa, where annual output rose by about 5% in 2013 – are enjoying strong growth. Now is the time to build on these gains, primarily by strengthening these countries’ capacity to raise revenues. With demand from emerging markets weakening, low-income countries should bolster their defenses against a serious downturn, even as they continue to focus their spending on key social programs and infrastructure projects.

Middle Eastern countries in transition face additional challenges in the form of social instability and political uncertainty. These problems should be addressed by laying the groundwork for dynamic, transparent economies, promoting more inclusive growth, and ensuring continued support from the international community.

While challenges vary by country and region, many common problems must be addressed in the years ahead. Too many countries face a legacy of high public and private debt, fiscal and current-account imbalances, and growth models that are unable to generate enough jobs. The international community also needs to complete the regulatory reforms required to create a safer financial system that better supports the needs of the real economy.

These are not abstract challenges. Only by addressing them can we ensure future prosperity at a time when billions of people have rising aspirations – to find jobs, to rise out of poverty, and to one day join the global middle class.

In 2014, we need to take the steps that would help make this dream a reality. The IMF is committed to working with its 188 member countries to define and implement the policy measures that can power the engines of growth – and lift all people to renewed prosperity.

Christine Lagarde is Managing Director of the International Monetary Fund. She previously served as France’s finance minister from 2007-2011, and in 2009 was named by the Financial Times as the best finance minister in the eurozone.

January 12, 2014 2:04 pm

The tide is rising for America’s libertarians

The new spirit in a rising climate of anti-politics has become an attitude, rather than a movement
Robert Nozick, the late US libertarian, smoked pot while he was writing Anarchy, State and Utopia. He would applaud the growth of libertarianism among today’s young Americans. Whether it is their enthusiasm for legalised marijuana and gay marriageboth spreading across the US at remarkable speed – or their scepticism of government, US millennials no longer follow President Barack Obama’s cue. Most of America’s youth revile the Tea Party, particularly its south-dominated nativist core. But they are not big-government activists either. If there is a new spirit in America’s rising climate of anti-politics, it is libertarian.
On the face of it this ought to pose a bigger challenge to the Republican partyat least for its social conservative wing. Mr Obama may have disappointed America’s young, particularly the millions of graduates who have failed to find good jobs during his presidency. But he is no dinosaur. In contrast, Republicans such as Rick Santorum, the former presidential hopeful, who once likened gay sex to “man on dog”, elicit pure derision. Even moderate Republicans, such as Chris Christie, who until last week was the early frontrunner for the party’s 2016 nomination, are considered irrelevant. Whether Mr Christie was telling the truth last week, when he denied knowledge of his staff’s role in orchestrating a punitive local traffic jam, is beside the point. Mr Christie’s Sopranos brand of New Jersey politics is not tailored to the Apple generation.

The opposite is true of Rand Paul, the Kentucky senator, whose chances of taking the 2016 prize rose with Mr Christie’s dented fortunes last week. Unlike Ron Paul, the senator’s father, who still managed to garner a large slice of the youth vote in 2008, Rand Paul eschews the more outlandish fringes of libertarian thought. Rather than promising an isolationist US withdrawal from the world, he touts a more moderatenon-interventionism”.

Instead of pledging to end fiat money, he promises to audit the US Federal Reserve – “mend the Fed”, rather thanend the Fed”. Both find echo among the Y generation. So too does his alarmism about the US national debt. Far from being big spenders, millennials are more concerned about US debt than other generations, according to polls.

They are also strongly in favour of free trade. More than a third of the Republican party now identifies as libertarian, according to the Cato Institute. Just under a quarter of Americans do so too, says Gallup.

All of which looks ominous for Ted Cruz, the Texan Republican whose lengthy filibuster against Obamacare last year lit the fuse for the US government shutdown. Mr Cruz, also a 2016 aspirant, leads the pugilistic wing of the Republican party that is prepared to burn the house down in order to save the ranch. Although also a Tea Partier, Mr Paul is cultivating a sunnier Reaganesque optimism that draws on the deep roots of US libertarianism. His brand of politics also strikes a chord with those who fear the growth of the US surveillance state – the types who view Edward Snowden (another millennial) as a hero rather than a traitor. Last year the US House of Representatives came within 12 votes of passing a bill to defund the National Security Agency. Mr Paul led the bill in the Senate. Next time they could succeed.

What does it mean for the Democrats? In terms of social values, libertarians are almost identical to liberals. Smoking pot and same-sex marriage both meet with big approval. The same is not necessarily true of guns. In spite of recent school massacres, 40 US states now haveconcealed weaponslawsmany passed in the past 12 months. Again, millennials are surprisingly sceptical of gun control, say the polls. But it is on economic policy where they really part company with liberals.

