Bank of America sees $50 oil as Opec dies

"Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.

By Ambrose Evans-Pritchard

8:01PM GMT 09 Dec 2014

The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe. 
Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.
The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.
The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.

The claims pit Bank of America against its arch-rival Citigroup, which insists that the US shale industry is far more resilent than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.

Bank of America said the current slump will choke off shale projects in Argentina and Mexico, and will force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 - given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.
If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.
Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they trigger systemic financial crises in commodity states.
Barnaby Martin, the bank’s European credit chief, said world asset markets may face a stress test as the US Federal Reserve starts to tighten afters year of largesse. “Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield that we have seen since 2009 is going into reverse”, he said.
Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets.
Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.
What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.
These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.

sábado, diciembre 13, 2014



Chris Powell: Gold market manipulation -- Why, how, and how long?

Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

German Precious Metal Society and the Foundation for Liberty and RatioHotel Bayerischer Hof, Munich, Germany
Tuesday, December 9, 2014

Thank you for coming here tonight even though I can speak only English. I'm afraid that when it comes to German I don't know scheisse.

Maybe I have an excuse. Mark Twain tried very hard to learn German and wrote afterward that German should be classified with the dead languages because only the dead had the time to learn it.

Still, I'm really glad to be here, since at least many of you speak English as well as German and since I've just come from London, where hardly anyone speaks English.

For the first 48 hours I was in London the only person I heard speaking English was the hotel desk clerk, and she didn't seem too happy about it. The first time I heard English on the street it was from a guy who recognized me as an American rube and asked me for money.

Yes, in London only the panhandlers speak English.

But seriously, folks -- You didn't come here for my travelogue. So here goes.

* * *

Most financial journalism and most academic teaching maintain that gold is at best a quaint antique. But gold not only remains money but may again become the best and most important money. Even more than this, gold is in fact the secret knowledge of the financial universe, a secret desperately concealed by central banks.

Gold already is so important that Western central banks -- particularly the U.S. Treasury and its Exchange Stabilization Fund, the Federal Reserve, and allied central banks -- rig the gold market every day, even hour by hour, to control and usually suppress gold's price.

Why do Western central banks rig the gold market?

It's because gold is a powerful competitive international currency that, if allowed to function in a free market, will determine the value of other currencies, the level of interest rates, and the value of government bonds. Gold's performance is usually the opposite of the performance of government currencies and bonds. So central banks fight gold to defend their currencies and bonds.

The problem is that the tactics of central banks in their war against gold affect far more than gold; they affect markets generally and eventually destroy markets generally. This destruction of markets now has a name, a name used even by former members of the U.S. Federal Reserve Board. That name is "financial repression."

There is much academic literature confirming gold's influence on currencies, interest rates, and government bonds throughout history. Prominent in this literature is the study written by Harvard University economics professor Lawrence Summers and University of Michigan economics professor Robert Barsky and published in August 1985 by the National Bureau of Economic Research, a study titled "Gibson's Paradox and the Gold Standard." As with all the documents I'll cite today, the Summers and Barsky study is posted at my organization's Internet site,

Summers went on to become deputy treasury secretary and then treasury secretary of the United States and president of Harvard University and recently almost became chairman of the Federal Reserve Board, so his study with Barsky about gold's influence on currencies, interest rates, and bond prices may be good authority. The Summers and Barsky study implied that governments could achieve their ideal of low interest rates and strong government bond prices by controlling the price of gold.

As it turns out, controlling the currency markets long has been the most efficient mechanism of imperialism. There is much history of this as well.

Rigging the currency markets was the primary mechanism by which Nazi Germany expropriated occupied Europe during World War II. Expropriation by force of arms was actually only a small part of the Nazi conquest.

The rigging of the currency markets -- that is, the gross distortion of exchange rates in Nazi Germany's favor -- turned every citizen of an occupied country into an agent of the occupation every time he used money. This currency market rigging directed all production in the occupied countries into Nazi Germany and blocked any return flow of production. It enabled Nazi Germany to run without consequence the same sort of fantastic trade deficit run in recent years by the United States.

The United States learned all about the Nazi expropriation of Europe through currency market rigging because it was documented by the November 1943 edition of the U.S. War Department's monthly intelligence letter, Tactical and Technical Trends:

Nazi Germany's manipulation of currency markets is also described in detail in the 2005 history "Hitler's Beneficiaries" by Gotz Aly:

How do Western central banks and particularly the U.S. government rig the gold market?

They used to do it conventionally and in the open by dishoarding their gold reserves at strategic moments, and then by dishoarding their gold reserves regularly, more often, even every day, as the United States, United Kingdom, and seven of their Western European allies did during the 1960s through a public operation called the London Gold Pool. The London Gold Pool held the gold price at $35 per ounce until it collapsed in March 1968 under rising demand that drained the U.S. gold reserve from 25,000 tonnes down closer to the 8,133 tonnes officially reported today:

After the collapse of the London Gold Pool the United States and its allies regrouped to decide how to rig the gold market surreptitiously -- not just with dishoarding but also with the so-called leasing of gold; with the purchase and sale of gold derivatives, including futures and options; and, more recently, with high-frequency trading undertaken through investment houses that are happy to serve as government's intermediaries in the gold market, since they can front-run government trades. When the rigging is done surreptitiously like this, much less central bank gold has to be dishoarded and the dishoarding that is done has far more suppressive influence on the price.

But Western central bank market rigging goes far beyond gold.

In an essay published in 2001 and titled "The Debasement of World Currency -- It Is Inflation, But Not as We Know It" --

-- the British economist Peter Warburton discerned that central banks were using investment banks to issue derivatives throughout the commodity futures markets to siphon away money that was seeking a hedge against inflation. That is, derivatives divert money from the hoarding of real goods, hoarding that would drive up consumer price indexes and make inflation even more obvious to the markets and the public. Most of these derivatives are essentially naked short positions that cannot be covered.

Warburton concluded that the prerequisite of a hedge against monetary debasement would have to be some asset that was not attached to a futures market, since anyone with access to enough money can control any futures market, and central banks have access to infinite money.

Inflation hedges Warburton suggested included farmland and clean water supplies. For as the saying goes: "The futures markets are not manipulated; the futures markets are the manipulation."

This market rigging by central banks and their agents explains the great disparagement of gold today: that, despite its tremendous price increase over the last 15 years, gold has not kept up with inflation since the metal's last great rise around 1980. Somehow no one who disparages gold asks why it has not kept up with inflation. The answer is that gold derivatives have created a vast imaginary supply of gold for which delivery has not been demanded, since most gold investors choose to leave their gold purchases on deposit with the bullion banks that sold them the imaginary gold.

