Bill Gross: Games People Play

by: Bill Gross            

  • Even with the U.S. growing at an acceptable rate for now, its recovery over the past 5 years has been anemic compared to historic norms.
  • Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to "the final destination of all games."
  • Officials at the Fed seem to now appreciate the hole that they have dug by allowing interest rates to go too low for too long.

My mother taught me how to play Monopoly – the game – and the markets over 40 years past have taught me how to play Monopoly – the financial economy. Financial markets and our finance-based economy are actually quite similar to the game in terms of the rules and strategies it takes to win.

Monopoly’s real-time bank (the Fed) distributes money to players at the beginning and then continues to create more and more credit as the economy passes go. The cash in Monopoly isn’t credit and the player can’t borrow, so in this respect the game and the reality are quite different, but the addition of cash liquifies the player in a similar way that the Fed creates money out of thin air to liquify today’s finance-based system and create growth in the real economy.

Good players know that it is critical to move quickly around the board, make acquisitions and then develop the properties by creating hotels. Three hotels on each property are desirable and of course as every Monopoly pro knows, it’s not Boardwalk or Park Place that are the key holdings but the Oranges and the Reds. Same thing in reality’s markets, I would suggest.

Which companies and which investments to overweight and how much leverage to use usually point to the eventual winners. But an ample amount of cash is important as well as you land on other owners’ properties. You need liquidity to pay rent or service debt – otherwise you sell assets at a discounted price and are swiftly out of the game. That reminds me of Lehman Brothers and its aftermath. Early in Monopoly, property is king but later in the game, cash becomes king and those without cash and the ability to get it go bankrupt.

It appears however, that since 2008 the rules of the finance-based economy have been substantially changed. Perhaps Parker Brothers will have to come with a new version of its own which incorporates the modern day methodology of central banks using Quantitative Easing and the outright purchase and occasional guarantee of private securities and public stocks to keep the game going. It’s as if Monopoly’s bank, which has a limited amount of 1, 5, 10 … dollar bills in each game box had “virtually” added trillions of dollars more in order to keep players solvent, in the hopes that some of it would trickle out to the real economy. With interest rates near zero and banks and other financial intermediaries sitting on trillions of Dollars, Euros, and Yen, why wouldn’t they lend it out to the private economy in hopes that they could obtain a higher return on their money? Sounds commonsensical, doesn’t it? Not in reality.

Well to be fair, in some cases and some countries they have. Bank loans in the U.S., for instance, are currently growing at 8% year over year and our economy appears to be growing at a 3% real and nominal growth rate with inflation at 0%. Still, even with the U.S. growing at an acceptable rate for now, its recovery over the past 5 years has been anemic compared to historic norms, and other developed economies are faring much worse. Many appear to be facing new recessions even with interest rates at 0% or – incredibly – negative rates. German and Swiss 5 year yields cost the lender money. Surreal to say the least.

Before 2008, economists and historians would not have believed such a condition could exist, but here it is with individual sovereign countries and their respective central banks pushing each other out of the way in a race to the bottom of interest rates – wherever that is – and a race to the bottom in terms of currency valuations. Central bankers claim that they are doing no such thing, but that bravado should be dismissed out of hand. You can’t accuse them of lying but you can accuse them of distorting reality.

If all of them collectively could be labeled “Parker Brothers,” like the creator of the board game, players would be justified in saying that competitive devaluations and the purchase of bonds at near zero interest rates is indeed a significant distortion of the markets and – more importantly – capitalism’s rules which have been the foundation of growth for centuries, long before Parker Brothers central bankers came into existence in the early part of the 20th century.

Even as the financial system morphed from the gold standard, to the Bretton Woods Dollar standard in 1944, and then the abandonment of any standard in 1971, capitalism seemed to be on firm ground. Incentives to lend, borrow, and invest for a profit were never challenged on a secular basis prior to 2008, except in Japan. There may have been recessions where such an appeal was eliminated at the margin, but no – capitalism was king. It was, as Francis Fukuyama proclaimed, “The End of History” – game, set, match – as Communism and other similar economic systems headed for the trash bin.

But the distortions created by post 2008 Parker Brothers have called Fukuyama’s forecast into question. There can be no doubt that negative or even zero percent interest rates cannot be a permanent rule on Monopoly’s new board. Investors and game players do not logically give money away; a mattress ultimately becomes a more attractive haven. And most importantly – because the markets and the financial sector are ultimately the servants of the real economy – growth is challenged and stunted.

In a new world, returns on real investment – ROI’s and ROE’s – become so low that the risk of a new project or the purchase of green hotels offer too little return for too much risk. Like the endgame in Monopoly where cash becomes king at the game’s conclusion, cash accumulates in corporate coffers or is used to repurchase stock in the financial economy. Investment in plant and equipment is deferred. Structural headwinds such as aging demographics and abnormally high debt/GDP ratios do not offer the player a “get out of jail free” card, in fact they help keep the cell door closed. Hope is challenged.

In the final analysis, while there is no better system than capitalism, it is incumbent upon it and its policymakers to promote a future condition which offers hope as opposed to despair.

Capitalism depends on hope – rational hope that an investor gets his or her money back with an attractive return. Without it, capitalism morphs and breaks down at the margin. The global economy in January of 2015 is at just that point with its zero percent interest rates.

Officials at the Federal Reserve – the most powerful and strongest of Parker Brothers – seem to now appreciate the hole that they have dug by allowing interest rates to go too low for too long.

Despite reasonable growth, some of them recognize the system’s distortion if only because inflation is going down, not up, in the process. Other Parker Brothers countries face deflation in the midst of negative interest rates. But the Fed, uniquely in my opinion, will move up the Monopoly board’s interest rates in late 2015, hoping to avoid landing on the figurative Park Place and Boardwalk in the process.

It won’t however, move quickly – capitalism has been damaged by the change in rules since 2008. Caution, therefore will prevail in the U.S. and elsewhere for a long time. Bonds despite their ridiculous yields will not easily be threatened with a new bear market. Investors should expect as well, that because of the slow unwinding of zero percent rates in the U.S., that U.S. and global stocks will be supported. Their heyday is over however. In effect, equity holders now own the Greens, the Blues and the railroads on Monopoly’s board while the Reds and the Oranges belong to another era. Returns in the real economy are too low partially because of the misguided efforts of Parker Brothers bankers.

There is no doubt that structural secular stagnation factors such as demographics, high debt, and technology have contributed significantly as well. Fiscal policy has been anemic since 2010.

In the final analysis, an investor – a player – must be cognizant of future low and in some cases negative total returns in 2015 and beyond. Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to what my mother warned was the final destination for all games – entertainment or real. “In the end,” she said, “all of the tokens, all of the hotels, all of the properties – they all go back in the box.” The strong odds are that 2015’s distorted capitalism continues with anemic growth, but the box rests on the family room coffee table, waiting, waiting, for its turn.

