The King of Dollar Pegs

by Doug Noland

November 28, 2014

Collapse of the "global reflation trade" runs unabated.  Where might contagion strike next?

On the back of OPEC’s failure to cut production, crude this week sank $10.36, or 13.5%, to the lowest price since May 2010. The Goldman Sachs’ Commodities Index (GSCI) dropped 8.2%, to the low since September 2010. It’s worth noting that Copper dropped 6% this week to the lowest level since July 2010.

On the currency front, this week saw Russia’s ruble slammed for 7.3% to a record low. Brazil’s real dropped 1.9%, the Colombian peso 3.2%, and the Chilean peso 2.3%. The Mexican peso fell 1.9% to the lowest level since the tumultuous summer of 2012. The South African rand declined 1.1%. And despite losing a little ground to the euro this week, the U.S. dollar index traded to the highest level since June 2010.

At the troubled “Periphery of the Periphery,” Russia's 10-year yields jumped 43 bps to 10.53%. Ukraine 10-year yields surged 297 bps to a record 19.49% (Bloomberg: “worst week on record”). Venezuela CDS jumped 188 bps to 2,292. Greek 10-year yields surged 42 bps to 8.35%.

The melt-up in global “developed” bond markets is nothing short of incredible. German (0.70%), French (0.97%), Italian (2.03%), Spanish (1.90%), Portuguese (2.84%), Austrian (0.84%), Belgian (0.92%), Irish (1.38%) and Dutch (0.82%) yields all traded to record lows this week. With GDP surpassing 130% of GDP, Italian 10-year yields at 2%? French yields below 1% - with a huge debt load and big deficits as far as the eye can see? Japanese yields at a record low 0.41% (federal debt-to-GDP exceeding 250%)?
What on earth have central bankers done to global markets? It’s worth noting that U.S. long-bond yields Friday fell below the October 15th “panic low” level, closing at a 19-month low 2.89%.

Market divergences have turned only more extreme. This week saw the S&P500 trade to another all-time high. The Dow Jones Transports jumped 1.1% this week to a record high.

Gaining 2.0%, the Nasdaq 100 traded to the highest level since that fateful month, March 2000. Biotech stocks traded to a record high. The Morgan Stanley Retail Index jumped 2.0% this week to close at a record high. Standard & Poor’s Supercomposite Restaurants Index gained 1.3% to also close at an all-time high. In (“Core”) EM, the Shanghai Composite traded to a three-year high, while Indian stocks closed Friday at a record high.

It’s worth noting that the last time crude, the GSCI and copper traded at today’s levels the Fed’s balance sheet was about half its current size. Ditto for Bank of Japan assets. China’s International Reserve holdings have increased more than 70% since June 2010 (to $3.888 TN). Total Chinese system Credit has almost doubled in five years. Debt has exploded throughout EM, with too much denominated in dollars.

The world is now six years into history’s greatest concerted monetary inflation. Unprecedented policy measures have incited an unmatched global speculative Bubble. There is the ongoing global securities market Bubble that inflates on the back of central bank liquidity pumping and market backstops. This week, however, provided added confirmation of the ongoing deflation of the “Global Reflation Trade.” I believe history will look back on the crude, commodities and EM currency collapses as warnings that went unheeded in manic securities markets. In the worst-case scenario, the faltering of the global Bubble at the Periphery ensures that central bank liquidity stokes “Terminal Phase” excess at the Core. The global monetary experiment is failing spectacularly, though over-liquefied securities markets remain in denial.

November 28 – Financial Times (Jamil Anderlini): “ ‘Ghost cities’ lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers. In 2009 and 2013 alone, ‘ineffective investment’ came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC. China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system. The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis… The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis…”

November 23 – Reuters (Kevin Yao): “China’s leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making. Friday's surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank… Economic growth has slowed to 7.3% in the third quarter and policymakers feared it was on the verge of dipping below 7% - a rate not seen since the global financial crisis. Producer prices, charged at the factory gate, have been falling for almost three years, piling pressure on manufacturers, and consumer inflation is also weak. ‘Top leaders have changed their views,’ said a senior economist at a government think-tank involved in internal policy discussions. The economist… said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry's reserve requirement ratio (RRR)…”

China has been somewhat off the markets’ radar of late. The People’s Bank of China has been injecting large amounts of liquidity and, last week, cut interest-rates. Chinese stimulus these days feeds the bullish imagination. Chinese equities have rallied sharply (short squeeze?), and the bulls view this as confirmation that China’s policymakers have everything under control.

At this point, I view China as a real near-term wildcard. Inarguably, both Chinese end demand and finance were integral to the “Global Reflation Trade.” Supposedly, the Chinese boom was to provide robust commodities demand for years to come. Chinese companies have scoured the world for commodities-related investment. At the same time, the Chinese financial system played a major role in global commodities financing. What does the commodities collapse mean for Chinese financial stability, especially with stability already challenged by serious domestic issues.

I find it intriguing that Chinese policymakers have apparently turned much more concerned about the economy (see Reuters excerpt above). And a report (see FT above) from government researchers has admitted that “government stimulus measures and hyperactive construction… have generated $6.8tn in wasted investment since 2009”? Wow. I’ll assume that Chinese officials are now in intense discussions as to how to respond to a bevy of pressing issues, including sinking commodities, heightened global disinflationary forces, king dollar, significant currency devaluation from the Japanese, Europeans, South Koreans and others, and overall mounting financial and economic risks.

Over the past six years, respective U.S. and Chinese Credit Bubbles have been engaged in somewhat of a mirror image dynamic. With U.S. federal debt up 150% in six years and the Fed’s balance sheet inflating 400%, surfeit dollar balances flooded into the PBOC. In the process, the People’s Bank of China accommodated a historic expansion of Chinese domestic Credit. This Credit fueled historic booms in manufacturing capacity and Chinese housing (apartments). This Credit Bubble was also fundamental to the greater EM Bubble that saw virtually unlimited cheap finance spur booms throughout the commodity-related economies.

Importantly, this powerful self-reinforcing U.S. to China to EM (“global government finance Bubble”) dynamic was possible because of the Chinese currency’s tight link to the U.S. dollar. This “peg” ensured that when finance flowed into China it would be easily converted into local currency balances at the PBOC, and then immediately recycled back to U.S. securities markets. The King of Dollar Pegs also created a powerful magnet for speculative flows. Why not borrow cheap and invest in higher-yielding securities (or finance commodities) in a currency tied to the dollar? Better yet, between June 2010 and January of this year the Chinese steadily revalued the renminbi higher against the dollar. In the past I referred to the renminbi/dollar as a “currency peg on steroids.” It made the SE Asian currency pegs from the nineties look tiny and feeble in comparison.

I all too clearly remember the bloody havoc unleashed when currency peg regimes collapsed back in the nineties. Part of the current bull case is that the world has largely moved to free-floating currencies, with EM central bankers sitting on huge treasure troves of International Reserves. And China’s massive $3.8 Trillion of Reserves has the world believing they have ample “money” to spend their way out of any predicament, certainly including pressure that might befall its currency.

I just believe we’ve reached the point where the renminbi peg to king dollar has turned quite problematic for the Chinese. Actually, it’s my view they have recognized this for a while now, and actually decided early this year to begin an orderly currency devaluation. And between late-January and into early-May, the renminbi was devalued about 3.5% versus the dollar (to about 6.25 per $). Yet they then reversed course, with the remninbi trading back down to 6.11 this month. I’ve pondered whether policymakers turned timid after renminbi devaluation prompted a problematic reversal of “hot money” flows and heightened stress in their huge commodities financing complex.