As a result the world now has a fractional-reserve gold banking system that is leveraged in the extreme.

Yes, all commodity futures markets have created paper promises of supply that could not be covered by real product and have been settled in cash. But most commodity markets are for goods that eventually are delivered and consumed to a great extent.

Gold is different, for gold is not consumed but rather hoarded, as a means of exchange, as money, even as most gold purchased in the futures markets is never delivered at all but rather left on deposit with those financial institutions that purport to sell it.

This system has produced a very disproportionate amount of imaginary, elastic, but undeliverable supply, even as people buy gold precisely because they assume that its supply is not elastic, that its supply is limited to total past production plus annual mine production.

That assumption is a terrible mistake.

While the principle of most gold investment analysis is "You can't print gold," "paper gold" can be printed to infinity just like regular government currency -- and indeed it has been printed practically to infinity.

You can get an idea of the vast imaginary supply of gold by reviewing the incomprehensibly huge gold and interest rate derivative positions attributed to the U.S. investment bank JPMorganChase in the reports of the U.S. Comptroller of the Currency.

These derivative positions are almost certainly not JPMorganChase's own positions at all but, as GATA consultant Rob Kirby of Kirby Analytics in Toronto has written, rather U.S. government positions arranged through MorganChase:

As John Hathaway, manager of the Tocqueville Gold Fund, wrote last month:

"The modern-day central banker trades with counterparties that are giant commercial banks with derivative books of disturbing scale and complexity. It seems impossible that these commercial exposures could be constructed and maintained without the knowledge and complicity of the official sector. For example, Deutsche Bank, already a defendant in a thousand lawsuits, claims derivative exposure that is 20 times the gross domestic product of Germany and five times that of the entire Eurozone. It is not a great leap to suggest that central bank traders and their megabank opposites -- spawn of the same gene pool, schooled in the same institutions, career paths intertwined, frequenters of the same conferences, and just a speed-dial away -- are ideologically indistinguishable and intellectually and morally corrupt in equal proportion."

After all, the U.S. Treasury Department's Exchange Stabilization Fund is expressly authorized by law, the Gold Reserve Act of 1934, as amended, to trade secretly in all markets, including the gold market, on the U.S. government's behalf. And the law expressly exempts the ESF from answering to anyone but the treasury secretary and the president:

Gold market expert Jeffrey Christian of CPM Group testified to a hearing of the U.S. Commodity Futures Trading Commission on March 25, 2010, that the ratio of "paper gold" to real metal in the so-called London physical market may be as high as 100 to 1:

In January 2013 a report by the Reserve Bank of India estimated the ratio of paper gold to real gold at 92 to 1:

CPM Group's Christian described the manufacture of "paper gold" in his essay "Bullion Banking Explained" published in 2000:

Some international investment houses are on the short end of this enormous leverage and are existentially vulnerable to a short squeeze. It is not likely that they would put themselves in such a position without assurances of emergency support from central banks -- and indeed the investment houses have received such assurances many times in public statements by central bankers.

For there are many official admissions of gold market rigging.

These include statements by four former chairmen of the U.S. Federal Reserve Board (Alan Greenspan, Paul Volcker, Arthur Burns, and William McChesney Martin); the minutes of the Federal Open Market Committee; declassified U.S. Central Intelligence Agency and State Department records, including one that cites the necessity for the U.S. government to remain "the masters of gold" --
-- statements by central bankers from other countries, including three officials of the Bank for International Settlements; and documents from the BIS and the International Monetary Fund.

For example:

-- In testimony to Congress in July 1998, Federal Reserve Chairman Alan Greenspan declared that "central banks stand ready to lease gold in increasing quantities should the price rise." Thus Greenspan confirmed that the purpose of gold leasing was not what was usually claimed -- to earn central banks a little money on their supposedly dead asset in their vaults -- but rather to suppress the monetary metal's price:

-- In January 2012 former Federal Reserve Chairman Paul Volcker admitted to the German financial journalist Lars Schall, who is here tonight, that central banks need to suppress the gold price to stabilize exchange rates at what he called a "critical point":

Volcker already had written in his memoirs that in 1973 as a U.S. Treasury Department official he advocated gold price suppression:

-- In 2009 a remarkable 16-page memorandum was discovered in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." The memo is a detailed plan of surreptitious intervention by the U.S. government to rig the currency and gold markets to support the U.S. dollar and to conceal, obscure, or even falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis:

For safety's sake it is also posted at GATA's Internet site:

-- In a letter to President Gerald Ford in June 1975, Federal Reserve Chairman Arthur Burns reported a secret agreement with the German Bundesbank to obstruct market pricing for gold. Burns wrote to the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns added, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

The Burns letter is posted at GATA's Internet site here:

-- In June 2004 the deputy chairman of the Bank of Russia, Oleg Mozhaiskov, told a conference of the London Bullion Market Association in Moscow that he suspected the United States of suppressing the gold price. Mozhaiskov mentioned the Gold Anti-Trust Action Committee, the only words he spoke in English, though at that time GATA had never knowingly had any contact with anyone in Russia:

-- A president of the Netherlands Central Bank who was also president of the Bank for International Settlements, Jelle Zijlstra, wrote in his memoirs in 1992 that the gold price was suppressed at the behest of the United States:

-- William R. White, the director of the monetary and economic department of the Bank for International Settlements, the central bank of the central banks, told a BIS conference in Basel, Switzerland, in June 2005 that a primary purpose of international central bank cooperation is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful":

-- The Bank for International Settlements actually advertises to potential central bank members that its services include secret interventions in the gold market. Here's a slide from a PowerPoint presentation the bank made to prospective central bank members in at BIS headquarters in Basel in June 2008:

-- Indeed, according to its annual report last year, the BIS functions largely as a gold banking and gold market intervention service for its member central banks. On Page 110 of the report the BIS says: "The bank transacts foreign exchange and gold on behalf of its customers, thereby providing access to a large liquidity base in the context of, for example, regular rebalancing of reserve portfolios or major changes in reserve currency allocations. The foreign exchange services of the bank encompass spot transactions in major currencies and Special Drawing Rights (SDR) as well as swaps, outright forwards, options, and dual currency deposits (DCDs). In addition, the bank provides gold services such as buying and selling, sight accounts, fixed-term deposits, earmarked accounts, upgrading and refining, and location exchanges."