-William H. Gross

Greece and the euro’s future

Go ahead, Angela, make my day

Syriza’s win could lead to Grexit, but it should lead to a better future for the euro

Jan 31st 2015

IT WAS in Greece that the infernal euro crisis began just over five years ago. So it is classically fitting that Greece should now be where the denouement may be played out—thanks to the big election win on January 25th for the far-left populist Syriza party led by Alexis Tsipras. By demanding a big cut in Greece’s debt and promising a public-spending spree, Mr Tsipras has thrown down the greatest challenge so far to Europe’s single currency—and thus to Angela Merkel, Germany’s chancellor, who has set the austere path for the continent.

The stakes are high. Although everybody, including Mr Tsipras, insists they want Greece to stay in the euro, there is now a clear threat of Grexit. In 2011-12 Mrs Merkel wavered, but then decided to support the Greeks to keep them in the single currency. She did not want Germany to be blamed for another European disaster, and both northern creditors and southern debtors were nervous about the consequences of a chaotic Greek exit for Europe’s banks and their economies.

This time the odds have changed. Grexit would look more like the Greeks’ fault, Europe’s economy is stronger and 80% of Greece’s debt is in the hands of other governments or official bodies. Above all the politics are different. The Finns and the Dutch, like the Germans, want Greece to stick to promises it made when they twice bailed it out. And in southern Europe centrist governments fear that a successful Greek blackmail would push voters towards their own populist opposition parties, like Spain’s Podemos.

A good answer to a bad question
It could all get very messy. But there are broadly three possible outcomes: the good, the disastrous, and a compromise to kick the can down the road. The history of the euro has always been to defer the pain, but now the battle is about politics not economics—and compromise may be much harder.

Tantalisingly, there is a good solution to be grabbed for both Greece and Europe. Mr Tsipras has got two big things right, and one completely wrong. He is right that Europe’s austerity has been excessive. Mrs Merkel’s policies have been throttling the continent’s economy and have ushered in deflation. The belated launch of quantitative easing (QE) by the European Central Bank admits as much. Mr Tsipras is also right that Greece’s debt, which has risen from 109% to a colossal 175% of GDP over the past six years despite tax rises and spending cuts, is unpayable. Greece should be put into a forgiveness programme just like a bankrupt African country. But Mr Tsipras is wrong to abandon reform at home. His plans to rehire 12,000 public-sector workers, abandon privatisation and introduce a big rise in the minimum wage would all undo Greece’s hard-won gains in competitiveness.

Hence this newspaper’s solution: get Mr Tsipras to junk his crazy socialism and to stick to structural reforms in exchange for debt forgiveness—either by pushing the maturity of Greek debt out even further or, better still, by reducing its face value. Mr Tspiras could vent his leftist urges by breaking up Greece’s cosy protected oligopolies and tackling corruption. The combination of macroeconomic easing with microeconomic structural reform might even provide a model for other countries, like Italy and even France.

A very logical dream—until you wake up and remember that Mr Tsipras probably is a crazy leftwinger and Mrs Merkel can barely accept the existing plans for QE. Hence the second, disastrous outcome: Grexit. Optimists are right that it would now be less painful than in 2012, but it would still hurt.

In Greece it would lead to bust banks, onerous capital controls, more loss of income, unemployment even higher than today’s 25% rate—and the country’s likely exit from the European Union. The knock-on effects of Grexit on the rest of Europe would also be tough. It would immediately trigger doubts over whether Portugal, Spain and even Italy should or could stay in the euro. The euro’s new protections, the banking union and a bail-out fund, are, to put it mildly, untested.

So the most likely answer is a temporary fudge—but it is one that is unlikely to last long. If Mr Tsipras gets no debt relief, then he will lose all credibility with Greek voters. But even if he wins only marginal improvements in Greece’s position, other countries are bound to resist. Any changes in the bail-out terms will have to be voted on in some national parliaments, including Finland’s. If they passed, voters in countries like Spain and Portugal would demand an end to their own austerity.

Worse still, populists from the right and left in France and Italy, who are not just against austerity but against their countries’ membership of the euro, would be strengthened.

And there are technical problems with any fudge. The ECB is adamant that it cannot provide emergency liquidity to Greece’s banks or buy up its bonds unless Mr Tsipras’s government is in an agreed programme with creditors, so any impasse is likely to trigger a run on Greek banks. By stretching out maturities, some of this could be avoided—but that may be too little for Mr Tsipras and too much for Mrs Merkel.

Hello to Berlin
So in the end, Greece will probably force Europe to make some hard choices. With luck it will be towards the good outcome outlined above. Greek voters may be living in a fool’s paradise if they think Mr Tsipras can deliver what he says, but the Germans too have to look at the consequences of their obstinacy. Five years after the onset of the euro crisis, southern euro-zone countries remain stuck with near-zero growth and blisteringly high unemployment. Deflation is setting in, so debt burdens rise despite fiscal austerity. When policies are delivering such bad outcomes, a revolt by Greek voters was both predictable and understandable.

If Mrs Merkel continues to oppose all efforts to kick-start growth and banish deflation in the euro zone, she will condemn Europe to a lost decade even more debilitating than Japan’s in the 1990s. That would surely trigger a bigger populist backlash than Greece’s, right across Europe. It is hard to see how the single currency could survive in such circumstances. And the biggest loser if it did not would be Germany itself.

January 29, 2015 6:54 pm

China: Overborrowed and overbuilt

Jamil Anderlini

Its economy has become the world’s largest but a credit-fuelled construction binge threatens growth

Wangjing’s Soho building: analysts fear areas such as the Beijing suburb face a perfect storm of overcapacity, demographic shifts and the potential for local debt crises©Dreamstime
Wangjing’s Soho building: analysts fear areas such as the Beijing suburb face a perfect storm of overcapacity, demographic shifts and the potential for local debt crises
The last time China was the world’s largest economy Beijing was a city of about 700,000 people, and its Wangjing district was nothing but a jumble of barren man-made hills built to protect the capital from barbarian invaders to the north. That was 1890. Today, Beijing’s population is more than 21m and Wangjing is an expanse of half-empty or half-built offices and residential towers inside the city’s fifth ring road.
China has regained its title as the world’s biggest economy, overtaking the US in purchasing power terms for the first time in 125 years, but this growing suburb provides a stark example of the mounting problems the country faces. The restoration of its pre-eminent position comes just as China steps into the so-called “middle-income trap” and as serious stresses built up over the past few years threaten to come to a head.

With its mix of old apartment blocks and gleaming but empty futuristic office towers Wangjing is typical of the credit-fuelled property construction of the past decade, which boosted growth, but at a high price.

China’s official growth rate of 7.4 per cent last year was the slowest pace since 1990, when the country still faced sanctions in the wake of the 1989 Tiananmen Square massacre. The International Monetary Fund has lowered its growth forecast for China this year from 7.1 per cent to 6.8 per cent and predicts the country’s gross domestic product will grow slower than India next year for the first time in decades.

Places like Wangjing are representative of “the huge amount of property stock, the potential for local debt crises and the unfavourable demographic shifts that will cause the real estate downturn to last for at least another three years,” according to Ai Jingwei, a property market commentator.