Over recent weeks, increasingly desperate measures from Draghi and Kuroda spurred king dollar, in the process pushing crude, commodities and EM currency markets over the edge. While U.S. equities investors are salivating over the thought of sinking energy prices, a deflating commodities complex has myriad negative ramifications. For one, the “hot money” exit from commodities and commodities-related economies has accelerated. This ensures serious Credit issues after years of financial and investment excess, with negative economic effects for EM generally.

These dynamics now place China in a real bind. Already suffering from massive overcapacity, slim profits and heightened financial stress, Chinese manufactures are now exposed to a severe global slowdown and acute pricing/competitive pressures. The bloated Chinese financial sector could be even more vulnerable. Keep in mind that Chinese bank assets are projected (Autonomous Research’s Charlene Chu) to end 2014 with assets of $28 Trillion – an astounding triple the level from 2008. And don’t forget the now substantial Chinese “shadow banking” sector that has apparently been a bastion of high-risk lending.

God only knows the mess that’s been created. Chinese finance was already facing the downside of both a historic housing Bubble and an unprecedented over-/mal-investment throughout the manufacturing complex. Throw in a global collapse in commodities and the bursting of the EM Credit Bubble, and one is left fearing for Chinese financial and economic instability.

I believe Chinese policymakers have major decisions to make. Do they stick with the peg to king dollar? Increasingly, it doesn’t seem tenable. With the way global dynamics are now playing out, divergent U.S. and Chinese economic structures are inconsistent with a stable currency peg. The (consumption and services) U.S. economy, with its relatively small export sector, is less sensitive to the global commodities downturn and economic slowdown. The U.S. financial sector is less directly exposed to global commodities and EM instability. Perceived economic and financial stability – in the face of a now deflating global Bubble – throws gas on the king dollar fire.

Meanwhile, the Chinese economy and financial sector appear more vulnerable by the week. To this point, sticking with The Peg has likely held financial instability at bay. At some point, however, I would expect priority to be given to China’s massive export sector and the challenge of maintaining full employment (and social stability). I believe it will prove difficult for the Chinese not to devalue. This week saw the renminbi decline 0.33%, the largest weekly drop since April.

Curiously, Chinese International Reserves dropped $81bn in September – and are now down $106bn from June highs. How much “hot money” flowed into China over recent years, enticed by the Chinese “miracle economy,” by high yields, by global liquidity excess and a currency tightly linked to the U.S. dollar? But with the China story turning sour and the temptation to devalue on the rise, why would “hot money” not be looking to exit? Has an important reversal in speculative finance already commenced? Might this have marked a momentous inflection point for the Chinese and global Bubbles? How stable is The King of Dollar Pegs? What are the ramifications if it falters - for Chinese financial stability, for commodities, for EM, for the global economy and global Credit? Could the escalating risk of a destabilizing unwind help explain the simultaneous collapse in global commodities prices and “developed” sovereign yields?

With global “hot money” now on the move in major fashion, it’s time to start paying close attention to happenings in China. It’s also time for U.S. equities bulls to wake up from their dream world. There are Trillions of problematic debts in the world, including some in the U.S. energy patch. There are surely Trillions more engaged in leveraged securities speculation. Our markets are not immune to a full-fledged global “risk off” dynamic. And this week saw fragility at the Global Bubble’s Periphery attain some significant momentum. Global currency and commodities markets are dislocating, portending global instability in prices, financial flows, Credit and economies.

Tightening by superpower Fed trumps mini-stimulus in Europe and Asia

The world is already turning on its axis even before the Fed pulls the trigger, as if the QE era were a memory

By Ambrose Evans-Pritchard

10:48PM GMT 26 Nov 2014

One dollar bill notes pass through a printing press
Some $11 trillion of cross-border loans and bonds issued outside the US are denominated in dollars Photo: Getty Images
The apparent tsunami of stimulus from central banks in Asia and Europe is a mirage. The world's monetary authorities are on balance tightening. 
There may or may not be good reasons to buy equities at the current giddy heights, but reliance on the totemic powers and friendly intention of central banks should not be one of them.
The US Federal Reserve matters most in a financial world that still moves to the rhythm of the 10-year US Treasury bond, and still runs on a de facto dollar standard. More than 40 currencies have dollar pegs or "dirty floats", including China, joined to America's hip whether they like it or not.
Some $11 trillion of cross-border loans and bonds issued outside the US are denominated in dollars.

The US capital markets are still a colossal $59 trillion, more than the total for Europe and Japan combined. The Institute of International Finance says the impact of Fed action on capital flows to emerging markets is "twice as large" as moves by the European Central Bank.
The Fed can hardly put off rate rises for much longer as the US economy grows at a 3.9pc clip and the jobless rate drops to a six-year low of 5.8pc. The "quit rate" tracked by labour economists as a barometer of the jobs market is suddenly surging, a clear sign that slack is vanishing and wage pressures will soon rise.

The world is already turning on its axis even before the Fed pulls the trigger, as if the QE era were a memory. The dollar largesse that flooded the commodity nexus and drove the credit booms of Asia, Latin America and Africa is draining away. "The liquidity cycle is inflecting downwards. The odds of turbulence are rising," said CrossBorder Capital, which monitors global flows.
Fresh money creation in Japan, China and the eurozone would not offset a liquidity squeeze by the Fed in a symmetric fashion even if it were happening, but it is not in fact happening on anything like an equivalent scale, and may not do so for a long time. The "happy handover" scenario is wishful thinking.
China is tightening at a slower pace, but it is still tightening. The surprise rates cuts last week are less than meets the eye. The People's Bank of China (PBOC) regulates the level of credit in the economy through curbs on quantity, not by adjusting the cost of credit. These controls are still in place.
It is too early to conclude that President Xi Xinping has capitulated and ordered the PBOC to reflate, pushing the day of reckoning into the future once again. The balance of evidence is that Beijing is still attempting - with great difficulty - to deflate China's $26 trillion credit boom before it turns into a national tragedy.
Fixed asset investment dropped to a 13-year low in October. New credit fell to $108bn, down 24pc from a year earlier. Shadow banking is being suffocated. Bo Zhuang, from Trusted Sources, said new rules for off-balance sheet loans (bringing it under reserve ratio limits) amount to a $250bn squeeze for lending.

The rate cuts have a specific aim. They alleviate a fraction of the drastic tightening that has occurred automatically - "passively" in the jargon - as China slides towards deflation. Tao Wang, from UBS, said the real cost of borrowing for companies has spiked from zero to 5.5pc since 2011. The interest burden has doubled to 15pc of GDP.
The rate cuts may avert bankruptcies but they will not in themselves increase credit or the M2 supply. The commodity markets have discerned this. The copper rally has fizzled. The CRB commodity index has continued dropping. It is down for five months in a row, the first time this has happened since the 2008-2009 crash.
Japan is another story. The Bank of Japan is adding roughly $12bn a month to its asset purchases, beyond what is has already been doing for more than a year. This is certainly strong medicine for the domestic economy. Governor Haruhiko Kuroda is determined to lift nominal GDP growth to 5pc, the minimum required to stop Japan's debt from spiralling out of control. Good luck to him.
Yet the extra amount is hardly detectable compared with the net reduction of $85bn a month by the Fed as it shuts down QE. A smaller share of Japan's stimulus is leaking into global finance in any case because of the closed nature of the Japanese system. The greater effect for the rest of the world from Mr Kuroda's latest blitz may be a deflationary trade shock caused by a 12pc fall in the yen since August.