The Great Depression helped forge a generation of solid Democrats. The same does not appear to be true of the Great Recession. Franklin Roosevelt helped dig people out of misery in the 1930s by providing direct public employment. Mr Obama, on the other hand, has stuck largely to economic orthodoxy. He may have missed a golden opportunity to mould a generation of social democrats.

He has also inadvertently fuelled scepticism about the role of government. Mr Obama came to power in 2008 on a surge of voluntarism.
He did so in part by appealing to youthful idealism about public service. That now feels like a long time ago. Distrust in public institutions has continued to rise during his presidency most strongly among the youngest generation. The share of voters who identify as independents, rather than Democrats or Republicans, recently hit an all-time high of 42 per cent, according to Gallup. This is bad news for established figures in either party – and, indeed, in any walk of life. Hillary Clinton should beware. So should Jeb Bush.

On the minus side, libertarians have no real answer to many of America’s biggest problemsnot least the challenges posed to US middle-class incomes by globalisation and technology. Nor are they coherent as a force.

Libertarianism is an attitude, rather than an organisation. It is also potentially fickle. Young Americans disdain foreign entanglements. That could change overnight with a big terrorist attack on the homeland. They feel let down by Democrats and hostile to mainstream Republicans. Yet they could flock to an exciting new figure in either party. Theirs is a restless generation that disdains authority. Establishment figures should take note. Tomorrow belongs to them.

Copyright The Financial Times Limited 2014

The Perilous Retreat from Global Trade Rules

Pascal Lamy

JAN 9, 2014
Newsart for The Perilous Retreat from Global Trade Rules

GENEVAOver the last half-century, the world has been undergoing a “great convergence,” with per capita incomes in developing countries rising almost three times faster than those in advanced countriesBut developments in 2013 revealed that the open trade regime that has facilitated this progress is now under grave threat, as stalemate in multilateral trade negotiations spurs the proliferation of “preferential trade agreements” (PTAs), including the two biggest ever negotiated – the Trans-Pacific Partnership (TPP), and the Trans-Atlantic Trade and Investment Partnership (TTIP).

The rules and norms arising from the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have underpinned the export-led growth model that has enabled developing countries to lift millions of people out of poverty. The irony is that large developing economies’ rise to systemic significance is at the heart of the current deadlock in multilateral trade negotiations.

Advanced countries argue that emerging economies should embrace reciprocity and establish trade regimes similar to their own. Emerging economies counter that their per capita incomes remain far lower than those of their developed counterparts, and insist that addressing their enormous development challenges demands flexibility in terms of their trade obligations. The resulting stalemate has impeded meaningful discussion of the main issues – including non-tariff measures, export restrictions, electronic commerce, exchange rates, and the trade implications of climate-change-related policies raised by an open global economy.

Against this background, mega-PTAs seem poised to re-shape world trade. The TPP negotiations involve a dozen Asian, Latin American, and North American countries, including Japan, Mexico, and the United States; the TTIP would encompass the world’s two largest economies, the European Union and the US; and the Regional Comprehensive Economic Partnership (RCEP) includes 16 Asia-Pacific countries. Japan is also developing an agreement with China and South Korea, as well as a deal with the EU.

Such PTAs are said to have the potential to improve conditions well beyond the borders of the countries involved. If either the TPP or the TTIP produces meaningful reforms to trade-distorting farm subsidies – becoming the first non-multilateral agreement to do so – the benefits will be truly international. But the PTAs that now exist or are being negotiated focus more on regulatory issues than tariffs, and would therefore require participants to reach agreement on a wide range of rules covering, for example, investment, fair competition, health and safety standards, and technical regulations.

This presents a number of obstacles. While some non-tariff measures might be easy to dismiss as protectionist, many others serve legitimate public-policy objectives, such as consumer safety or environmental protection, making it difficult to ensure that they do not conflict with the basic principles of fairness and openness.

Moreover, such agreements can lock various groups into different regulatory approaches, raising transaction costs for domestic traders and making it difficult for external goods and services to penetrate the bloc. Such market segmentation could disrupt supply chains and lead to efficiency-damaging trade diversion.

Finally, the ability of mega-PTAs to set norms that benefit non-participants might prove to be more limited than many believe. Transatlantic trade rules on currency valuation, for example, might leave Japan indifferent. And specific rules to protect intellectual property could do nothing more than prevent Brazil and India from participating.

Overcoming these obstacles will require, first and foremost, some level of coherence among PTAs, with the various deals following roughly similar principles when addressing regulatory issues. Furthermore, if regionalism comes to be perceived as coercive and unfriendly, countries could form defensive trade blocs, leading to economic fragmentation and heightened security tension. To prevent such an outcome, the deals should be relatively open to newcomers and amenable to the possibility of “multilateralization.”