Although growth of 7.4 per cent (or even 6.8 per cent) remains the envy of slow-growing developed economies in the west it is a far cry from the double-digit average annual expansion China maintained for three decades starting in the late 1970s.

As recently as the start of 2010, China’s economy was expanding by about 12 per cent in a surge of credit and construction unleashed by Beijing to counter the effects of the 2008 global financial crisis.

One of the biggest problems China faces now is that the slowdown is happening even as credit and construction, the main drivers of growth, are continuing almost unabated.

‘Disorderly unwinding’

While Beijing suburbs such as Wangjing are representative of this over-borrowing and overbuilding, the problem is even more acute in smaller cities that will never see the demand for real estate that should eventually catch up with supply in the capital.

China data

When ancillary industries are taken into account, real estate construction makes up about a quarter of China’s $10tn economy, a higher proportion than the US, Ireland or Spain at the height of their property bubbles last decade . Nearly a decade of frantic building has created massive overcapacity and left vast belts of empty apartment blocks ringing most Chinese cities.

Last year, the gravity-defying rises of the previous decade, which have seen prices quadruple in major cities, finally came to a halt. Average nationwide housing prices were down 4.3 per cent in December from 12 months earlier.

But total investment in the sector still increased 10.5 per cent for the year and unsold floor space was up by more than 26 per cent by the end of December, according to official figures.

The data suggests the correction in China’s real estate sector has not even really begun. When the sector starts to contract, which could be as early as this year, the headline growth rate could fall much faster and the country could face a wave of bankruptcies — as well as a possible debt crisis, economists warn.
The “slowdown in China could turn into a disorderly unwinding of financial vulnerabilities with considerable implications for the global economy,” the World Bank warned this month.

China data
The impact is already being felt in global commodity prices, including oil, and in the stuttering performance of economies in Brazil, Germany, Australia and much of Asia, which are increasingly reliant on Chinese demand.
Prices of commodities, such as iron ore and copper — key ingredients in any construction boom, are trading close to levels last seen in the midst of the global financial crisis, and that is before the Chinese construction correction has even properly happened.

The financial vulnerabilities are particularly concentrated at the local government level, where provincial officials have ignored budget constraints and a ban on borrowing to indulge in a credit and construction binge.

Local government debt

By the middle of 2013, the last time the government published any data, outstanding local government debt stood at Rmb18tn, up 80 per cent in just two years. That increase happened even after Beijing forbid local officials from raising excessive amounts of money.

But even as the economy slowed last year and officials were tasked with propping up growth with even more infrastructure investment, local government borrowing appears to have surged again. Partial statistics on local government fundraising shows they sold Rmb1.66tn worth of bonds in 2014, compared with Rmb900bn in each of the two previous years.
As with the continued rise in property investment, the government’s stated goal of deleveraging has not yet begun, which means that when it does the economy could slow much more sharply.
The links between the two biggest risks to China’s economy — the property sector and local government debt — make the situation more alarming.

Local governments rely on sales of land for 35 per cent of their revenues, according to research from Deutsche Bank, and virtually all of their outstanding debt is collateralised by government-owned land that is often seriously overvalued.

China data

In a recent study that raises concerns about the sustainability of current growth rates, Zhang Zhiwei, chief China economist for Deutsche Bank, found that local governments have become the dominant buyers of land in the past few years. To avoid a ban on running deficits local governments have set up thousands of wholly-owned “financing vehicles” that have borrowed money on their behalf from state banks, bond markets and lightly regulated underground institutions.

This process is technically illegal but has been tolerated because it bolstered growth in the wake of the global financial crisis.

As real estate sales have slumped and demand for land from commercial developers has evaporated, local officials have started using these financing vehicles to purchase land from themselves using credit from both state-owned and shadow banks. Officials and analysts worry that this is an unsustainable attempt to boost short-term growth and flagging fiscal revenues.

“In 2015, China will probably face the worst fiscal challenge since 1981 [before growth accelerated],” Mr Zhang wrote in his report. “We believe the fiscal slide [the fall in revenues] is the top risk for the Chinese economy and it is not well recognised in the market.”

As well as the slowest growth in a quarter of a century, 2014 marked the first time the ruling Communist party had missed its annual growth target since the height of the Asian financial crisis in 1998.

China data

Officials and some analysts argue that last year’s goal of “around 7.5 per cent” growth was not really missed because the government, anticipating a slower pace, had made it more of a soft target by introducing the word “around” for the first time. The government is set to announce a growth target of “around 7 per cent” this year.

But even Lou Jiwei, China’s finance minister, tells visiting dignitaries that Beijing will be happy with 6 per cent growth in coming years. In private, he warns that just to maintain that growth will require very high levels of government-led infrastructure investment.

Given the mounting problems at home it is little wonder China’s leaders see the title of world’s largest economy as a burden that brings unwanted attention. In fact, Beijing has so far refused to even acknowledge the new estimates, which attempt to adjust for the relative value of non-tradable goods and services in different economies.

Beijing in denial

“Recently there have been some scholars and media who estimated China’s GDP has already surpassed the US in purchasing power terms, but China and the National Bureau of Statistics do not recognise these opinions,” China’s genial statistician-in-chief said last week as he revealed the country’s latest growth figures.

“The problem comes from not being able to include identical goods in the complex basket of goods you compare [across different economies] — in China’s consumer basket of goods the main food items are steamed buns and rice, while European friends perhaps have a lot of bread in their basket. You can’t really compare them.”

Arguments over the relative value of carbohydrates aside, officials quite reasonably point out that China ranks 89th in the world in terms of per capita GDP, a better measure of the wealth of a population, putting it on a par with the Maldives or Peru. They also argue the latest estimates seriously overvalue the quality of items available in the Chinese market.

“China is only just entering the ranks of middle-income economies and is facing all of these headwinds so it really doesn’t want to accept the global responsibilities . . . of being the world’s number one economy,” says one person who was involved in the heated discussions over the new estimate.

Using the government’s current exchange rates China’s slowing economy topped $10tn for the first time last year, while the US economy is accelerating and is bigger than $17.5tn.

China data

According to research by the British economist Angus Maddison, China had the world’s biggest economy for nearly two millennia and in 1820 it accounted for 33 per cent of the world’s GDP, or about the same proportion the US accounted for in 2000. But by 1890, after decades of internal rebellion and foreign incursions, China had lost its number one spot to the US in purchasing power terms.

Back then China’s exports only accounted for 0.6 per cent of GDP, there were virtually no imports of machinery or other modern inputs and opium still accounted for more than a quarter of Chinese imports.

Today China is the world’s biggest trader of goods and the biggest consumer of everything from iron ore to powdered milk. So unlike the 1890s, when its economy was still largely self-sufficient and had little impact globally, the rest of the world now needs to pay close attention to half-built office towers in the suburbs of Beijing.

Additional reporting by Gu Yu


Distortions in the data – Is the real growth figure much lower?