The only point of central banks trading in gold derivatives is to affect the price. See:

-- Secret gold market interventions by the BIS have been going on for a long time. A long article in Harper's magazine in 1983, based on a seemingly unprecedented interview with BIS officials, disclosed that the BIS was constantly intervening in the gold market in secret:

-- Perhaps most incriminating is the secret March 1999 staff report of the International Monetary Fund that GATA obtained in December 2012. The secret IMF report says Western central banks conceal their gold swaps and loans to facilitate their secret interventions in the gold and currency markets:

Some records of surreptitious intervention in the gold market by Western central banks are quite current. The director of market operations for the Banque de France, Alexandre Gautier, told the London Bullion Market Association’s meeting in Rome in September 2013 that the French central bank trades gold for its own account "nearly on a daily basis" and is "active in the gold market for other central banks and official institutions."

Speaking again to the LBMA, meeting last month in Lima, Peru, Gautier said central banks lately have been managing their gold reserves "more actively," and the slides he presented indicated that this more active management is undertaken mainly through gold swaps, a mechanism of surreptitious market intervention. In what appeared to be a reference to the recent clamor for gold repatriation in Germany and Switzerland, Gautier cautioned his co-conspirators at the LBMA that what he called "auditability" is "becoming a crucial issue" for central bank gold reserves.

-- The recent participation of the United States in gold market manipulation was confirmed by a member of the Board of Governors of the Federal Reserve System, Kevin M. Warsh, in a letter written in September 2009 denying GATA's request for access to the Fed's gold records.

Warsh wrote that among the records the Fed was refusing to show GATA were records of gold swap arrangements between the Fed and foreign banks:

In commentary published in The Wall Street Journal in December 2011 Warsh wrote about what he called "financial repression" by governments. "Policy makers," Warsh wrote, "are finding it tempting to pursue 'financial repression' -- suppressing market prices that they don't like." Warsh added, "Efforts to manage and manipulate asset prices are not new."

I later reached Warsh by e-mail and asked him if he had learned about "financial repression" through his service on the Federal Reserve Board. I also asked him if he would identify the asset prices under manipulation by policy makers. He cordially wished me a nice day.

The government of China knows all about the gold price suppression scheme and isn't afraid to talk about it.

The U.S. State Department diplomatic cables obtained by the Wikileaks organization and published in 2011 included cables from the U.S. embassy in Beijing to the State Department in Washington that were translations of reports from the Chinese government-controlled news media. These translations included stories and commentaries about gold price suppression by the United States.

For example, the Chinese newspaper World News Journal wrote: "The United States and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or euro. Therefore, suppressing the price of gold is very beneficial for the United States in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the renminbi."

So not only does the Chinese government know all about the gold price suppression scheme -- the U.S. government knows that China knows:

Many people in the gold business in China also know about gold price suppression by the U.S. government and its allies.

For example, thanks to GATA consultant Koos Jansen, now market analyst for Bullion Star in Singapore, last January GATA published the remarks of the president of China's gold mining association, Sun Zhaoxue, to a financial conference in Shanghai, in which he said gold price suppression is U.S. government policy to maintain the dominance of the U.S. dollar in the ongoing international currency war:

And last December GATA distributed commentary by Zhang Jie, deputy editor of the Chinese publication Global Finance and a consultant to the China Gold Association, who said the U.S. Federal Reserve manipulates the gold market to protect the U.S. dollar's standing as the world reserve currency. Zhang said:

"Through continuous gold leasing the gold in the market can be circulated and produce derivatives, creating more and more paper gold. This is very significant for the United States.

Gold leasing is a major tool for the Federal Reserve and other central banks in the West to secretly control and regulate the gold market, creating gold credit derivatives and global credit conflict":

The U.S. government's public archives are actually full of records documenting the government's longstanding objective of removing gold from the world financial system to maintain the dominance of the U.S. dollar as the world reserve currency.

Perhaps most descriptive are the minutes of a meeting at the U.S. State Department in April 1974 between Secretary of State Henry Kissinger and his assistant undersecretary of state for economic and business affairs, Thomas O. Enders.

The meeting addresses the growing desire among Western European countries to revalue their gold reserves upward, thereby increasing gold's role in the international financial system and threatening the dollar's status:

Secretary Kissinger asks: "Why is it against our interest to have gold in the system?"

Assistant Undersecretary Enders answers him.

Mr. Enders: It's against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings -- about $11 billion -- a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We've been trying to get away from that into a system in which we can control. ...

Secretary Kissinger: But that's a balance-of-payments problem.

Mr. Enders: Yes, but it's a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible -- no longer acceptable. Therefore, we have gone to Special Drawing Rights, which is also equitable and could take account of some of the less-developed-country interests and which spreads the power away from Europe. And it's more rational in ...

Secretary Kissinger: "More rational" being defined as being more in our interests or what?
Mr. Enders: More rational in the sense of more responsive to worldwide needs -- but also more in our interest. ...

So there you have it. Whoever has the most gold can control its valuation -- and implicitly the valuation of every currency -- and thereby create the most "reserves," the most money.
Of course money is power and infinite money is infinite power. The interest of the United States, at least as it was perceived at that meeting at the State Department in April 1974, was to dominate the world through the power over money creation and currency valuation.

Documentation continues to be discovered. A few weeks ago the founder of the market research company Nanex in Illinois, Eric Scott Hunsader, called attention to documents filed with the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission by CME Group, operator of the major futures exchanges in the United States.

In its filing with the CFTC, the CME Group reports that it is giving volume trading discounts to central banks for trading all major futures contracts in the United States -- financial futures, metal futures, and agricultural futures:

In its filing with the SEC the CME Group reports that its customers include "governments and central banks":

The CME Group letter to the CFTC justifies secret futures trading by central banks throughout the currency and commodity markets as a matter of adding "liquidity" that will benefit all traders. But "liquidity" here is actually an ocean, for central banks can create infinite money, and no ordinary investor can trade against a central bank.

That central banks and governments are secretly trading all major futures markets in the United States signifies that central bank intervention in markets is now likely comprehensive -- that there really are no markets anymore, just interventions, that the main objective of central banking now is to prevent markets from happening at all,and that the market economy that has been the engine of progress and democracy has been destroyed.

This is the financial news story of the century.

GATA has sent all these documents to major financial news organizations throughout the world. But no mainstream financial news organization has yet reported about them and what they mean.

There are many, many more records about the Western government policy of gold price suppression. They are posted in the "Documentation" section of GATA's Internet site --

-- but the records located by GATA are almost certainly only a small fraction of the documents that exist.

These records are not mere speculation and "conspiracy theory." They are the records of decades-long Western government policy conducted almost entirely in secret.

But there is nothing wrong with the word "conspiracy" here.

Conspiracy occurs when people meet in secret to decide and pursue a course of action.