As for the European Central Bank, its actions never quite seem to catch up with rhetoric. The ECB's balance sheet is still sitting at €2.033 trillion. It has contracted by more than €150bn since early June when the bank first talked of reaching €3 trillion.
Mario Draghi is doing what he can against entrenched resistance, chipping away with "TLTRO" loans , and purchases of asset-backed securities, covered bonds and probably corporate bonds next week. Yet the pace is painfully slow. The net increase of securities last week was €400m.
Vice-president Vitor Constancio made clear that the ECB is preparing escalate to sovereign bonds, but not yet. “During the first quarter of next year we will be able to gauge better,” he said.
At each meeting, the ECB's governing council issues a statement showing unanimous support for further measures "if needed", but nobody knows what this means, or when, or on what scale. The balance sheet mantra is "towards" €1 trillion, but not actually €1 trillion. It is an "expectation" not a target.
It is always the same elusive language, and always for the same reason: Germany is not yet on board. Bundesbank chief Jens Weidmann repeated again this week that the debate is "intense" and that there are "high legal hurdles" to sovereign QE.
The ECB's Latin bloc and its allies can of course outvote the Teutonic core - and I have long argued that they should do exactly that - but the risk of doing so is to engender a surge of support for the AfD anti-euro party in Germany, enrage the Bavarian Social Christians (CSU) among others, and undermine German political consent for monetary union.
Eurosceptic professors are ready to launch a fresh case at the German constitutional court as soon as full-blown QE is launched, arguing that the scale of full QE amounts to fiscal policy by the back door, in violation of the budgetary sovereignty of the German parliament. They are right, of course, and comments by chief justice Andreas Vosskuhle suggest that Karlsruhe would take such arguments very seriously.
Some had been praying that Germany would at least do Europe a favour by sliding into deep recession, forcing the Bundesbank's hand. They are likely to be disappointed. The IFO index is rebounding. German exports are recovering.
This divergence between the interests of Germany and southern Europe may get worse rather than better over coming months as the euro weakens. Germany has a much higher trade gearing than France, Italy or Spain, and sells a much higher share of exports (50pc) outside the eurozone. Devaluation is acting as an asymmetric stimulus for the country that needs it least.
JP Morgan expects German growth to reach a 2pc rate in the first half of 2015, with domestic inflation running 1.7pc later in the year. It is hard to imagine that the German authorities will tolerate full-blown QE - with all its legal and political risks - when its own economy appears to be recovering anyway. Mr Draghi must walk through a political minefield.
So we have a hiatus.The Fed has turned off the liquidity spigot, and the rising dollar is pre-emptively tightening policy for half the world. Europe chiefly excels in cacophony. So if you hate QE, your moment is here. Outside Japan there isn't any. Enjoy the drought.

Heard on the Street

Banks Drink Deep From Uncle Sam’s Debt Fountain

New Liquidity Rules Send Banks Scrambling for U.S. Debt

By John Carney

Nov. 30, 2014 4:57 p.m. ET

Treasurys now comprise a larger portion of total bank assets than at any point in this century. The U.S. Treasury Building in Washington. Getty Images

America’s banks are gobbling up U.S. government debt.

Bank holdings of Treasurys rose by $71 billion in the third quarter, to $345 billion, according to last week’s quarterly banking profile from the Federal Deposit Insurance Corp. That 26% upswing from the previous quarter marked the fourth consecutive quarter of double-digit-percentage growth in bank Treasury portfolios. What’s more, Treasurys now comprise a larger portion of total bank assets than at any point in this century. This is a tectonic shift—and, because yields on Treasurys are so low, it is one that likely will weigh on earnings.

The downward pressure is exacerbated by the fact the change appears to be the result of a move away from higher-yielding assets in banks’ securities portfolios. And those portfolios have become increasingly central to banks in recent years, now making up over 20% of their total assets.

So why have banks developed such a voracious appetite for low-yielding U.S. government debt?

The most likely catalyst is the need to begin complying with a new type of bank liquidity rules.

This will require the biggest U.S. banks to hold a portfolio of assets that could be easily sold to make up for cash outflows in a stress period that lasted 30 days. The rule will start phasing in early next year.

Alongside the Federal Reserve’s stress-test capital-planning program, the liquidity requirement is one of the most novel innovations in postcrisis bank supervision. The idea is to force banks to self-insure against liquidity stress instead of relying on emergency lending from the Fed.

To account for the fact that some assets are more easily sold in a liquidity crunch than others, regulators impose haircuts on assets banks can use to meet the new requirements. Corporate bonds, for example, get a 50% haircut, so that a $1 billion bond would make up for just $500 million of assumed cash outflows.

Banks only get full credit for holding obligations backed by the full faith and credit of the U.S. That is pretty much limited to Treasurys and Ginnie Mae mortgage securities.

Perhaps even more important, these have to make up at least 60% of the liquidity portfolio. That combination is what is fueling the banks’ demand for Treasurys.

One silver lining: Additional liquidity should make banks less vulnerable to downturns. That means that on a risk-adjusted basis, any decline in returns on assets may not be as severe as it first appears.

Fight For Physical Gold Has Started (Just Like 1968)

by: Willem Middelkoop            

  • Gold is making a remarkable comeback into our financial system.
  • Germany, Switzerland, France and the Netherlands are in the process of repatriating gold or discussing it.
  • The current development looks like a remake of the implosion of the London Gold Pool in 1968.
Gold is making a remarkable come back into our financial system. Russia and China are openly accumulating gold in an aggressive way, while India has been confronted with huge gold demand, even leading to large trade deficits.

In Europe, Germany, Switzerland, France and the Netherlands are in the process of repatriating gold or discussing it. On top of this even the ECB stated they could buy gold, probably in an effort to fight deflation.

(click to enlarge)Russian gold reserves
You could say a new gold standard is being born without any formal decision. At least that's how the well influential international business editor of The Telegraph, Ambrose Evans-Pritchard, described the ongoing efforts by countries to lay their hands on as much physical gold as possible last year.
The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project… Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time - for better or worse. The only real disagreement is over the speed… The central bank gold buyers are of course the rising powers of Asia and the commodity bloc, now holders of two thirds of the world's $11 trillion foreign reserves, and all its incremental reserves. It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America. And now the Bundesbank has chosen to pull part of its gold from New York and Paris. Personally, I doubt that Buba had any secret agenda, or knows something hidden from the rest of us. It responded to massive popular pressure and prodding from lawmakers in the Bundestag to bring home Germany's gold. Yet that is not the end of the story. The fact that this popular pressure exists - and is well-organised - reflects a breakdown in trust between the major democracies and economic powers. It is a new political fact in the global system.
(click to enlarge)Shanghai
He also quotes Mohammed El Erian, Pimco's former chief investment officer, who is afraid that the repatriation of gold might lead to a growing international mistrust in our financial system:
In the first instance, it could translate into pressures on other countries to also repatriate part of their gold holdings. After all, if you can safely store your gold at home - a big if for some countries - no government would wish to be seen as one of the last to outsource all of this activity to foreign central banks. If developments are limited to this problem, there would be no material impact on the functioning and well-being of the global economy. If, however, perceptions of growing mutual mistrusts translate into larger multilateral tensions, then the world would find itself facing even greater difficulties resolving payments imbalances and resisting beggar-thy-neighbour national policies.
The current development reminds us of the implosion of the London Gold Pool in 1968.
We quote from The Big Reset;
During meetings of the central bank presidents at the BIS in 1961, it was agreed that a pool of $ 270 million in gold would be made available by the eight participating countries. This so-called 'London Gold Pool' was focused on preventing the gold price from rising above $ 35 per ounce by selling official gold holdings from the central banks gold vaults.
The idea was that if investors attempted to flee to the safe haven of gold, the London Gold Pool would dump gold onto the market in order to keep the gold price from rising. During the Cuban Missile Crisis in 1962, for instance, at least $ 60 million in gold was sold between 22 and 24 October. The IMF provided extra gold to be sold on the market when needed.