China data
Amid all the discussion about China’s growth rate, some economists believe the world’s new biggest economy is already growing much slower than Beijing will admit.
Rodney Jones, who headed the Hong Kong research office of Soros Fund Management from 1994 to 2000 and is credited with predicting the Asian financial crisis, estimates China’s growth rate last year — officially 7.6 per cent — was actually 5.6 per cent.
He argues the headline rate is distorted by the way Beijing calculates value-added output in the industrial and manufacturing sectors. Instead, he uses the government’s own unadjusted industrial production figures to recalculate gross domestic product.
“The lower rate of 5.6 per cent is much more consistent with what we see happening in global commodity markets, and in other indicators like power production,” says Mr Jones, who runs his own advisory firm, Wigram Capital. “It also fits with producer price deflation, which has plagued China for 34 consecutive months — the longest period for the country on record.”
The prices of many commodities are close to the depressed levels they reached in the global financial crisis. Wholesale prices fell 3.3 per cent at the end of 2014 and power generation expanded just 3.2 per cent.
Senior Chinese officials say their plan is to support the economy by continuing to pump huge amounts of credit and infrastructure investment into the system. But they see it as a stopgap measure to give them time to overhaul an obsolete economic model and make growth driven more by consumption, services and innovation.
The question is whether the ruling Communist party can maintain sufficient growth to ensure employment and stave off social unrest in the medium term, while reforming the model that served it so well for more than three decades.

Wall Street for President?

Simon Johnson

JAN 30, 2015          

American flag office building

 WASHINGTON, DC – America’s presidential election is still nearly two years away, and few candidates have formally thrown their hats into the ring. But both Democrats and Republicans are hard at work figuring out what will appeal to voters in their parties’ respective primary elections – and thinking about what will play well to the electorate as a whole in November 2016.
The contrast between the parties at this stage is striking. Potential Republican presidential candidates are arguing among themselves about almost everything, from economics to social issues; it is hard to say which ideas and arguments will end up on top. The Democrats, by contrast, are in agreement on most issues, with one major exception: financial reform and the power of very large banks.
The Democrats’ internal disagreement on this issue is apparent when one compares three major proposals to address income inequality that the party and its allies have presented in recent weeks.
There are only small differences between President Barack Obama’s proposals (in his budget and State of the Union address), those made in a high-profile report from the Center for American Progress, and ideas advanced by Chris Van Hollen, an influential member of Congress. (For example, Van Hollen recommends more redistribution from higher-income people to offset a larger tax cut for middle-income groups.)
Against this backdrop of programmatic unity, the difference of opinion among leading Democrats concerning Wall Street – both the specifics of the 2010 Dodd-Frank financial reforms and more broadly – stands out in bold relief.
On Dodd-Frank, Democrats – including Obama – are apparently of two minds on the extent to which they should stick up for their own reforms. In December, the White House agreed to a Republican proposal to repeal a provision of Dodd-Frank that would have limited the risk-taking of the country’s largest banks (in fact, the proposal’s language was drafted by Citigroup).
More recently, however, Obama has threatened to veto any further attempts to roll back financial reform. And now he is proposing to impose a small tax on the largest banks’ liabilities, which he hopes will encourage “them to make decisions more consistent with the economy-wide effects of their actions, which would in turn help reduce the probability of major defaults that can have widespread economic costs.”
In contrast, the Center for American Progress report devoted very little space to financial-sector reform – in the authors’ view, such issues hardly seem to be a high priority. Van Hollen does have some concerns – and proposes a financial transaction tax to reduce speculative activities.
But a serious challenge to all of these views has now emerged, in proposals by Senator Elizabeth Warren, a rising Democratic star who has become increasingly prominent at the national level. In her view, the authorities need to confront head-on the outsize influence and dangerous structure of America’s largest Banks.
Warren’s opponents like to suggest that her ideas are somehow outside the mainstream; in fact, she draws support from across the political spectrum. In last month’s fight against Citigroup’s successful effort to roll back Dodd-Frank, for example, Warren’s allies included the House Democratic leadership, the Independent Community Bankers of America, Republican Senator David Vitter, and Thomas Hoenig (a Republican-appointed vice chair of the Federal Deposit Insurance Corporation).
Warren’s message is simple: remove the implicit government subsidies that support the too-big-to-fail banks. That single move would go a long way toward reducing, if not eliminating, crony capitalism and strengthening market competition in the financial sector. This is a message that plays well across the political spectrum. And growing support for Warren’s ideas helps the Federal Reserve and other responsible regulators in their efforts to prevent big banks from taking on dangerous levels of risk.
The big Wall Street banks have enormous influence in Washington, DC, in large part because of their campaign contributions. They also support – directly and indirectly – a vast influence industry, comprising people who pose as independent or moderate commentators, edit the financial press, or produce bespoke “research” at think tanks.
These megabanks are making a determined attempt to repeal as much of Dodd-Frank as possible, and the House Republicans seem keen to help them. This is not an issue that will fade away.
The Democrats need to figure out their policy on Wall Street. In the past, they have simply gone for the campaign contributions, doling out access and influence in exchange. It is now obvious that this is not consistent with defending what remains of Dodd-Frank.
Warren offers a plausible, moderate alternative approach to financial-sector policy that would play well in the primaries and attract a great deal of support in the general election. Will the Democrats seize the opportunity?

Gold: A Flash In The Pan?

by: Markit            

  • Gold ETFs attract $2bn worth of net inflows in January, the highest level since 2012.
  • Investors pull funds from other precious metal ETFs amounting to $1.3bn.
  • But gold's volatility levels indicate investors still question safe haven status.
Gold has broken through the $1300 mark for the first time in over four months, once again garnering the attention of investors as other precious metals seemingly fall out of favour.

Golden opportunity

The gold price is still down over 30% from all-time highs reached in 2011, but as the metal rose this week above $1300 for the first time in four months investors are questioning if these are the first glimpses of a potential gold rally.

The factors are stacking up for a bullish gold scenario as increased global debt levels have continued to flow through financial systems and now will be bolstered by Europe's new QE program, which should increase market liquidity further while also adding to volatility levels.

Speculative long positions in the metal have increased and gold prices have actually exhibited a stable price level in the last 12 months, trading in a $100 range in a year that was anything but stable for other commodities and major currencies.

Inflows into gold ETFs ticked up dramatically in January 2015 to $2.2bn and are set to be the highest since November 2012. This new trend comes after 21 months out of the past 25 seeing investors pull money out of ETFs exposed to gold. During this period a total of $44bn worth of funds exited gold ETFs.

Others not so precious

While gold's future prospects have attracted renewed interest and net inflows into ETFs, other precious metals have witnessed the opposite, particularly over the past two months.

ETF investors have withdrawn $1.3bn from non-gold precious metals ETFs in the last two months, perhaps indicating that uncertainties surrounding the global economy are driving renewed interest in the yellow metal's historic function of a safe haven for capital.

Mining new gold

Metals and Mining ETFs are made up predominantly of gold miners, which represent 80% of the categories AUM. While gold has come back into favour and other precious metals are seemingly falling out, materials and metal mining ETFs have not witnessed significant prolonged outflows. In fact, despite seeing a large outflow occurring in December 2014, investors have consistently invested in mining and metal ETFs since 2006, with net annual inflows every year.