For example, it was conspiracy when the central bank members of the European Central Bank met secretly over the last 15 years to formulate all four editions of their Central Bank Gold Agreement and said they would continue to meet secretly to plot their policy toward gold:

It also was conspiracy when the G-10 Gold and Foreign Exchange Committee, consisting of representatives of the central banks and treasury departments of the major industrial nations, met secretly in April 1997 at the BIS in Switzerland to coordinate their secret policies toward the gold market:

Indeed, even in nominally democratic countries, government itself is often conspiracy. Government is conspiracy whenever it functions in secret. How can any serious market analyst or journalist disparage the term?

Then there is the evidence of market action itself.

GATA also has exposed gold market manipulation by examining trading data, most notably in a study by our late board member and market analyst Adrian Douglas showing that the gold price during trading in the London market went down steadily for 10 years even as the world gold price went up steadily in that time. Anyone buying gold on the opening of the London market and selling it on the close every day over the last decade would have lost a huge amount of money even as the gold price rose steadily:

GATA consultant Dimitri Speck, who is here tonight, has written a whole book compiling the data of gold market manipulation, "Secret Gold Policy":

That is, the London Gold Pool of the 1960s suppressing the price continues to operate today, only with different mechanisms.

In the last several years attacks on the gold price have become frequent and obvious, like the strange dumping of paper gold in the futures markets on April 12 and 15, 2013, where the nominal equivalent of maybe a quarter of annual gold mine production was sold in two days even though there was no special gold-related news. Many similar dumps are undertaken at particularly illiquid times as some entity with access to seemingly infinite money tries to pound the gold price down for psychological effect.

Even on October 1, 2013, as the U.S. dollar index broke below 80 and the government of the world's only superpower, the issuer of the world reserve currency, was incapacitated and half shut down by political turmoil, the gold price suddenly fell by 5 percent under an avalanche of futures selling, sometimes at a rate of many thousands of contracts per second.

These overwhelming attacks on the gold market out of the blue are almost certainly incidents of government intervention. Nothing else can plausibly explain them.

Indeed, central banks refuse to explain their involvement in the gold market.

In 2009 GATA sued the Federal Reserve in U.S. District Court for the District of Columbia seeking access to the Fed's gold records. Technically we won the case in 2011, as the court ordered the Fed to disclose one record, the minutes of that G-10 Gold and Foreign Exchange Committee meeting in April 1997.

The Fed was ordered to pay GATA court costs, which it did.

But the court allowed the Fed to conceal all its other gold records:

Since that time GATA has peppered Western central banks with specific questions about their gold activities, which is something financial journalism, mining companies, or any ordinary investor could do. The central banks largely maintain a guilty silence.

For example, in July 2013 the Bank of England reported on its Internet site that it was vaulting about 1,200 tonnes of gold less than it had listed in the bank's annual report in February.

GoldMoney research director Alasdair Macleod called attention to this. It raised suspicion that the departed gold had been used in the smashing of the gold price three months earlier. So GATA asked the Bank of England to explain the discrepancy.

The Bank of England replied only that the data posted on its Internet site for the public was "deliberately non-specific." But that data had been fairly specific, and had given a number vastly different from the number published in the bank's annual report. Sensing its vulnerability, the Bank of England concluded its brief statement arrogantly and defensively: "The bank will not be offering any further comment on this matter." See:

The specific questions that GATA has put to central banks without receiving answers are posted at our Internet site and remain available to any serious financial journalist or gold investor:

As long as central banks refuse to answer some basic questions about their involvement in the gold market, it must be concluded that they have much to hide.

Why does all this matter? How might it end?

It matters because the rigging of the gold market is the rigging that facilitates the rigging of all markets -- part of a much broader scheme by which a secretive and unelected elite in the United States and Western Europe controls the value of all capital, labor, goods, and services in the world -- controls the value of everything and thereby impairs or destroys all markets and democracy itself everywhere and obstructs humanity's progress.

This is an utterly totalitarian and parasitic system. It is also just the latest manifestation of the everlasting war of the financial class against the producing class, only it is hidden well enough that the producing class hasn't yet figured it out.

This system might end in various ways.

First it's a question of world politics at the highest levels.

The system may end at the insistence of the developing world with an official worldwide revaluation of gold and gold's formal restoration to the international monetary system and the demotion of the U.S. dollar.

The system may end when one country pulls the plug on it, exchanging U.S. dollars and government bonds for more gold -- real metal -- than is available, or when ordinary investor demand exhausts supply, which is more or less how the London Gold Pool ended in 1968.

Or the system may end as part of a plan by the major central banks to avert the catastrophic debt deflation that now threatens the world.

For example, a study in 2006 by the Scottish economist Peter Millar concluded that to avert such a catastrophic debt deflation, central banks would need to raise the gold price by a factor of seven to 20 times in order to reliquefy themselves and devalue their currencies and society's debts generally:

In May 2012 the U.S. economists and investment fund managers Lee Quaintance and Paul Brodsky published a report speculating that central banks likely are already redistributing gold reserves among themselves in preparation for just such an upward revaluation of gold and gold's return as formal backing for currencies:

The current system's end is an arithmetical question, a question of how much real gold is retained by the central banks participating in the price suppression scheme. Some metal is always draining away to support the gold derivatives system, and it seems lately that more is draining away every year than is being mined. How much do the gold-suppressing central banks really still have left? How much gold has been put into the market through swaps and leases?

Central banks refuse to say. For since the control of gold is the control of markets and the control of the valuation of everything, the amount, location, and disposition of central bank gold reserves are state secrets far more sensitive than the amount, location, and disposition of nuclear weapons.

The end of central bank market rigging is a question of education and publicity, a question of whether central banks that are not part of the gold price suppression scheme and investors alike will ever realize that as much as 90 percent of the world's investment gold, supposedly being held in trust for its owners, has been, to put it politely, oversubscribed. That is, the gold may not exist. If there is ever such a realization and delivery is demanded, gold will rise to multiples of its current price.

While that prospect excites gold investors, will governments let them keep the resulting extraordinary gains, or will governments impose windfall profits taxes or even try to confiscate gold?

If the gold price soars, will governments let mining companies keep taking metal out of the ground at current royalty rates? Will governments even let private companies keep mining gold at all?

On the other hand, if there is no general realization of the fraud of "paper gold" and central bank intervention in markets, gold price suppression and the destruction of markets generally may go on forever.

Central banks are formidable enemies because of their power to create infinite money and debt.

But that power is not their biggest advantage in the gold suppression scheme and the scheme to defeat markets and democracy generally.