Contributions to the London Gold Pool per participating country
$ 135 million
(120 tonnes)
$ 30 million
(27 tonnes)
$ 25 million
(22 tonnes)
$ 25 million
(22 tonnes)
$ 25 million
(22 tonnes)
$ 10 million
(9 tonnes)
The Netherlands
$ 10 million
(9 tonnes)
$ 10 million
(9 tonnes)
$ 270 million
(240 tonnes)

The participating countries also had to declare that they would not buy gold in the open market from countries such as Russia. In true BIS fashion, these agreements were not put on paper, thereby ensuring complete secrecy. In 2010, a number of previously secret US telex reports from 1968 were made public by Wikileaks. These messages describe what had to be done in order to keep the gold price under control. The aim was to convince investors that it was completely pointless to speculate on a rise in the price of gold. One of the reports mentions a propaganda campaign to convince the public that the central banks would remain 'the masters of gold'. Despite these efforts, in March 1968, the London Gold Pool was disbanded because France would no longer cooperate. The London gold market remained closed for two weeks. In other gold markets around the world, gold immediately rose 25% in value...The end of the London Gold Pool was the starting shot of a 'bull market' in gold which would last for 13 years and which would see the gold price increasing by over 2,500%.

The implosion of the London Gold Pool lead to the breakdown of the Bretton Woods system in 1971 when Nixon suspended gold conversion. Just like 1971 the current flight towards gold will lead to a monetary reset in the years to come, in which gold will take its place as a monetary metal again.

Setting monetary policy by popular vote

Full of holes

A plan to boost Switzerland’s gold reserves has no benefits and many costs

Nov 29th 2014  

THE Swiss franc is a volatile currency that is fast becoming worthless. That, at least, is what some members of Switzerland’s right-wing People’s Party (SVP) would have you believe. Thanks to the SVP, Switzerland will vote on November 30th on a radical proposal to boost the central bank’s gold reserves. Bigger reserves, activists argue, will make the Swiss economy more stable and prosperous. In fact the opposite is true.

SVP activists forced the referendum by collecting the necessary 100,000 signatures. They are annoyed at the behaviour over the past few years of the Swiss National Bank (SNB), Switzerland’s central bank. In the late 1990s it came to the conclusion that it held far too much gold. Its reserves were worth 25% of annual imports, while Germany’s were worth just 6%.

The tumbling gold price at the time also made the hoard seem less sensible. By 2005 the SNB had sold half its gold—1,300 tonnes.

The SNB then added insult to injury, by acquiring big reserves of a different sort. When the financial crisis hit, investors flocked to the Swiss franc, which is widely seen as a safe haven.

That pushed it up in value: from 2010 to 2012 it appreciated by about 20% against the euro. The strong franc hurt Swiss exports, so the SNB bought foreign currencies in order to stop it appreciating. From 2010 to 2014 it acquired about $400 billion in foreign currencies (its total reserves are now $530 billion). Gold, which had accounted for about a third of its reserves in 1999, now makes up only 8%.

All this has alarmed many Swiss, who have a particularly soft spot for gold. The Swiss franc was explicitly backed by gold until 2000, long after most rich countries had switched to fiat currencies. Switzerland still has more gold reserves per person than any other country, according to the SNB.

The reforms, if approved, would require the SNB to accord gold more respect, in three ways.

First, it would have to hold 20% of its reserves in gold, which would involve the purchase of about 1,500 tonnes. Second, it would have to repatriate the 30% of its gold which is held in foreign central banks. Finally, it would never be allowed to sell any gold again.

Proponents of a Yes vote are woolly about how they arrived at the magic proportion of 20% of reserves. Campaigners probably picked it because it would return the SNB’s holdings to the level of the late 1990s in absolute terms. They speak vaguely of a “gold-backed franc”. Yet people in Switzerland would not be able to trade in their francs for gold bars, and there would be no relationship between gold reserves and the number of francs in circulation.

The franc probably would strengthen if the Swiss vote Yes, in that the SNB’s ability to influence the currency’s value would diminish. If it wanted to buy foreign currency to stem its rise, it would also have to buy yet more gold to keep to the 20% ratio. That would not only be expensive, but might also compound its problems. If the SNB wished at some point to offload foreign currency, perhaps to support a depreciating franc, the proportion of gold in its reserves would rise because selling it would be forbidden. “Gold could end up comprising 100% of Switzerland’s reserves,” says Robin Winkler of Deutsche Bank.

As the proportion of gold grew, the central bank’s profits would fall. Foreign-exchange reserves are typically held in the form of foreign bonds, which earn interest; gold does not. It would also become trickier for the central bank to control the domestic money supply, and thus inflation, says Mr Winkler. At present the SNB can reduce the money supply by selling reserves of any sort. It would have less flexibility if a big chunk of its assets were unsellable.

For the scheme to be approved, it must win both an overall majority and a majority in at least half of Switzerland’s cantons. Most observers assume that Swiss voters will side with the central bank over the SVP. Even if there is a Yes vote, disruption to financial markets would be minimal: the gold price is 10% lower than it was in the summer. How that could possibly be, given all the debased fiat currency sloshing around, the Yes camp has not explained.

How to prevent the coming war

Sergei Glazyev

21/11/2014 - 16:15

The hostilities in Donbass are a menace to Russia, Europe and the entire world. Failure to realize it may spark a regional war, and eventually a world one. The world media’s interpretation of that war as the Ukrainian authorities’ crusade against pro-Russian separatists for the sake of the country’s integrity is as superficial and senseless as the delusion that World War I resulted from the murder of an Austrian prince, and World War II, from the Nazis’ success in Germany’s parliamentary elections. The Russian mass media’s explanation of that war is only slightly meaningful – popular resistance in Donbass against a Nazi junta that grabbed power in Kiev in an anti-government coup.

In the meantime, without understanding the underlying causes and driving forces that keep the armed conflict going it is impossible to bring it to a halt. In this paper the Ukrainian crisis is scrutinized in the context of global economic changes that are breeding objective prerequisites for an escalation of military-political tensions in international relations. The analysis explains the motives of the main actors in the Ukrainian conflict and the technologies they employ. It also unveils the reasons why attempts to end the conflict have failed and prompts a forecast it may evolve into another world war. Avoiding that will be possible only by upsetting the cause-effect relationship between the persisting crimes, whose scale is growing in a geometric progression. Otherwise there will be no option left other than getting ready for a world war, in which many would like to see Russia as an enemy, a victim and a prize to win.

Conflict Fields of the Ukrainian Crisis

The nature of the Ukrainian crisis is complex, indeed. It is a tight bundle of quite a few conflict semantic fields. Regrettably, frontline reports, commentaries by politicians or explanations of their decisions fail to take due account of them. The most obvious conflict is that between the current Ukrainian authorities and the Donbass militias. The authorities have been trying to resolve it through the physical extermination of the militias and of the population whose interests they express as well. There are two semantic fields in this conflict and neither is strong enough to trigger a fratricidal war.