But the need for policy coherence extends beyond the mega-PTAs. Optimal outcomes for international trade require attention at all levels to the interface between trade and a host of other policy areas.

Consider food security. Effective national policies concerning land, water, and natural-resource management, infrastructure and transport networks, agricultural-extension services, land-ownership rights, energy, storage, credit, and research are as important as trade arrangements to transferring food from surplus countries to those in need.

Likewise, regional cooperation on water and infrastructure is critical to improving diplomatic relations and establishing well-functioning markets. And, at the multilateral level, agricultural production and trade is influenced by policies on subsidies, tariffs, and export restrictions (although the latter are not currently governed by strict WTO rules).

Despite the great value of regional cooperation and coherent national policies, a functional multilateral trade system remains vital. In order to reinvigorate multilateral trade cooperation, governments must work together to address unresolved issues from the Doha agenda, such as agricultural subsidies and tariff escalation. To be sure, the agreement reached at the WTO’s recent ministerial conference in Bali represents a boon for world trade and multilateral cooperation.

But governments must expand the agenda to include guidelines aimed at ensuring that mega-PTAs do not lead to economic fragmentation. Future WTO rules on export restrictions could help to stabilize international markets for agricultural commodities. Trade in services could be liberalized further, and industrial subsidies could prevent countries’ green-innovation objectives from getting lost amid pressure to boost employment at home.

Moreover, global rules on investment could enhance the efficiency of resource allocation, while international guidelines for competition policy would serve the interests of consumers and most producers more effectively than the existing patchwork system. Increased cooperation with the International Monetary Fund on exchange-rate issues, and with the International Labor Organization on labor standards, could diminish trade tensions and enhance trade’s contribution to improving people’s lives.

A shared strategy for addressing non-tariff measures would help countries to avoid unnecessary trade friction. And new developments in energy production might facilitate more meaningful international cooperation on energy trade and investment.

All of this would require that emerging economies accept eventual alignment of their trade commitments with those of advanced economies, and that advanced countries accept that emerging countries deserve long transition periods. In 2014 and beyond, all parties must recognize that, in a multipolar world, an international trading system based on an updated set of rules is the least risky means of pursuing their growth objectives. The recent WTO agreement reached in Bali on streamlining border protocols, among other issues, shows that important steps in this direction can indeed be taken.

Pascal Lamy, former Director General of the World Trade Organization, is Chair of the Oxford Martin Commission for Future Generations.

Second-Greatest Opportunityto Buy Gold

January 2014                                                                                  
By Nick  Barisheff

As presented by Nick Barisheff at the 20th Annual Empire Club
Investment Outlook Luncheon | January 9, 2014 | Toronto, Canada

Good afternoon.

Last year, a year that saw gold’s greatest decline in 32 years, my book $10,000 Gold was published. How’s that for timing.

However, I’m confident that gold’s bullish fundamentals are still intact.

Last year the COMEX futures exchange distorted gold prices, and provided investors with the second-greatest opportunity to buy gold since 2002.

On April 12 the gold price declined by $150 per ounce, and on June 20 by $80 per ounce, because of the naked short selling of futures contracts.

These precipitous drops triggered sell stops and margin calls, and the Western media jumped in to declare that the bull market in gold was over.

In sharp contrast to the falling price of paper gold, the demand for physical gold soared. Many retail coin stores ran out of stock, and premiums rose as much as 20% for gold and 40% for silver.

The lower gold price presents a problem for miners. Because average mine production costs exceed $1,200 per ounce, many high-cost producers will be forced to shut down, causing supply and demand pressure

Clearly, the physical price of gold cannot decline further for any length of time, and the correction is close to a bottom.

In addition, the days of COMEX dominance in gold price setting are numbered, since monthly deliveries on the Shanghai Exchange already surpass mine supply.

The main driver of the gold price is, and always has been, increasing money supply.

“An increase in the money supply” is the very definition of inflation, as it devalues currency and destroys purchasing power. If increasing money supply led to prosperity, Zimbabwe would be the richest country in the world.

Gold Price & U.S. Debt Ceiling

This chart shows that gold and U.S. government debt have shared a lock-step relationship since
2001. Despite the divergence in 2013, over the longer term, gold and U.S. debt should return to the mean.

Official U.S. public debt currently stands at $17.3 trillion. In order to bring the debt-to-gold relationship back into equilibrium, gold should be at $1,800 today.

Since there is no political will to curtail debt increases or introduce austerity measures, I believe gold will surpass $1,800 and likely set new highs in 2014.

And it’s not just the U.S. Ever since President Nixon closed the gold window in 1971, the world has been in a global fiat currency experiment where every dollar in existence has been created through the issuance of new debt.

Without the stability of gold backing, this has encouraged unbridled currency creation and reckless credit expansion at an exponentially increasing rate, taking fewer and fewer years to double.