Gold miners will benefit from increases in the gold price and have also recently benefited from oil prices halving in less than a year, driving operating costs lower. Lower oil prices and an increasing gold price overall can only be positive for gold mining firms.

This haven's more volatile

Despite the recent bullish sentiment towards the commodity in recent weeks, the last couple of years of volatility appear to have taken some of the shine off gold's safe haven status, if the options market is assessed. 90 day at the money options for contracts written against the SPDR Gold Trust are now trading with a greater implied volatility than those written against the S&P 500 according to Markit Daily Volatility.

GLD options used to trade with roughly the same implied volatility as the S&P 500 options prior to gold's recent price dip and at one point in 2013 traded 10% higher than equities.

While this volatility trend has tapered off somewhat in recent months as calm returned to the price of gold, the fact that options market makers price gold options as more volatile than large cap equity ones does punch a big hole in gold's safe haven status.

Alexis Tsipras' Open Letter To Germany: What You Were Never Told About Greece

by Tyler Durden

01/29/2015 22:27 -0500

Most of you, dear [German] readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence.

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to.

Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-covery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece. An opportunity Europe can ill afford to miss.


A peg in a poke

Currency markets have suddenly become a lot more volatile

Jan 31st 2015

THE year is only a few weeks old but already there has been turmoil in the foreign-exchange markets. On January 28th Singapore eased monetary policy, allowing its currency to fall to its lowest level against the dollar since 2010. The Swiss have abandoned their policy of capping the franc against the euro and the European Central Bank (ECB) has unveiled a big programme of quantitative easing (QE), sending the euro to an 11-year low against the dollar (see chart). Meanwhile, a rate cut from the Bank of Canada has pushed the loonie down to around 80 American cents, from 94 cents a year ago.

The main reason for this sudden surge of volatility seems to be a divergence in monetary policy: no longer are central banks moving in the same direction. “There are two huge forces at work,” says David Bloom, a currency strategist at HSBC. “The ECB and Bank of Japan are printing money and devaluing their currencies while the US economy is growing strongly. Anyone who stands in the middle risks getting crushed.”

The Swiss were caught in the middle. Their cap involved creating Swiss francs and using them to buy euro-denominated assets, but they clearly balked at maintaining this policy in the face of QE in the euro area. A much stronger franc, however, will add to the deflationary pressures in the domestic economy.

Falling commodity prices mean this is a potential problem for much of the rich world. A stronger currency can be the difference between low inflation and outright deflation. But currencies are a zero-sum game: if the euro and yen weaken, something must gain. So foreign-exchange markets become a little like a game of pass-the-parcel, in which countries try to offload the threat of deflation somewhere else.

Meanwhile, emerging-market currencies, which took a bit of a battering in 2014, have been recovering. The Brazilian real, the Indian rupee and the Turkish lira have all risen by more than 10% against the euro since mid-December. Simon Derrick, a currency strategist at BNY Mellon, a fund-management group, says there are signs of a “carry trade” at work, with traders borrowing money cheaply in euros and investing in higher-yielding currencies in the developing world.

Volatility is a bit like a bouncy castle: sit down on one side and it will pop up somewhere else.

Central banks have intervened heavily in the bond markets, bringing yields down to historic lows. Equity markets have also been boosted by the conviction that central banks will remain supportive.

And corporate bond markets have been pretty steady; low government-bond yields have caused income-seeking investors to buy corporate debt and defaults have been very low.

So it is unsurprising that volatility is appearing in other markets—most dramatically in oil and now in currencies as well. However, sudden currency moves can be devastating for companies and individuals who have borrowed abroad. Many east Europeans took out mortgages in Swiss francs to take advantage of lower interest rates and are nursing big losses after the franc’s sudden rise.

Mismatching assets and liabilities by borrowing in a foreign currency is rarely a good idea. Of course, many of those home-owners will have been tempted to take out a Swiss-franc mortgage because of the franc’s peg to the euro. Therein lies the problem with currency pegs. They may eliminate volatility in the short term, but at the cost of a very big currency move if the peg gives way.

The problem was faced on an even bigger scale by Thailand in the 1990s with its dollar peg, and by Argentina, which abandoned a currency board in 2002; that shift necessitated the forcible conversion of dollar deposits into pesos, the so-called corralito.

Pegs require a lot of discipline. If monetary policy in the target country changes, the pegging country has to follow suit, regardless of the consequences. Other economic priorities have to be subordinated to the currency target. The strain often proves too much, as it did when Britain left the European exchange-rate mechanism in September 1992.

A single currency is an extreme version of a peg. And Greece’s new government is chafing at the constraints imposed by being part of the euro zone. (Some of those constraints may be unnecessarily onerous but that is another matter.) Greek bank shares have been tanking on fears of capital flight. If the strains prove too much, the result may involve leaving the euro and capital controls—a Greek corralito. That would only reinforce 2015’s growing reputation for currency spasms.

Incomes and Outcomes

Gains From Economic Recovery Still Limited to Top One Percent


JAN. 27, 2015

It’s the economic statistic that spawned the Occupy protest movement (“We are the 99 percent”), reshaped President Obama’s domestic program (“middle-class economics”), and most recently led the eternal Republican presidential hopeful Mitt Romney to bemoan that “the rich have gotten richer.”

I am speaking of the income share of the richest 1 percent of American families. Emmanuel Saez, the economics professor who crunches these numbers based on data provided by the Internal Revenue Service, has just released preliminary estimates for 2013. The share of total income (excluding capital gains) going to the top 1 percent remains above one-sixth, at 17.5 percent. By this measure, the concentration of income among the richest Americans remains at levels last seen nearly a century ago.

It is tempting to note that the latest reading is somewhat below the 18.9 percent share that was recorded in 2012. But Professor Saez warns against reading too much into this year-to-year change. The problem is that his estimates rely on tax data, and tax rates on the rich rose sharply in 2013, leading many to shift taxable income out of 2013, and into 2012. Thus, the latest estimate is probably too low, just as the previous year’s number was probably too high.

The economist Emmanuel Saez has analyzed the share of wealth held by the wealthiest. Credit Don Feria/Getty Images for MacArthur Foundation

Far better instead to focus on the average of the past two years. That average supports the narrative that the economic recovery so far has only boosted the incomes of the rich, and it has yielded no improvement for the bottom 99 percent of the distribution. After adjusting for inflation, the average income for the richest 1 percent (excluding capital gains) has risen from $871,100 in 2009 to $968,000 over 2012 and 2013. By contrast, for the remaining 99 percent, average incomes fell by a few dollars from $44,000 to $43,900.
That is, so far all of the gains of the recovery have gone to the top 1 percent. By contrast, this group suffered only one-third of the income declines during the preceding recession.