The first highly contentious sematic field concerns Ukraine’s internal political structure. The people of Donbass, just as of other regions in the south and the east of Ukraine, from the very outset put forward the demand for a federative system and for the recognition of the Russian language as an official one. These demands were openly declared throughout the two decades of Ukrainian independence and even reflected in the election platforms of the Party of Regions and other election blocs which represented the interests of Ukraine’s southern and eastern regions. None of them, however, resorted to force to press for those aspirations. The Ukrainian political establishment, while systematically dismissing both claims, never interpreted them as a crime against the state. Everybody agreed with the need for addressing these issues exclusively by legal, democratic means. The current Kiev regime frenzy to wipe out the advocates of federalization, just as the militias’ steadfast resistance goes far beyond universally accepted means of handling conflicts of this kind. Unlike peaceful discussions of the federalization idea in the previous years, Poroshenko and his war-mongering entourage have labeled the federalization demands as separatism and even terrorism, which definitely looks nothing but a provocation of the conflict outside the legal space.

The second contentious semantic field is Ukraine’s so-called European choice. If the Maidan protest activists are to be believed, it is for the sake of this choice that they were beating up Kiev’s police and setting them on fire. It was also the officially professed goal of European bureaucrats and politicians, who were warming up the protesting crowds and supporting the opposition in other ways.

Remarkably, opinion have shown that an overwhelming majority of the population in Ukraine’s south and east prefer Eurasian integration to the European one . And, although the European emissaries, in defiance of the professed European values of democracy and law, left the opinion of half of the Ukrainian population unnoticed, just as they had turned a blind eye on the discrepancy between the Association Agreement they were dictating and the Ukrainian Constitution, they hardly had any intention of starting a war of extermination against all those opposed to the association with the EU.

Ukraine’s own professional euro-integrators had no wish to go beyond the Verkhovna Rada in their attempts to resolve the issue. They painstakingly steered clear of public discussions of the theme, and rather preferred behind-the-scenes tactics to press for the Association Agreement. Meanwhile, the opponents of association with the EU presented their own arguments showing its discrepancy with the Ukrainian interests exclusively in the professional press, without addressing the people with calls for resolving the issue by violent means. It is nakedly clear that even in case of insurmountable divergence of opinion it was possible to find a peaceful way to settle the conflict by legally formalizing different trade regimes for the two parts of Ukraine, using Denmark and Greenland as examples (the latter is not a member of the EU).

Not a single issue put forward by the leaders of the rival factions, which they are trying to address through the use of force admits of such a solution. Consequently, the hostilities were unleashed for some other reasons. Ideologically this war is Nazism-fuelled – the Kiev junta’s propaganda works hard to instill into the public mind a misanthropic view of its opponents. They are targets for beastly comparisons; they are denied the right to speak their mind, with beatings and arrests being the sole alternatives; it is allowed to burn them alive, and the Ukrainian military is ordered not to hesitate to take their lives. The leaders of the Kiev regime have been making public calls for massacres of Ukrainian citizens in Donbass who dare express dissent. As he distributed awards among the butchers of Slavyansk, so-called President Poroshenko openly referred to their victims as “non-humans” and the head of government Arseny Yatsenyuk in his public statements called the Russians in the east of Ukraine subhumans. Their main political opponent before the political conflict – Yulia Timoshenko – said Donbass deserved atomic bombing, and number three candidate in the presidential election race Oleg Lyashko personally participated in organizing mass repression against Russian citizens of Ukraine. In a word, the Kiev junta manifests a full neo-Nazi consensus regarding the genocide of Russian citizens, who have been stripped of all human rights, including the right to life.

The Nazi semantic field generates the main tensions of the conflict and explains the use of violence in attempts to tackle it. Nazism always excuses violence against other ethnic groups, who are labeled as second-rate races and against whom any crime is declared permissible. This is precisely the path that the regime in Kiev has taken to foment hatred towards those people who disagree with the Ukrainian exclusiveness. In fact, to all Russians, because all other European and world ethnoses have never heard of a Ukrainian nation. In the other countries of the world all those born in the territory of the former USSR, including Ukrainians, are called Russians. In the meantime, the chiefs of the Kiev junta and the media on their payroll are emphasizing the superiority of Ukrainians over Russians in full conformity with the principles of Nazism. Russians are described as born slaves worthy of no other fate than ruthless exploitation in the interests of Ukrainians. Ethnic Russians residing in Ukraine have no option left other than taking up arms to defend themselves from the neo-Nazis.

International historical experience and Russia’s own experience provides convincing proof that Nazism can be resisted only by force. The Nazis understand no other language. This is not surprising: differentiation of human rights on account of race is incompatible with the rule of law. Once the Nazis deny rights to people of other nationalities, the latter have to give up hope they can ever protect themselves by legal means. They can safeguard their rights only if they put up armed resistance.

Ukrainian Nazism is no exception. Moreover, having no roots in Ukrainian culture and being an alien implant, Ukrainian Nazism is asserting itself in the harshest ways possible. Insane and deliberate cruelty the Ukrainian Nazis have demonstrated while shelling Donbass cities and communities was expected to demonstrate their exclusiveness to themselves in the first place. There is no such thing as Ukrainian exclusiveness in classical Ukrainian literature or popular culture, which have always remained part of Russian culture, or in the countries’ common history. By organizing mass crimes against those who consider themselves Russian and using massive Russophobic propaganda attacks the Nazi fuehrers in Kiev have been trying to create a strong confrontation in the Ukrainian public mind they need to consolidate society in conformity with the “either-with-us-or-against-us” principle.

It is noteworthy that none of today’s Nazism-leaning Ukrainian leaders is an ethnic Ukrainian. All of them are very far from Ukraine and from its cultural, historical and spiritual bonds. Possibly this is the reason why they lack the slightest moral self-restrictions and display such super-cruelty against their own people. They have been trying to assert themselves as Nazi fuehrers by involving their followers in mass murders of fellow citizens, turning the former into the country’s new elite, and the latter, into a dumb and obedient herd.

In the article titled Nazi Mistakes its author, Alexander Rogers, convincingly shows that the cult of violence is the key feature of Ukrainian Nazis. By the level of senseless cruelty and misanthropy they have surpassed their Hitlerite idols, finding special pleasure in posing for pictures next to the charred bodies of Odessa residents burnt alive or openly rejoicing at the killings of children and women in Slavyansk. As the same author indicates, Ukrainian society has developed all fourteen essential traits of Nazism the prominent Italian philosopher, Umberto Eco, pointed at a while ago. The cult of force, contempt for the weak and condemnation of pacifism as a form of betrayal are most important for understanding the way in which the conflict will be unfolding. It also explains why the negotiations on the cessation of hostilities and resolution of the Ukrainian crisis have reached nowhere.

It might seem that all parties should be interested in the termination of combat operations in Donbass, for they are harmful to Ukraine, Russia, and Donbass itself, and also threaten Europe. However, the Kiev junta shows no wish to listen to the other side. Its sole language is that of threats and ultimatums. Any attempts at calling in question their arguments evoke hysteria, hatred and aggression. Any legislator, journalist or just passer-by who may have dared to questioned the Ukrainian Nazis’ actions is instantly humiliated and beaten up and Ukrainian special services instantly launch criminal proceedings. This is done in in full conformity with one of the key features of Nazism that Umberto Eco identified as “Dissent is betrayal.”

The conflict field Ukrainian Nazism is generating is the main driving force of violence in Ukraine in general and of the punitive operation in Donbass in particular. The question arises what are the sources and driving forces of Ukrainian Nazism. How come in a country that experienced the horrors of Nazi occupation and made a tremendous contribution to the victory over Hitlerites there are so many of their followers today eager to continue the criminal war against the people of Ukraine? After all, at a certain point it seemed that the Red Army had cleared Ukraine of all Nazis for good.