For the scheme cannot work without deception, surreptitiousness, and misunderstanding.

And therefore to be overthrown the scheme needs only to be exposed, since when people realize that a market is rigged, they will not take the losing side of the trade.

That's why the biggest advantage of central banks here is not their power of money and debt creation but rather the complicity of the financial news media and the gold mining industry itself.

Mainstream financial journalists will not press the vital questions. Indeed, the first rule of mainstream financial journalism is: Never put a critical question to a central bank and report the inadequate answer. The second rule of mainstream financial journalism is that the first rule goes double in regard to gold.

The journalistic questions for central banks could begin very simply:

1) Are central banks trading secretly in the gold market and other markets, directly or through intermediaries, or not?

2) If central banks are secretly trading in the gold market and other markets, directly or through intermediaries, does this trading have policy purposes or is it just for fun?
3) And if this secret trading does have policy purposes, what are they and why are they too being kept secret?

Then the answers from central banks could be compared with the documentation GATA has compiled.

As for the gold mining industry, it seems unaware of the monetary nature of its product and the way the price of its product is suppressed. Further, the gold mining industry has been intimidated by its governments and its bankers, all agents of central banks, and has consented to die quietly.

Will any of this ever really change?

I think it will eventually. Some central banks are growing suspicious of what presents itself as the gold market and are steadily accumulating gold reserves. And of course here in Germany your citizens campaign has induced the Bundesbank at least to claim that it is gradually repatriating your national gold reserves. Your citizens campaign has caused enormous trouble and embarrassment for the bad guys and has inspired similar movements in other countries. I salute you.

But will any of us live to see the defeat of totalitarian central banking as it is now practiced? I don't know. Sometimes I can only get apocalyptic about it, with a little help from the American abolitionist poet James Russell Lowell:

Truth forever on the scaffold,
Wrong forever on the throne,
Yet that scaffold sways the future,
And, behind the dim unknown,
Standeth God within the shadow
Keeping watch above His own.

In this struggle we are up against nearly all the money and power in the world. But the Ascent of Man should continue, and if we're doing the right thing we can hasten that ascent a little. We are all working to advance the ideals of democratic, transparent, and limited government, of fair dealing among nations and people, and, really, to advance individual liberty and the brotherhood of man, which, in the end, are what the monetary metals are about.

If you'd like more information about this issue or help in locating any of the documents I've mentioned, please e-mail me at

Thanks for your kind attention.


BIS Quarterly Review December 2014 - media briefing

On-the-record remarks by Mr Claudio Borio, Head of the Monetary and Economic Department, and Mr Hyun Shin, Economic Adviser & Head of Research, 5 December 2014 

Claudio Borio   

Once again, the financial market scene was far from uneventful during recent months.

Volatility spiked in mid-October. Stock prices fell sharply and credit spreads soared. US Treasuries were exceptionally volatile, at least intra-day - even more than at the height of the Lehman crisis. And yet, just a few days later, the previous apparent calm had returned.

Volatility in most asset classes had sunk back down to the depths of the previous two years.

And as benchmark sovereign yields sagged once more, the valuation of riskier assets recovered at least part of the lost ground. So, what is going on?
It is too early to say what exactly triggered these sharp, if brief, price swings. As we speak, researchers and market regulators in the United States and elsewhere are sifting through tons of data to understand every market heartbeat during those turbulent hours on October the 15th. That said, some preliminary reflections are in order. No doubt, one-sided market positioning played a role, as participants were wrong-footed.

But is there more to it?
It is, of course, possible to draw comfort from recent events. Those who do so stress the speed of the rebound. At the same time, a more sobering interpretation is also possible. To my mind, these events underline the fragility - dare I say growing fragility? - hidden beneath the markets' buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves.

Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions.

Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed.
The highly abnormal is becoming uncomfortably normal. Central banks and markets have been pushing benchmark sovereign yields to extraordinary lows - unimaginable just a few years back.

Three-year government bond yields are well below zero in Germany, around zero in Japan and below 1 per cent in the United States. Moreover, estimates of term premia are pointing south again, with some evolving firmly in negative territory. And as all this is happening, global growth - in inflation-adjusted terms - is close to historical averages. There is something vaguely troubling when the unthinkable becomes routine.
Looking ahead, two major developments in the period under review are likely to leave a profound imprint on the financial and macroeconomic scene.
The first concerns exchange rates. As macroeconomic conditions have diverged across the key currency areas, so have the actual and expected monetary policy stance. The ECB and the Bank of Japan have loosened policy and indicated that more easing may well be in the offing; by contrast, the Federal Reserve has stopped purchasing assets and has been hinting at an interest rate hike at some point in 2015. This has already triggered sizeable exchange rate shifts. The US dollar has appreciated relative to the euro and the yen as well as more generally.
The second concerns the sharp drop in the oil price, alongside a milder one in that of other commodities. In fact, the 40 per cent fall since June 2014 is the third largest in the last fifty years, exceeded only by that following the Lehmann default and the breakdown of the OPEC cartel in 1985.

Part of the drop reflects demand factors, not least softening growth in China. But much of it reflects unexpected increases in supply. This is surely good news for the global economy. That said, there are bound to be winners and losers, and the drop may disproportionately affect some regions of the world, possibly compounding domestic vulnerabilities.
These developments will be especially important for emerging market economies. The spike in market volatility in October did not centre on these countries, unlike at the time of the taper tantrum in May last year and the subsequent market tensions in January. But the outsize role that commodities and international currencies play there makes them particularly sensitive to the shifting conditions.

Commodity exporters could face tough challenges, especially those at the later stages of strong credit and property price booms and those that have eagerly tapped equally eager foreign bond investors for foreign currency financing. Should the US dollar - the dominant international currency - continue its ascent, this could expose currency and funding mismatches, by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the United States normalise.
Unfortunately, there are few hard numbers about the size and location of currency mismatches. What we do know is that these mismatches can be substantial and that incentives have been in place for quite some time to incur them. For instance, post-crisis, international banks have continued to increase their cross-border loans to emerging market economies, which amounted to $3.1 trillion in mid-2014, mainly in US dollars. And total international debt securities issued by nationals from these economies stood at $2.6 trillion, of which three quarters was in dollars.

A box in the Highlights chapter of the Quarterly Review seeks to cast further light on this question, by considering the securities issuance activities of foreign subsidiaries of non-financial corporations from emerging markets.
Against this backdrop, the post-crisis surge in cross-border bank lending to China has been extraordinary. Since end-2012, the amount outstanding, mostly loans, has more than doubled, to $1.1 trillion at end-June this year, making China the seventh largest borrower worldwide.