When we count the robust increase in capital gains, the overall recovery appears stronger. But because capital gains are largely enjoyed by the rich, it remains the case that nearly all the fruits of that recovery have gone to the rich.
I think these data are more puzzling than might appear on first glance. My colleague David Leonhardt has discussed these issues in analyses of “the great wage slowdown.” Certainly, meager wage growth explains why the size of the average paycheck has not risen. But for many families, the number of paychecks — whether mom or dad can find work — looms much larger than whether that paycheck is a few percentage points larger. The puzzle is why robust employment growth over recent years — much of it concentrated in middle-class occupations — has not translated into larger income gains for the broader population.
Perhaps we need to be patient, and the recent pickup in employment is yielding more broadly shared growth that will become evident when the data for 2014 are released.

martes, febrero 03, 2015



How Fast Will China Grow?

Justin Yifu Lin

JAN 29, 2015


BEIJING – In the 35 years since China’s transition to a market economy began, the country has grown at an average rate of 9.8% – an explosive and unprecedented rise. But there are signs that the Chinese miracle is coming to an end – or at least that the country’s economic growth is slowing. China’s growth rate has been falling since the first quarter of 2010. In 2014, it was a relatively anemic 7.4%.
China’s economic growth is likely to continue to face stiff headwinds this year as well, at least when compared to previous decades. As policymakers draw up the country’s 13th five-year plan, they will grapple with a fundamental question: How fast can China expect to grow?
In setting a country’s GDP target, the first thing to understand is the economy’s potential growth rate: the maximum pace of expansion that can be attained, assuming favorable conditions, internally and externally, without endangering the stability and sustainability of future growth. As Adam Smith discussed in An Inquiry into the Nature and Causes of the Wealth of Nations, economic growth depends on improvements in labor productivity, which today result from either technological innovation or industrial upgrading (the reallocation of productive capacity into new sectors with higher added value).
But developed countries at the innovation frontier are at a disadvantage. To benefit from new technology, they must create it. Developing countries, by contrast, possess a “latecomer advantage,” because they can achieve technological advances through imitation, importation, integration, and licensing. As a result, their costs and risks are lower. Over the last 150 years, developed economies have grown at an average rate of 3% per year, whereas some developing countries have achieved annual growth rates of 7% or higher for periods of 20 years or longer.
To calculate how much of a latecomer advantage China has after 35 years of unprecedented growth, one needs to look at the gap between its levels of technological and industrial development and those of high-income countries. The best way to see this is by comparing its per capita income, adjusted for purchasing power parity (PPP), with those of developed countries. The larger the gap in per capita income, the larger the latecomer advantage and the greater the potential for growth.
In 2008, China’s per capita income was just over one-fifth that of the United States. This gap is roughly equal to the gap between the US and Japan in 1951, after which Japan grew at an average annual rate of 9.2% for the next 20 years, or between the US and South Korea in 1977, after which South Korea grew at 7.6% per year for two decades. Singapore in 1967 and Taiwan in 1975 had similar gaps – followed by similar growth rates. By extension, in the 20 years after 2008, China should have a potential growth rate of roughly 8%.
But potential growth is just one part of the story. Whether it can be achieved depends on domestic conditions and the international environment. In order to exploit its latecomer advantage, China must deepen its reforms and eliminate its economy’s residual distortions.
Meanwhile, the government should play a proactive role in overcoming the market failures – such as externalities and coordination problems – that are certain to accompany technological innovation and industrial upgrading.
China has the potential to maintain robust growth by relying on domestic demand – and not only household consumption. The country suffers no lack of investment opportunities, with significant scope for industrial upgrading and plenty of potential for improvement in urban infrastructure, public housing, and environmental management.
Moreover, China’s investment resources are abundant. Combined central- and local-government debt amounts to less than 50% of GDP – low by international standards.
Meanwhile, private savings in China amount to nearly 50% of GDP, and the country’s foreign-exchange reserves have reached $4 trillion. Even under comparatively unfavorable external conditions, China can rely on investment to create jobs in the short term; as the number of jobs grows, so will consumption.
The external scenario, however, is gloomier. Though developed countries’ authorities intervened strongly in the aftermath of the global financial crisis in 2008, launching significant fiscal- and monetary-stimulus measures, many of their structural shortcomings remain unresolved. “Abenomics” in Japan has yet to yield results, and the European Central Bank is following in the footsteps of America and Japan, pursuing quantitative easing in an effort to shore up demand.
Employment in the US is growing, but the rate of workforce participation remains subdued and the economy has yet to attain the 6-7% growth rates usually recorded in a post-recession rebound. The US, Europe, and Japan are likely to experience continued sluggish performance, inhibiting China’s export growth.
As a result, Chinese growth is likely to fall below its potential of 8% a year. As policymakers plan for the next five years, they should set China’s growth targets at 7-7.5%, adjusting them within that range as changes in the international climate dictate. Such a growth target can help to stabilize employment, lower financial risk, and achieve the country’s goal of doubling income by 2020.

The Keys to the Gold Vaults at the New York Fed – Part 2: The Auxiliary Vault

by Ronan Manly

28 Jan 2015

The FRBNY’s Auxiliary Vault

As mentioned in Part 1 of Keys to the Gold Vaults at the New York Fed, there are two gold vaults at the New York Fed, the main vault and the auxiliary vault. Very little is written anywhere about the FRBNY’s auxiliary vault, or the ‘aux vault’ as it has sometimes been referred to.

The auxiliary vault also fails to make an appearance during the New York Fed’s famous gold vault tour. It’s as if the Fed specifically wants to keep this aux vault off the radar, or at least flying under the radar.

Although neither the 1991 nor the 1998 versions of the Fed’s publication ‘Key to the Gold Vault’ (KTTGV) refer to the auxiliary vault, the 2004 and 2008 versions do (in passing) as follows:

Bullion at the Federal Reserve Bank of New York belonging to some 60 foreign central banks and international monetary organizations is stored in 122 separate compartments in the main and auxiliary vaults.” (page 5, 2004)

Bullion at the Federal Reserve Bank of New York belonging to some 36 foreign governments, central banks and official international organizations is stored in 122 separate compartments in the main and auxiliary vaults.” (page 5, 2008)

All four of the on-line versions of ‘Key to the Gold Vault’ that I sourced (from 1991 – 2008, see Part 1) state that the “main vault was opened in September 1924” and so this statement indirectly implies that there is another ‘non-main’ vault.

The reference to the auxiliary vault in the more recent 2004 and 2008 versions of KTTGV seems to imply that the aux vault is still in active use for gold storage. Otherwise, why would the Fed mention it?

Just to clarify what auxiliary means. Various dictionary definitions of ‘Auxiliary’ include the following: supplementary, additional, subsidiary capacity, backup reserve. In the context of space, auxiliary refers to additional space.

New York Fed writer Charles Parnow’s ‘A Day at the Fed – Charles Parnow’ publication (first published in 1973) explicitly refers to the auxiliary vault with a quite precise reference. This is probably the only detailed description of the auxiliary vault that’s on record, and it states:

“A smaller auxiliary vault built in 1963 holds three accounts. One account with 107,000 bars of gold is stacked with bricklayer precision into a solid wall 12 feet high, 10 feet wide, and 18 feet deep.” (From: ‘A Day at the Fed’)


The above photo from the NY Fed shows a self-described ‘wall of gold’. If you look closely to the very left of the photo, the number ‘2’ is visible about half way up the white column beside the wall.