The answer to this question lies in another conflict field that has existed for many centuries. It is the field of Western aggression against Russia, of the perpetual “Drang nach Osten,” which is still continuing today. In that field Ukraine has invariably been in focus. Otto von Bismarck formulated the attitude of the West to Ukraine in the most explicit way. Нe said: “The power of Russia could be undermined only by separating it from the Ukraine ... one must not only pull, but also oppose Ukraine to Russia, purposely antagonize the two parts of one and the same people, and see how brother will kill brother. To do this, one only has to find and nurture traitors among the national elite and use them to change the identity of one part of a great nation to such an extent that they would hate everything Russian, hate their own family without even realizing it. The rest is a matter of time.” And Zbigniew Brzezinski in his book The Grand Chessboard: American Primacy and Its Geostrategic Imperatives noted that without Ukraine Russia will stop being a Eurasian empire.
Ukrainian Nazism is another artificial product of the misanthropic ideology that has been cultivated in the West for several centuries. Three centuries ago the British fancied themselves a master race and made racism the groundwork of their world empire. The Americans are still certain about their superiority over all other peoples around the globe, which, they argue, empowers them to judge other countries and their leaders proceeding from their own criteria.

The U.S. authorities use this cult of exclusiveness as a pretext for punishing any other people and even for exterminating the disobedient ones. The underlying purpose of such subjugation is determined by the interests of U.S. capital, disguised in the human rights and democratic values rhetoric. It implies the lifting of all borders to U.S. goods and capital, introduction of U.S. education and cultural standards, and the use of the dollar as the main reserve currency and international legal tender. The United States is dictating to all countries its role of the supreme arbiter in all conflicts, both internal and external ones. It has assumed the right to arrest and punish any citizens of any countries it may not like, and it applies internal U.S. legislation to the entire world, while other countries are expected to agree with the supremacy of international obligations. President Barack Obama’s recent statements about the exclusiveness of the United States was a sure sign the racist ideology is still there and is being employed to excuse any crimes by the U.S. military-political machinery against humanity. Soaring military spending and the flywheel of world tensions are essential for the United States to preserve the notorious exclusiveness of America. “America must always lead on the world stage. If we don’t, no one else will,” Obama said. In more down-to-earth terms: to shrug off the mammoth burden of the state debt and to shift the U.S. economy onto a new long wave of growth.

In accordance with a racist ideology the U.S. political machinery is taking a discriminatory approach to countries depending on the readiness of their leaders to abide by U.S. interests. All countries are grouped into good ones, fully supportive of U.S. policies (the British Commonwealth, Western Europe, Japan, South Korea, Israel, Saudi Arabia and the United Arab Emirates), the under-developed, to be taught the U.S. values through political compulsion (Eastern Europe, Latin America), and the bad ones, defiant of U.S. diktat. Any technologies of external destruction are good towards the latter group of countries (Russia, China, India, North Africa, and the Middle East); the ultimate aim being their subjugation through a revolution and implanting of a U.S.-controlled regime, or through conquest and establishment of a colonial administration, or through destruction and subjugation piece by piece. In relation to Russia and the post-Soviet space, U.S. spin doctors have used all tools of destruction that come handy.

In full conformity with the Anglo-Saxon “divide-and-rule” tradition U.S. political psychology specialists are instructing the Ukrainian Nazis to master the cult of hatred to and supremacy over Russians, who have been appointed responsible for all troubles and misfortunes of the Ukrainian people. At the same time they are told to never forget they are inferior to the Americans and West Europeans, who should be viewed as examples to follow and blindly obeyed as senior partners in the Association. As a result of such brainwashing, contempt and hatred towards Russians are oddly intertwined in the Ukrainian Nazis’ mind with blind worshiping of the Americans and West Europeans. This faith in the omnipotence of the United States and Western Europe is so strong that the Ukrainian Nazis sincerely believe that Washington will be able to force Russia to cater to all of Ukraine’s demands.

Ukrainian Nazism, which the Western instructors have been cultivating with so much zeal has been invariably targeted against Russians and Moscow. In this respect today’s Nazis essentially do not differ from their predecessors – Hitler and his henchmen. Simply the Big Boss has changed, now it is the U.S. Department of State. In contrast to the German Nazis, however, the new boss prefers to have everything done by someone else. The Ukrainian Nazis do not only have to do all dirty work, such as punitive operations and mass killings of fellow citizens, but also bear the risks incurred from combat operations and political responsibility.

Like in time of WWII Nazi invasion, Ukrainian Nazism is used today as a tool in the hands of foreign forces, which are fundamentally hostile to the genuine national interests of Ukraine. There is hardly anyone in his right mind who will dare claim that a pro-Hitler regime might have been a blessing for the Ukrainian people. For the German Nazis the latter was nothing but a herd of draft animals, whose sole task was to toil for food to ensure the prosperity of German imperialism. For today’s European bureaucrats, Ukraine is nothing but a source of cheap labor, a market for European goods, a dump for industrial waste, and a backyard for ecologically hazardous industries. It is hard to imagine any realistically minded national leaders genuinely concerned about national interests who should be eager to put their signature to anything like Ukraine’s Agreement of Association with the European Union, an agreement that unilaterally delegates to the other party the sovereign functions of the state to govern foreign economic activity and conduct foreign and defense policies. Moreover, an agreement that hamstrings the competitiveness of the Ukrainian economy and undermines its balance of payments.

Ukrainian Nazism is evolving within the conflict field of Western aggression against Russia. This explains its amazing upsurge. Without a consistent policy pursued by the United States and its NATO allies it would have never emerged and grown, because there were no objective prerequisites for it.

But heavy sponsorship for a bunch of nationalist organizations and consistent efforts to cultivate hatred towards Russia worked. The country’s nationalist leaders do not care about the discrepancy of their ideology and the historical reality. For meager remunerations from their sponsors in the NATO member-states they have never stopped drawing the enemy image of Russia. As such attempts do not hold water against common history, faith, language and culture (Kiev being the Mother of Russian Cities; the Kiev Monastery of the Caves, the main holy shrine of the Russian Orthodox World; and the Kiev-Mogilyansk Academy, the birth place of the Russian Language), flagrant lies have had to be put to use that interprets the tragic episodes of common history (revolution, civil war and famine) as proof of the Russian authorities’ arbitrariness. The ideologists of Ukrainian Nazism keep silent about a very telling fact: ethnic Russians were in the absolute minority in the Bolshevik bodies of government, while functionaries born in Galitsia, Odessa and Central Ukraine constituted an overwhelming majority. Besides, the Bolshevik authorities relied mostly on Ukrainian nationalists in placing under their control the vast and densely populated lands of Novorossiya. Nazism-based Russophobia has become the core of Ukrainian national identify these days.

In the meantime, the reincarnation of Nazism in the current situation is not quite harmless to Europe, where memories of WWII horrors are still green. The European leaders need some plausibly looking excuses to explain why they turn a blind eye on rampaging Ukrainian Nazis and keep conniving with their crimes. The U.S.-controlled leading European mass media are ready to provide such arguments. The Ukrainian Nazis are portrayed as champions of European values, and their crimes against humanity, as heroic accomplishments in defense of Ukraine’s European choice. The European public is being zombied and serves as a benchmark for European politicians. At the same time the very same public is being set against Russia as the Russian leadership is blamed for high-profile crimes that the U.S.-leaning neo-Nazis have staged against European citizens, the way it happened to the Malaysian passenger jet shot down by the Ukrainian military.