And Chinese nationals have borrowed more than $360 billion through international debt securities, from both bank and non-bank sources. Contrary to prevailing wisdom, any vulnerabilities in China could have significant effects abroad, also through purely financial channels.
Let me now pass on to Hyun Shin, who will go into more detail about the special features in this issue.

Hyun Shin   

Let me take over and discuss the special feature articles in this issue of the BIS Quarterly Review.
In the first article, my colleagues Bob McCauley and Tracy Chan take on one of the perennial questions in international finance: namely, why so much of the world's foreign exchange reserves are held in US dollar-denominated assets. More than 60% are held in US dollars, and that share has barely budged since the Bretton Woods era of fixed exchange rates to the dollar even though the share of US output in the world economy has declined to less than one quarter of global output.
Bob and Tracy explore to what extent the high dollar share can be explained by a concern by reserve managers to maintain a stable value of their foreign exchange reserves in local currency terms. The idea is that a country holds its FX reserves in dollars if the local currency moves closely with the dollar. Bob and Tracy introduce the notion of a "dollar-zone" of countries whose currencies are relatively stable against the dollar, and they show that a country's weight in the dollar zone explains about two thirds of the variation across countries in the dollar share of their reserve portfolios.
In the second article, Adonis Antoniades and Nikola Tarashev revisit the issue of the risks associated with securitisation, which received a lot of attention during the financial crisis. The practice of bundling loans and then slicing and dicing the claims into tranches of different seniorities received particular attention. It turned out that the mezzanine and senior tranches were much more risky than investors had bargained for.
With signs of the beginnings of a revival of securitisation discussed briefly in the Overview chapter, the question of the true risk of securitised claims is back on the agenda, and this piece is well timed.

Adonis and Nikola show that no matter how simple the underlying loans are, the slicing and dicing of claims into tranches of differing seniorities introduces a so-called "cliff effect" into the mezzanine tranche. The idea is that total losses on the securitised piece are highly sensitive to measurement error in the default risk of the underlying claims. Since we cannot banish uncertainty completely, such sensitivity to small errors in measurement means that calculating the appropriate amount of capital as a buffer against loss is subject to large uncertainty. The problem is even more severe when the securitised assets are sliced and diced once again into further securitised assets through the practice of "securitisations squared", which was prevalent before the crisis.
The uncertainty about the risk assessment of mezzanine tranches means that any calculation of the prudent regulatory bank capital held for these tranches should be significantly higher than that for the underlying asset pool. By how much higher depends on the nature of this pool.
Nikola is the author of another special feature in this Quarterly Review, this time with Rungporn Roengpitya of the Bank of Thailand and Kostas Tsatsaronis of the BIS. They use bank balance sheet data and a technique called "statistical clustering" to classify banks into broad categories that share similar summary features of their balance sheets. Using this technique, they identify three distinct bank business models: retail-funded commercial banks, wholesale-funded commercial banks, and capital markets oriented, or trading, banks.
Armed with this classification, the authors then investigate how well these banks performed according to a number of yardsticks. During last decade, they find that retail-funded commercial banks displayed the lowest variation in its return on equity, while the wholesale-funded commercial bank was the most cost-efficient.
But they also find that business models are not set in stone. Banks can and do shift their business model over time. In the years before the crisis, they moved mostly from a retail-funded towards a wholesale-funded business model. But the trend reversed in the years after the crisis, with wholesale-funded banks coming to rely more on deposits.   

The final special feature continues the recent string of studies from the BIS examining the issuance of debt securities by non-financial corporations headquartered in emerging market economies. The box in the Highlights chapter that Claudio mentioned a moment ago also belongs to this line of research.

I was involved in this latest special feature, and together with Stefan Avdjiev and Michael Chui, we ask how a non-financial company can issue bonds offshore and send the money back to headquarters, and how such transactions might show up in the balance of payments. We dig deep into the balance of payments to find three channels.
Some of the money shows up foreign direct investment, or FDI for short. We often associate FDI with greenfield investment or the acquisition of domestic firms by foreigners. But FDI also includes the loans made by an offshore subsidiary to its parent. For a number of emerging economies, we find that such flows are quite large. Far from being stable or "good" flows, such loans would have more in common with hot money that could be withdrawn if foreign creditors demand their money back.
A second channel is trade credit between companies that arises from delays in paying invoices.

Trade credit is typically quite small, but we show that it is large for some countries.
A third channel is cross-border deposits in the domestic banking system. We try to capture such deposits by combining the balance of payments data with the BIS international banking statistics. The BIS data cover only the loans made by banks, and so any difference between the two series should give an indication of the activity of non-banks. These two series tracked each other reasonably closely until the financial crisis, but the gap between them has subsequently widened dramatically, indicating a pickup in external loan and deposit financing by non-banks.

There is even reason to believe that this comparison understates non-financial deposits in emerging market economies because of reporting issues in the balance of payments.

Heard on the Street

Ratings Game Behind Big Banks’ Derivatives Play

Wall Street’s Victory May Have Steep Political Costs

By John Carney 

Dec. 12, 2014 3:45 p.m. ET

Why did fierce fighting on Capitol Hill over an arcane piece of financial regulation nearly derail passage of the $1.1 trillion spending bill passed by Congress Thursday night?

The provision largely repeals a Dodd-Frank Act rule that required banks to push some derivatives into subsidiaries that aren’t eligible for government support, such as deposit insurance or borrowing from the Federal Reserve’s discount window. So far, none of the big banks have explained why such a fight was worth having. There has been talk of the move helping small businesses and midsize financial firms, or clearing up inconsistencies within the financial overhaul law.

That rings hollow. As with so much else on Wall Street, short-term profit was the likely motive along with reluctance to give up what is essentially a taxpayer subsidy.

For starters, the banks’ own actions show there was a good deal at stake. J.P. Morgan Chase chief James Dimon called to lobby lawmakers Thursday, according to people familiar with the calls. And the provision’s language was reportedly authored by lobbyists for Citigroup . That led Sen. Elizabeth Warren to say, “This is a democracy and the American people didn’t elect us to stand up for Citigroup.”And while 1,404 U.S. banks had derivatives activities at the end of the second quarter, according to the Office of the Comptroller of the Currency, just five accounted for 95% of the total notional derivatives of $302 trillion. They are: J.P. Morgan, Citigroup, Goldman Sachs Group , Bank of America and Morgan Stanley .

Of vital importance, especially for Citi, is where the derivatives are legally housed. Except for Morgan Stanley, the banks hold most derivatives in their depository unit. The advantage: The bank subsidiaries, with implicit government backing, are considered less risky than parent holding companies. Being seen as a less-risky counterparty gives banks an advantage in pricing and collateralization of derivatives.