Since President Obama took office in 2008, U.S. cash debt has increased from about $10 trillion to over $17 trillion today. This figure does not take into consideration the very real $127 trillion in unfunded liabilities such as Medicare, the Prescription Drug Plan and Social Security, for which taxpayers will ultimately be responsible.

Today, this works out to $1.1 million for each U.S. taxpayer.

The debt build up is not limited to the US but includes most western economies. The systemic risks that caused the financial meltdown in 2008 have gotten worse. The world’s financial system was almost destroyed because of $1.2 trillion in mortgage derivatives. Today interest rate derivatives alone are 450 times higher at $561 trillion or 7 times global GDP. What could possibly go wrong?

Long-term Treasuries ended 2013 pushing 3 percent, and will likely rise if the Fed’s tapering measures increase. In the U.S., a one percent rise in interest rates translates to an additional $170 billion in additional annual interest costs, and increases both the debt and the deficit.

All other Western central banks face similar situations. Interest rates at 3% in Japan will consume all the country’s tax revenues just to service interest payments

The bigger problem will be the decline in bond portfolios. In Europe, most banks hold significant amounts of sovereign debt as part of their capital. As interest rates increase, the value of their holdings will decrease incrementally. Due to high leverage ratios, some banks may need either bail-outs or bail-ins to shore up those capital ratios, and those same banks may find their interest rate derivatives have unexpected counterparty risks.

The debilitating effect of the growing debt is clearly illustrated by the next chart. It shows that in the 1950s, for every dollar of debt increase, the economy grew by about $4. In 2013, for every dollar of debt increase, the economy has only grown by fifty cents. In real GDP over the last decade it has only grown by $0.08.

You don’t need to be a mathematician to understand that this trend is not a recovery, and is unsustainable over the long term.

GDP increase for every $1.00 Increase in Debt

While demand for gold in the West dropped to an all-time low in 2013, the unprecedented demand for physical gold from Eastern buyers confirms that Eastern nations will no longer tolerate the debasement of their U.S. Treasury holdings.

China bought a record 2,200 tonnes of gold last year. This is close to total global mine production for 2013. Many informed gold watchers feel this is a conservative figure, and the true figure will remain a mystery until China chooses to disclose itlikely in 2015. China is the world’s largest gold producer, and not only buys all of its own domestic production, but also buys through opaque sovereign wealth funds.

In 2009 China announced its gold reserves at 1,054 tonnes. I would not be surprised to see that China owns over 5,000 tonnes by 2015.

If we add the purchases of the other Far Eastern, Middle Eastern and Central Asian countries like Russia, far more physical gold was purchased than was mined.

The movement away from the U.S. dollar is intensifying. China has signed as many as 25 trade agreements that circumvent the U.S. dollar, and settle trade imbalances with the participants’ own currencies. This will continue to place downward pressure on demand for U.S. dollars. If the dollar loses its reserve currency status, America’s ability to print unlimited amounts of dollars without consequences will be over.

Lifespan of Reserve Currencies

This chart shows the lifespan of the six reserve currencies that preceded the U.S. dollar; the average is 94 years. Gold’s lifespan as stable money is 3,000 years and counting. If we take the demise of the British pound as the world’s reserve currency in 1920 as our starting point, 2014 will mark the 94th year of the U.S. dollar’s lifespan. During this time it has lost 97% of its purchasing power. I firmly believe we are in the late stages of the U.S. dollar’s reign as world reserve currency.

Considering the strengthening fundamentals we witnessed for gold in 2013, despite its poor price performance, it appears that an opportunity similar to that of 1976 is a strong possibility.

Gold rose 450% from 1971 to 1974. It then retreated 43% over the next 18 months. Many investors lost confidence and sold their holdings vowing never to invest in gold again. At the bottom of the correction, the New York Times declared unequivocally, “the end of the gold bull.”

However, during the next four years gold climbed 750%. A similar percentage increase from today’s price would see gold trading above $10,000 an ounce.

While there may still be price declines, I feel today’s situation is similar to that of the 1970s, and that we have the second-greatest opportunity to buy gold since 2002.

Today many investors are tempted to sell their underperforming precious metal holdings and use the proceeds to purchase U.S. equities. But remember—the old Wall Street saying is “Buy low, sell highNOTSell low, buy high.”

While no one knows with absolute certainty the exact timeframe for developing events, the most conservative route for portfolio protection is diversification with a 10% allocation to gold. Gold is the most negatively correlated asset to financial assets, and acts as portfolio insurance in a decline or a crisis.

This means physical gold bullion to which you hold clear title, bullion stored in allocated storage or in your own vault. It is critical that your bullion holdings have no counterparty risks, and are not proxies or derivatives like gold certificates, futures contracts, or ETFs.

Thank you, and all the best in 2014.