As follows from this analysis, European support for the Ukrainian Nazis is induced by a stronger conflict field stemming from the United States’ interest in retaining global domination. The latter has been put to test as the opportunities for economic growth have been objectively exhausted with the simultaneous completion of the life cycle of the dominating technological system and the century-long accumulation cycle. The United States is losing its dominating position in world production. Its center is drifting towards China and other Asian countries. Their financial hegemony is endangered by the growing risk of the collapse of the dollar pyramid of state obligations. The dollar’s leading position of the world currency is being undermined by the processes of regional economic integration. Lastly, as the national financial and economic system cannot be kept in balance without powerful and growing outside support, the United States is objectively forced to escalate military and political tensions and eventually start a world war. This is the main conflict field, and its super-tensions induce higher tensions in all other conflict fields. Its nature deserves special analysis.

The bio on Sergei Glazyev is here.

Heard on the Street

Oil Makes Eurozone Inflation a Slippery Prospect

Falling Oil Prices Pose Yet Another Challenge For The European Central Bank

By Richard Barley

Updated Nov. 28, 2014 9:37 a.m. ET
The price of Brent crude has fallen 27% in euro terms this year, adding to the challenges facing the ECB in its bid to raise the inflation rate in the currency bloc.The price of Brent crude has fallen 27% in euro terms this year, adding to the challenges facing the ECB in its bid to raise the inflation rate in the currency bloc. Agence France-Presse/Getty Images        

So much for the hoped-for bounce in eurozone inflation in the fourth quarter. Falling energy prices—even without taking account of Thursday’s collapse in the oil price—have put paid to that. Eurozone inflation in November was just 0.3% and looks almost certain to go lower in the near future.

That of course will raise expectations that the European Central Bank will go further in extending its asset-purchase program. This week Vice President Vitor Constancio said the ECB could consider government-bond purchases in the first quarter of next year.

But away from energy prices, inflation has been broadly stable over the last six months, at least in comparison with its sharper declines in 2012 and 2013. Core inflation—excluding energy, food, alcohol and tobacco—at 0.7% in November was just below its six-month average of 0.8%. The same is true of services prices, up 1.1% versus a six-month average of 1.2%, and industrial goods, flat versus up 0.1%.

The ECB still has to worry both about headline inflation and expectations. The risk from lower oil prices is that headline inflation could fall to zero or below in the near term. But the outlook for eurozone growth given a 27% fall in Brent crude in euro terms so far this year has also brightened, especially when coupled with signs of improving business and consumer confidence, and easing constraints on credit.

Expectations too seem to be being shaped by oil prices. The five-year/five-year euro inflation swap, a measure of longer-term expectations watched by the ECB, has declined in line with the fall in oil, RBS notes.

That raises the question of what would happen if oil prices were to recover—even by a relatively small amount. If inflation expectations are being mainly driven by oil—which could be true for consumers as well as markets, given that frequently-bought items such as fuel tend to have a bigger impact on perceived inflation—then a rebound could yet change the picture rapidly for the eurozone.

Higher oil prices may be a way off yet, however. That leaves the ECB grappling with the disinflationary impact of oil set against its stimulative effect on growth. Oil could send the ECB skidding toward the government-bond purchases it has so clearly sought to avoid.


Work, save, move

How to fix America’s pension system

Nov 29th 2014

AMERICANS are living longer but retiring earlier than they did 50 years ago. Their workplace pensions have become less generous, as has Social Security, and their medical expenses have risen. Given this, they have not saved nearly enough to provide for their old age.

It all adds up to a budding crisis, as a new book from Charles Ellis, Alicia Munnell and Andrew Eschtruth explains. There are only three solutions.

Retired people must live on less, they must work longer or they must save more during their working lives. The last two options may be preferable, but they are not easy.

First, the problem. The average period in retirement has risen from 13 years in the 1960s to 20 today. There is a 50% chance that one member of a retiring couple will live to 92. The average age of retirement is 64, lower than it was in the 1960s.

For most people, the main source of their retirement income will be Social Security, the government pension. This was originally designed on the insurance principle: what workers took out was related to what they paid in. But the principle was soon broken for early retirees, who received far more than they contributed. As presently constituted, the fund into which Social Security payments go will run out of money in 2033. The system is essentially “pay-as-you-go”.

Various attempts to repair its finances mean that Social Security is paying out less as a proportion of pre-retirement earnings. During the 1980s and 1990s this “replacement ratio” was around 40% for the average worker. But the formal retirement age is rising to 67, and those who retire earlier receive lower payments. The tax system also weighs more heavily on retired workers: in 1985 only 10% of Social Security recipients were taxed; now it is 37%.

Medicare premiums are also rising, and are deducted directly from Social Security. The net effect will be a fall in the replacement ratio to 31% by 2030. If Congress decides to replenish the trust fund by cutting benefits, the ratio will fall even further.

Meanwhile, for private-sector workers, final-salary pension schemes have been replaced with less generous defined-contribution schemes, known as 401(k)s. Not only does this expose employees to investment risk, the total amount contributed is low, at around 9% of annual salary.

This leaves workers short. The median household approaching retirement in a defined-contribution scheme has a pot of just $111,000. To put that in perspective, the average out-of-pocket medical expenses for an elderly couple over the remainder of their lives are $200,000.

There is some good news. In general, people’s expenses tend to fall after retirement; a replacement ratio of 75% seems reasonable. Even allowing for that, the authors calculate that more than half of all American workers will not be able to maintain their standard of living in retirement, up from 30% in 1989 (see chart).

So what can be done? Workers will need to work for longer: on current Social Security rules, postponing retirement until 70 results in a 76% increase in payments compared with taking the pension at 62. They will need to pay more attention to their pension needs: in a 2014 survey, 36% of workers had not saved anything for retirement and 56% had not even tried to work out how much they might need.

Starting early helps: the authors calculate that those who begin saving at 25 need to save 12% of their income to retire at 65. If they wait until 45, the proportion rises to 35%. When they do retire, more workers should exploit their housing wealth, either via a reverse mortgage (trading equity in their home for an income) or by moving to a smaller place.

The federal government could help by following the British lead, and insisting on, rather than merely encouraging, auto-enrolment, whereby workers have to opt out of, rather than into, pension schemes. Only half of American workers participate in some kind of employer-sponsored pension plan. Auto-enrolment boosts participation by 40 percentage points.

The government could also increase the minimum retirement age under Social Security from 62 to 64. That would require assistance for those who are physically unable to work in later life but it would encourage able-bodied citizens to keep working. Congress could also redesign tax incentives in favour of the lower-paid, matching pension contributions (with a limit) rather than making savings tax-deductible, which gives the biggest gain to the richest. Politicians seem to assume, however, that changing Social Security in any way will lead to their own retirement.

lunes, diciembre 01, 2014



Le Pen calls for audit of French gold reserves

The latest request for an audit for a nation’s officially held gold reserves has come from France’s Marine le Pen.

Author: Lawrence Williams

Posted: Wednesday , 26 Nov 2014

LONDON (Mineweb) -  Demands for gold reserve accountability have been rising in Europe – is this something that could spread around the world for those nations who own gold in vaults in countries other than their own – or indeed supposedly held even in their own countries? 

We have seen Germany requesting repatriation of around half of its gold reserves, mostly held in the US, the recent return of some of its foreign held gold to The Netherlands, the Swiss referendum on the return of much of the nations’s gold and the raising of its reserve levels to 20% of its foreign reserves, and now the latest is a request to M. Christian Noyer, the Governor of the Bank of France, for that nation’s gold reserves to be comprehensively audited. 