Bank-capital rules matter, too. These impose capital charges based on an assessment of counterparty risk, which is closely linked to credit ratings. And those ratings explain the big banks’ desire for the rule change.

Citigroup’s insured depository unit is rated A2 by Moody’s ; the parent company is a far lower Baa2. So a bank buying a derivative contract from the parent would receive a higher capital charge than if it bought it from the depository unit. So the price Citi could fetch for it would be lower. The same divergence exists at the other banks, though to a lesser degree.

The result: Each would suffer from having to push derivatives out of their depository units. In effect, they would lose the advantage of the higher rating and the view the government will support the bank unit.

Resistance on Capitol Hill wasn’t baseless. The rule would have pushed out nearly $10.4 trillion in credit default swaps, of which J.P. Morgan owns 44%, according to Thomas Hoenig, Federal Deposit Insurance Corp. vice chair. That is three times the amount of such swaps American International Group had when it was bailed out.

One irony is that Morgan Stanley arguably lost out because it has few derivatives in its bank. So the push out would have leveled the playing field among Banks.

Another is that the banks may have overreached. Yes, they have secured a short-term financial advantage. But they have also galvanized Wall Street’s critics and potentially squandered political capital being rebuilt following the financial crisis.

12/10/2014 04:07 PM

Reforming France

Emmanuel Macron's Impossible Mission

By Julia Amalia Heyer

 French Economics Minister Emmanuel Macron: "If being a politician means wanting to be re-elected at any price, then I'm not one."
French Economics Minister Emmanuel Macron: "If being a politician means wanting to be re-elected at any price, then I'm not one."

Thirty-six year old Economics Minister Emmanuel Macron has been tasked by French President Hollande with reforming the country. But it won't be easy. Socialists view him with suspicion and the party's left wing is already preparing for battle.

Recently, he gave voice to the question himself. It was last Thursday at 8:30 a.m. and Emmanuel Macron, dressed in a teal suit coat and navy blue tie, found himself at a podium in the Grand Palais in Paris. "Why am I actually a Socialist?" he asked his audience.

For a former investment banker who was recently assigned with the unenviable task of reforming his country as economics minister, it is an excellent question.

Macron's audience last Thursday morning was made up of perhaps 70 business leaders in an event organized by an economics magazine. Most of them were just as elegantly dressed as Macron himself, and they chuckled with amusement at his question.

But instead of answering his own question, the minister for economics, industry and information technology unfurled his far-reaching vision for a reinvigorated France. He spoke of the common welfare, which needed to once again take precedence over individual interests. And he underscored his exposition with a quote from the Socialist reformer Jean Jaurès from the year 1887.

It is the French way, a method of situating one's self in the grand arch of history. And it suits Macron well.

France must change, he said last Thursday from the podium in the vast palace on the Champs-Élysées, and it wasn't the first time he had uttered the sentiment. The country isn't doing well, he continued. "Those who say we can continue on like this for another 10 years are lying."

Macron's tone was far from shrill. Rather, he spoke calmly, almost quietly.

Emmanuel Macron has been France's economics minister for three-and-a-half months now and, at 36 years, he is the youngest member of Hollande's cabinet. Since he was appointed to renew the country, he has been called everything from a "high-flyer," to a "beacon of hope" to a "careerist." The magazine Marianne recently even referred to him as a "wolf in sheep's clothing." There are some within François Hollande's inner circle who say he is the president's "last wildcard."

Symbolic Break

Back in March, Hollande heralded a political about-face by naming the conservative Social Democrat Manuel Valls as prime minister. Macron's appointment was a further symbolic break from the president's disappointing first two years in office.

Macron's predecessor at the Economics Ministry, Arnaud Montebourg, was a convinced Colbertist, an approach which calls for significant state control over the economy. Many in France still see it as the only valid model.

But Macron intends to push through far-reaching economic reforms of the kind that have thus far been largely shunned. There is much riding on his success and on whether Hollande and his party give him a free hand. The central question is whether France can find the strength to free itself of its current plight.

This week will go a long way toward determining whether it can. On Wednesday, Macron will be presenting his first significant draft law to the cabinet in Paris, the so-called "Loi Macron," including 107 different measures. The party's left wing has already said it will oppose the package.

The law, says Socialist lawmaker Jean-Jacques Urvoas, contains 107 "fragmentation bombs," while former Environment Minister Delphine Batho would not exclude the possibility of what she termed a "parliamentary accident." Many Socialists do not completely trust Macron because of the four years he worked as an investment banker with Rothschild. They see him as a handmaiden for high finance and as a careerist. "He probably doesn't even know how to get to party headquarters," one Socialist party member spat when President Hollande announced his appointment at the end of August.

Indeed, the criticism of Macron and his signature draft law makes it look for the moment as though the government may not get the support it needs when the package comes up for a vote in parliament, currently scheduled for January. Its failure would be the final proof that significant change is not compatible with the Hollande era.

'Responsibility Pact'

Macron is hoping to open up his country's overregulated, static labor market. One element of his plan, for example, calls for the elimination of legal protections which grant monopoly-like powers to dozens of professions. Notaries, pharmacists and bus and taxi drivers would all be affected.

Furthermore, he would like to allow shops to open on 12 Sundays per year instead of the current five and introduce €40 billion worth of tax and withholding relief to French companies over the next three years to help them on the road to increased competitiveness. A reduction of high non-wage labor costs, which play a role in the country's high rate of unemployment, is also part of the plan, at least for the low-wage sector.

All of these measures are part of the so-called "responsibility pact" introduced by Hollande at the beginning of the year, part of the president's attempt to make France more business friendly. The reforms are to be accompanied by spending cuts worth €50 billion by 2017. But in France, special interest groups remain powerful, meaning that negotiations over several elements of the pact have made little progress.

A Friday morning in November found Emmanuel Macron on his leather couch in his office, a basket of fruit from the supermarket Regis on the table in front of him. A bouquet of tulips adorned the shelf behind him. His office is in a glass and steel building on the banks of the Seine, one of the many ministries in the Paris quarter of Bercy. Together, they clearly convey the French view of the state's role in the economy.

Macron -- dapper and handsome with his perfectly parted hair and boyish face -- is relaxed as he lounges on his sofa. He possesses a perfect resume, of the kind that could lead one to suspect arrogance were he not so polite. Indeed, his CV explains much of the envy and resentment people have for him -- but also the immense hopes that have been placed on his shoulders.