This vault layout is very different to the small cages or compartments featured in most of the FRBNY’s gold vault photos. Therefore this wall of gold shot appears to be from a totally different location than the main vault.

Could this be a shot taken in the auxiliary vault? Most probably. Apart from the above photo, there are two additional photos below that I believe are also shots taken within the auxiliary vault. One shows 3 men with clipboards, presumably Fed staff and auditors, looking at a wall of gold. The other shots shows 2 Fed vault workers, with protective magnesium shoe covers, adding bars to a wall of gold, and out of shot a third person consulting some type of weight list.

If, in the early 1970s, when Charles Parnow’s above comment was first penned, the aux vault stored gold for only three customers, then the Fed may have simply just used three areas or alcoves in the aux vault, listed as 1, 2 and 3, in which to store customer gold for three customers. However, without knowing the vault layout its difficult to say.

Wall of Gold

This literal ‘wall of gold’ is also mentioned in the 1991 ‘Key to the Gold Vault’ but is attributed to a ‘compartment’ and there is no mention of the auxiliary vault. Another mysterious omission by the Fed. The comment is as follows:

The gold in compartment number 86, which faces the vault entrance, is arranged as a display.

The compartment contains 5,160 bars valued at about $87.1 million at the official rate of $42.2222. Its capacity of about 6,000 bars makes it one of the smaller compartments.

The largest compartment contains about 107,000 bars—literally a wall of gold 10 feet high, 10 feet wide and 18 feet deep.”

(KTTGV 1991 – notice the dimensions quoted of the wall are slightly different in height to those specified in the previous specification 12 x 10 x 18).

As an aside, who would be holding 107,000 bars of gold (more than 1,300 tonnes) at the FRBNY back in 1973? By a process of elimination, I think it was the Swiss National Bank (SNB). This is so because, in my view, the only other realistic candidates that held so much gold in New York were the IMF and West Germany, and each of these customers held more than 1,300 tonnes of gold at the NY Fed at that time.

Tours of the Vault(s)

Since the FRBNY never really writes about the aux vault, I emailed the ‘Media Relations Department’ of the FRBNY last year (2014) and asked them to explain the reference to the auxiliary gold vault that was opened in 1963.

The Fed replied by email that “the auxiliary vault is a vault located near the main gold vault; hence it’s referred to as an auxiliary vault.

Not a very full answer, but at least it’s a confirmation from the NY Fed that there is an auxiliary vault and that it is located ‘near’ the ‘main gold vault’. And the Fed didn’t deny that it was opened in 1963.

When I worked in New York in 1999 my employer booked us a tour of the Fed’s gold vault. During the tour, there was no mention of the auxiliary vault and the gold vault visit just consisted of going into the entrance of the main vault where some gold was brought out from the weighing room for people to pass around.

The FRBNY gold vault tour (open to the public) is quite famous and has been written about extensively, but neither the promotional material for the tour nor the media coverage ever seem to mention the auxiliary vault.

Just to double check what the current tour covers, I recently emailed the Fed gold vault tour people and asked them if the auxiliary vault is included in the current tour in addition to the main vault.

Their succinct reply was that “the tour covers the main vault“. Yet again, another very short reply  from the Fed and in this case no extra information about the auxiliary vault was volunteered.

Since discussion of the FRBNY’s  auxiliary vault is quite rare, its worth looking at the few web references to the aux vault which do exist.

One such reference about the aux vault comes from well-known New York writer Andrew Tobias who appears to have visited the auxiliary vault while on a private or customised tour of the NY Fed in June 2010. In his blog, Tobias wrote that “the door to the auxiliary vault weighs 30 tons, yet is so precisely balanced that I was able to swing it open and shut.”


Where is the Aux Vault?

The exact location of the FRBNY’s auxiliary vault appears to be something that the Fed doesn’t wish to discuss. It’s therefore interesting that there is a comment on the web that appears to state exactly where the aux vault is located.

In July 2002, a forum contributor called Woodman wrote in a bulletin board at that the Federal Reserve aux vault is located at Level B5 of 1 Chase Manhattan Plaza.

While discussing the gold supposedly stored under the WTC, Woodman wrote “…all of the Gold stored in the WTC was really stored 3 blocks east in the basement vaults of the Federal Reserve Bank and the aux. at 1 Chase Manhattan Plaza B5.

For those not familiar, the vault at 1 Chase Manhattan Plaza (CMP) on the fifth sub-level (B5) is the famous Chase (now JP Morgan) vault, supposedly the largest bank vault in the world. Some of the details of this vault were uncovered in 2013 and can be read here on Zerohedge.

The interesting angle about the 2002 comment is that, how, in 2002, could someone refer to the Chase Manhattan Plaza (CMP) B5 vault as the aux (auxiliary) of the FRBNY vault unless they knew details about these two adjacent vaults?

Back in 2002, the Chase – JP Morgan merger had only just been completed the previous year, and JP Morgan’s 1 CMP B5 vault was not yet a licensed Comex depository for gold and silver (it only became Comex licensed in 2011). So, in 2002 the Chase (JP Morgan) vault wasn’t yet on the radar (even to the CFTC) as a JP Morgan Comex precious metals vault.

Therefore, in 2002, to refer to the FRB’s aux as 1 Chase Manhattan Plaza – B5, was a very specific statement.

To recap, the main Fed New York gold vault is in basement E of the fifth sub-level. The Chase vault is on B5, also on the fifth sub-level. Indeed, it was highlighted (via a ZeroHedge contributor) that there is a tunnel between the FRBNY and CPM vaults. While discussing the Fed’s gold vault facility, the contributor wrote:

Chase Plaza (now the Property of JPM) is linked to the facility via tunnel… I have seen it. The elevators on the Chase side are incredible. They could lift a tank.”

Ironically, this Zerohedge comment was originally posted to an article about ‘Key to the Gold Vault’, on 24th January 2012.

Given that the FRBNY auxiliary vault was opened in 1963, around the same time that 1 Chase Manhattan Plaza was completed, it would seem logical that the Fed’s aux vault was built in parallel with the construction of the Chase Manhattan Plaza vault.

Where Charles Parnow states that this auxiliary vault was ‘built in 1963’ he probably means opened in 1963, since like the main vault, although it was opened in 1924, it’s construction was part of a building project which took a few years over 1921-1923.

The Chase Manhattan Plaza building and vault construction project ran from around 1959 to 1963, and the Chase building was fully functional by 1963. Parts of the building were fully functional and occupied in 1962.

Working on a gold wall at the FRBNY

Mosler vault doors

The precisely balanced door of the auxiliary vault (referred to above by Andrew Tobias) sounds very different to the cylindrical design of the vault entrance of the main FRBNY vault, opened in 1924.

In the 1991 ‘Key to the Gold Vault’, the ‘door’ of the main vault is described as follows:

There are no doors into the gold vault. Entry is through a narrow 10-foot passageway cut in a delicately balanced 9-feet tall, 90-ton steel cylinder that revolves vertically in a 140- ton steel and concrete frame. The vault is opened and closed by rotating the cylinder 90 degrees so that the passageway is clear or blocked.