The request has come in the form of an open letter from the French right wing Front National opposition leader, Marine Le Pen. In it she requests that: 

 “This comprehensive audit should contain:

·     A complete inventory of the physical gold amounting to 2,435 tonnes currently displayed and their quality (serial number, purity, bars 'Good Delivery' ...), conducted by an independent French body (to be defined). This inventory, under supervision of a bailiff, must indicate the country in which the gold reserves are stored in France or abroad.

·     A census of all formal financial employment agreement or secret vis-à-vis private banks and corporations, or bilateral loan between France and national and international institutions, having pawned the gold of France to ensure rescue of the euro. In this case, the comprehensive audit should contain the conditions of agreement or loans.”

In her letter she goes on to refer to the Swiss gold referendum, moves to repatriate gold by Germany and Poland, the recent Dutch repatriation of 122.5 tonnes of gold as well as France being a signatory to the latest Central Bank Gold Agreement “which provides no transfer of quotas on this five-year period (2014-2019), in contrast to the three previous agreements.”

She also noted: “Over the period 2004-2012, about 614.6 tonnes of gold were sold by France, while at the same time the other central banks of the Eurosystem with the ECB have agreed to limit their gold sales. According to a report of the Court of Auditors in 2012, this operation is extremely costly for public authorities and constitutes a serious violation of the national heritage, made without any democratic consultation.”

Whether the French Central Bank or Government will respond in any positive way to this initiative, or if the letter published on the Front National website is in fact genuine, remains to be seen. 
However the very fact that such a letter has been presented suggests growing French unease over whether the world’s official gold vaults actually contain what they are purported to, and precisely what is the ownership of gold within them.  The gold repatriation movement is thus gaining momentum.  Indeed le Pen’s letter may well precipitate a flood of such demands with no country prepared to stand last in line for repatriation of its gold from foreign vaults just in case that gold is not really there.

Thus perhaps the late Venezuelan President Chavez’s move to have his country’s gold repatriated in 2011/12 will prove to have been an extremely smart one.

Doubts over gold repatriation surfaced primarily following Germany’s request to have a large proportion of its gold repatriated which only managed to elicit 5 tonnes from the biggest holding in the US in the first year. There has been a considerable amount of doubt expressed, particularly on pro-gold sites and by such outspoken politicians as Ron Paul in the US, over whether supposedly officially held gold has been leased out and cannot be returned given the recent high demand volumes which appear to exceed total supply. There are thus doubts as to where all the gold seen flowing from West to East in particular is coming from.

All the above is yet another factor which could start a run on gold. The Central Bankers will likely be resistant to such moves whether they in fact hold the gold they report, or not, but there certainly is the likelihood that some gold reserves have been depleted through gold leasing, but how widespread this may be remains open to speculation as long as the Central Bankers hold firm.

Trustbusting in the internet age

Should digital monopolies be broken up?

European moves against Google are about protecting companies, not consumers

Nov 29th 2014


ALTHOUGH no company is mentioned by name, it is very clear which American internet giant the European Parliament has in mind in a resolution that has been doing the rounds in the run-up to a vote on November 27th. One draft calls for “unbundling search engines from other commercial services” to ensure a level playing field for European companies and consumers.

This is the latest and most dramatic outbreak of Googlephobia in Europe.

Europe’s former competition commissioner, Joaquín Almunia, brokered a series of settlements this year requiring Google to give more prominence to rivals’ shopping and map services alongside its own in search results. But MEPs want his successor, Margrethe Vestager, to take a firmer line. Hence the calls to dismember the company.

The parliament does not actually have the power to carry out this threat. But it touches on a question that has been raised by politicians from Washington to Seoul and brings together all sorts of issues from privacy to industrial policy. How worrying is the dominance of the internet by Google and a handful of other firms?

Who’s afraid of the big bad search engine?
Google (whose executive chairman, Eric Schmidt, is a member of the board of The Economist’s parent company) has 68% of the market of web searches in America and more than 90% in many European countries. Like Facebook, Amazon and other tech giants, it benefits from the network effects whereby the popularity of a service attracts more users and thus becomes self-perpetuating. It collects more data than any other company and is better at mining those data for insights. Once people start using Google’s search (and its e-mail, maps and digital storage), they rarely move on. Small advertisers find switching to another platform too burdensome to bother.

Google is clearly dominant, then; but whether it abuses that dominance is another matter. It stands accused of favouring its own services in search results, making it hard for advertisers to manage campaigns across several online platforms, and presenting answers on some search pages directly rather than referring users to other websites. But its behaviour is not in the same class as Microsoft’s systematic campaign against the Netscape browser in the late 1990s: there are no e-mails talking about “cutting off” competitors’ “air supply”. What’s more, some of the features that hurt Google’s competitors benefit its consumers. Giving people flight details, dictionary definitions or a map right away saves them time. And while advertisers often pay hefty rates for clicks, users get Google’s service for nothing—rather as plumbers and florists fork out to be listed in Yellow Pages which are given to readers gratis, and nightclubs charge men steep entry prices but let women in free.

There are also good reasons why governments should regulate internet monopolies less energetically than offline ones. First, barriers to entry are lower in the digital realm. It has never been easier to launch a new online product or service: consider the rapid rise of Instagram, WhatsApp or Slack.

Building a rival infrastructure to a physical incumbent is far more expensive (just ask telecoms operators or energy firms), and as a result there is much less competition (and more need for regulation) in the real world. True, big firms can always buy upstart rivals (as Facebook did with Instagram and WhatsApp, and Google did with Waze, Apture and many more). But such acquisitions then encourage the formation of even more start-ups, creating even more competition for incumbents.

Second, although switching from Google and other online giants is not costless, their products do not lock customers in as Windows, Microsoft’s operating system, did. And although network effects may persist for a while, they do not confer a lasting advantage: consider the decline of MySpace, or more recently of Orkut, Google’s once-dominant social network in Brazil, both eclipsed by Facebook—itself threatened by a wave of messaging apps.

Finally, the lesson of recent decades is that technology monopolists (think of IBM in mainframes or Microsoft in PC operating systems) may be dominant for a while, but they are eventually toppled when they fail to move with the times, or when new technologies expand the market in unexpected ways, exposing them to new rivals. Facebook is eating into Google’s advertising revenue. Despite the success of Android, Google’s mobile platform, the rise of smartphones may undermine Google: users now spend more time on apps than on the web, and Google is gradually losing control of Android as other firms build their own mobile ecosystems on top of its open-source underpinnings. So far, no company has remained information technology’s top dog from one cycle to the next. Sometimes former monopolies end up with a lucrative franchise in a legacy area, as Microsoft and IBM have.

But the kingdoms they rule turn out to be only part of a much larger map.

Looking after their own
The European Parliament’s Googlephobia looks a mask for two concerns, one worthier than the other. The lamentable one, which American politicians pointed out this week, is a desire to protect European companies. Among the loudest voices lobbying against Google are Axel Springer and Hubert Burda Media, two German media giants. Instead of attacking successful American companies, Europe’s leaders should ask themselves why their continent has not produced a Google or a Facebook. Opening up the EU’s digital services market would do more to create one than protecting local incumbents.

The good reason for worrying about the internet giants is privacy. It is right to limit the ability of Google and Facebook to use personal data: their services should, for instance, come with default settings guarding privacy, so companies gathering personal information have to ask consumers to opt in. Europe’s politicians have shown more interest in this than American ones. But to address these concerns, they should regulate companies’ behaviour, not their market power. Some clearer thinking by European politicians would benefit the continent’s citizens.