"If being a politician means wanting to be re-elected at any price, then I'm not one," he says. The fact that he has never been elected to political office, he says, gives him the necessary freedom to fight for his convictions. On his desk stands a model of the Ariane 5 rocket next to stacks of colored file folders. If there is a picture of his family, it is well hidden.

Since 2007, Macron has been married to his former French teacher, Brigitte Trogneux, who is 20 years his senior. He was just 17 when they met at the Catholic school he went to in Amiens, north of Paris. The gossip magazine Closer, which has preferred in the past to focus on Hollande's liaison with the actress Julie Gayet, recently published a photo series of Macron and Trogneux. It showed the two taking a weekend stroll through Montmartre, he in jeans and white shirt and she, a peroxide blonde wearing dark sunglasses. They make for an unconventional couple, and not just in France.

'You Can't Pick the Moment'

On this November morning, Macron speaks openly about the failures of recent French governments, including his own, and their preference for blaming others for not introducing badly needed reforms. He is particularly critical of what he calls "misguided Marxism," a clear reference to the majority of his own party.

He is fully aware of the resistance he is facing. Though he often demands rhetorical clarity, the frequency with which he escapes into vocal contortions has increased. When asked, for example, about the 35-hour work week -- sacred to many Socialists -- he says: "I defend it, but I don't place it on a pedestal." He would like to see "more flexibility," he says. It makes it sound like he would like to do away with it, but doesn't have the power at present -- a realistic assessment.

When asked if he is bothered by the fact that his first ministerial post has come under a struggling President Hollande, he responds coolly: "You can't pick the moment in which you take on responsibility." It is sentences such as these that lay bare his elite school education and the rhetorical aloofness that comes along with it. He is adept at finding an appropriate reply to any query within just a few seconds.

In France's political class, Macron's elite education -- he graduated from Sciences Po and Ena -- is hardly an exception, of course. Prior to moving on to the Ècole Nationale d'Administration, attended by many top French politicians, including Hollande, Macron obtained a master's degree in philosophy, writing his thesis on Machiavelli. For two years, he also worked as the assistant to well-known philosopher Paul Ricoeur. Together, the two wrote essays on history and memory for the philosophy periodical Esprit, where Macron is still listed as a contributing author, though his last article for the publication appeared in 2011, after he had already begun working as an investment banker. His business career also included a stint as an advisor for customers such as Nestlé.

Hollande and Macron met several years ago at a dinner hosted by Jacques Attali, a former advisor to François Mitterrand, who has great respect for Macron. It is possible the two hit it off so well because Macron, like Hollande himself, is the consummate technocrat.

Before Macron became minister, he was Hollande's economic advisor, first during the campaign and then in the Elysée. His views were sought out and valued, but very few of them actually found their way into governmental policy. Macron, for example, was particularly critical of Holland's 75 percent tax on incomes over €1 million, saying it made France a "Cuba without sun." The tax was implemented anyway.

'Time Is Too Short'

In the Elysée, he was called Mozart because of his piano-playing abilities, which are advanced enough that he likely could have become a professional pianist. But he always wanted to go into politics, say long-time acquaintances. He got plenty of help along the way from well-known political personalities, most of them older men and not all of them from the leftist camp.

Alain Minc, a former advisor to President Nicolas Sarkozy, is one of them. He has known Macron for more than 10 years, calls him "my chick," and says Macron is an "extremely able minister.

Nevertheless, he doubts whether he will achieve much. "In the two-and-a-half years remaining in Hollande's presidency, it won't be possible to push through large reforms. The time is too short," he says, adding that Macron won't get the support he needs from the Socialist-controlled parliament. Minc says that Macron and Valls are alone with their desire for an economic renewal and that when the economy minister presents his plans to lawmakers in January, the battle against them will begin in earnest. Macron, Minc believes, is a "great talent" damned to be forced to wait for better times.

The wait might be long. The French economy has shown no growth in the last three years with unemployment, currently at almost 11 percent, rising during the same period. Hollande's inconsistency is partially to blame. He has taken steps forward, but they have often been followed by steps backward, a back-and-forth that has consumed much of his five-year term in a presidency that is the least popular France has seen in some time. What does he really want? Despite the appointments of Valls and Macron, it is a question that still can't be answered.

The prime minister, the economics minister and the president agree on one thing, though: They are opposed to biting austerity measures, fearing they might plunge France even deeper into recession. Indeed, Paris only plans to bring France's budget deficit in line with the EU maximum -- of 3 percent of gross domestic product -- in 2017. The European Commission has admonished the Hollande administration while German Chancellor Angela Merkel has desperately tried to get her flagging neighbor to change course. But to no avail.

A Meaningless Gesture

Indeed, France has recently found powerful allies for its dawdling in Berlin. In late November, a report called "Reform, Investment and Growth: An Agenda for France, Germany and Europe," was released by the Hertie School of Governance in Berlin. The study had been jointly commissioned by Macron and his German counterpart Sigmar Gabriel, but the two immediately rejected its core demands, a move which essentially degraded the report to a meaningless gesture.

Back in his office, Macron furrows his brow and says he is well aware that his country has a credibility problem following all of the empty promises. "Instead of talking, we have to finally act," he says.

The problem is, though, that the French government hasn't just lost credibility abroad. Many in France have lost their faith in the state and in the political classes. Indeed, the crisis of confidence may even be more damaging to the country than its economic problems, and it is the reason that right-wing populist Marine Le Pen's Front National has found such success of late. Current surveys indicate that she would beat Hollande in the first round of presidential elections were they held now, yet another indication that traditional political parties have fallen into disrepute.

It is perhaps no surprise, then, that Macron is confronted by skepticism from all sides. His approval rating of 35 percent may make him one of the most popular members of Hollande's current cabinet. But he is also one of its most unusual: a young man who is more Social Democrat than Socialist.
Still, as the product of elite schools, he also embodies a type of politician that has long dominated French politics. Many such technocrats walk the halls of French ministries and of the Elysée -- and they are part of the increasing estrangement between the French and their politicians. Indeed, one of Macron's most telling missteps came when speaking in a radio interview about female workers at a factory that was threatened with closure. He said that these women "could neither write nor read."

It was a blunder that confirmed the image many had of him as someone with no understanding of grassroots Socialist voters. One newspaper called him an "elite sweetie," a moniker clearly intended as an insult. But in France, a country which has a long tradition of developing its elite, such insults are sanctimonious at best. Macron is but one of many functionaries in the upper echelons of business or politics who can easily move from one important position to another.

When he took office, Macron said that he would resign from his post as economy minister were he unable to push through policies he was convinced of. Either way, his future is secure.