If, as was claimed above, the Fed´s auxiliary gold vault is situated in the Chase Manhattan Plaza vault facility, or is even part of the Chase vault, then the door of  this auxiliary vault would be similar to the vaults doors of the Chase Plaza vault.

As explained below, Andrew Tobias’s description of a 30 tonne door that swings open and shut sounds very similar to the doors of the Chase / JP Morgan vault across the road at 1 Chase Manhattan Plaza, level B5. These vault doors were built by Mosler.

A number of newspaper articles from 1960 and 1961 provide additional perspective on the Chase Manhattan Plaza vault doors, with slightly differing door details.

This newspaper article from July 1961 says that there are actually 6 doors to this cavernous Chase vault:

On the lowest level, ninety feet below the street, is the world’s largest bank vault, 350 feet wide and 100 feet long. The vault has six massive doors, each twenty inches thick, which weigh a total of 250 tonnes.

This New York Times article from May 1960 states that:

The Chase-Manhattan bank building is on a two-block site bounded by Nassau, William, Liberty and Pine. 8th May 1960.

With delivery last week, of six doors weighing an average of forty-five tons each, a bank vault that will be the world’s largest is rapidly nearing completion.”

The vault weighing 985 tonnes and occupies 35,000 square feet of floor space.”

newspaper article from August 1961 confirms the above vault details, and includes a description of the vault doors being able to be opened and closed with one finger, which is uncannily like Andrew Tobias description.

The new skyscraper bank just finished here naturally has the world’s largest bank vault, I found on peeking in. its length is 350 feet and width 100 feet, with the height being over 8 feet. Concrete walls seven feet thick encase it and the whole thing weighs about a thousand tons.

“Although these stainless steel doors weigh 45 tons each, they can be opened or closed with one finger, I was told.”

Recall Tobias´s phrase of “so precisely balanced that I was able to swing it open and shut.”
A photo of one of the six doors of the vault under 1 Chase Manhattan Plaza can be seen here in this old Mosler advert. See photo 7. Notice how the door is of the standard rectangular swinging variety.

The vault doors at Chase Plaza  are said to be Mosler Century  doors, some weighing 45 tons and 20 inches thick and also some 35 tonnes doors. If 4 of the 6 doors each weighed 45 tons, and the remaining 2 doors weigh 35 tons each, that would give a total weight of 250 tons, as quoted above.

These vault doors were also featured in a reference to the November 1961 issue of Mosler’s newsletter “Mosler Messenger”, as mentioned here. Why there would need to be 6 separate doors to the Chase Plaza bank vault is not clear. Perhaps there are 6 different sections to the vault, each with a distinct entrance door.

Unfortunately, there is little or no information in the public domain about the Chase Plaza vault, despite the fact that there apparently used to be tours of the Chase Plaza building (and vault areas) back in the 1960s.

Corner of Liberty Nassau at Fed

Structure of the main vault

To appreciate possible construction approaches to the Fed’s auxiliary vault in the early 1960s, and why it would have made sense at the time to leverage the nearby Chase Plaza vault area, it’s worth examining the structure of the FRBNY’s main vault and how it was constructed.

It’s possible that an auxiliary vault could have been built in the early 1960s within the Fed´s existing level E basement by, for example, converting an existing storage room or similar into a reinforced vault room. Whether such a suitable available space would have been adjacent the main vault is unclear.

However, if space constraints dictated the need for further excavations beyond the perimeter of the building at basement level E, then evidence suggests that creating this space would be most practical by excavating south near the corner of Nassau Street and Liberty. The fact that, luckily enough, there were already excavations being done south of Liberty in 1958-1960, makes it entirely logical that the New York Fed piggybacked on the Chase Manhattan vault project.

The main gold vault lies at the bottom of the FRBNY’s, 5 basement level, headquarters in Manhattan. The building is bordered by four streets, namely, Maiden Lane, William St, Liberty, and Nassau St. For ease of explanation, (but simplified slightly) Maiden Lane is roughly to the north of the building, William St to the east, Liberty to the south, and Nassau St to the west.

The main gold vault is actually the bottom level of a three-tier vault structure known as basement levels C, D and E. This three-tier vault was lowered into an excavation that had been dug down to the Manhattan bedrock.

The vault sits within this excavation or ‘hull’, with a corridor running all the way around between the vault and the outer walls of the hull. The walls of the vault, as well as the walls of the corridor are lined with reinforced concrete. Hence the main vault has been, at times, described as a double-vault.

In a section about the HQ building, the Fed’s current website has a few references to the main vault as a “triple-tiered vault system” with a “nine-foot door and door frame (weighing 90 and 140-tons, respectively)” that was “lowered to the bedrock foundation”. Notably, the ‘About the Building’ web page says nothing about the auxiliary vault.

The perimeter of the FRBNY HQ is a trapezoid with the west side wider than the east side, i.e. the length of the perimeter adjacent to Nassau St is a lot longer than the perimeter adjacent to William St.

FRBNY basement A plan and layout

Floor plans of some of the higher basement levels of the FRBNY HQ are viewable on here, and were sourced from  the Avery Library at Columbia University. You can see the blueprints of Basement A here. Notice that the largest open type space of the basement (with what looks like pillars) is to the west of the building, running north to south.

Staircases and elevators etc are positioned more in the centre, or core, of the building. A narrower open space seems to run west to east parallel to liberty. Thick external walls (and possibly corridors) seem to be indicated around the entire plan and also within the plan one third the way to the left. Although this is said to be Basement A, this drawing would be in keeping with the description of the lower basement levels:

The main vault is described in some detail in the Fed´s older educational material:

The gold is secured in a most unusual vault, an impressive chamber nearly half the length of a football field”. KTTGV 1991

The gold vault is actually the bottom floor of a three story bunker of vaults arranged like strongboxes stacked on top of one another. The massive walls surrounding the vault are made of reinforced structural concrete” KTTGV 1991

The vault’s interior, encased by steel-and-concrete walls several yards thick, resembles a cell block with 122 triple-locked storehouse compartments.” A Day at the Fed 1997

Additional details of the main gold vault structure can be gleaned from old newspaper coverage, including the corridor running all the way around:

A four-foot corridor surrounds the vault itself and at each turn a mirror is arranged so that a guard standing before the vault may look all the way around it without moving.Newspaper article 1925

Completely around this double gold-vault ran a narrow alleyway, with mirrors set at the corners, so that a guard standing at any one point could see the entire circuit. The outer face of this passageway was a concrete wall, set in the foundation rock.” Newspaper article 1931

The vault below has three floors: bar gold and coins on the bottom, currency on the second, securities on the third.” New Yorker, September 1931


The construction of the main vault faced a number of construction challenges, but you have to go right back to 1921 when it was still being constructed to grasp what these challenges were.

Additional information from 1930 provides some more background.

During the FRBNY HQ foundation excavation, the bedrock of Manhattan first appeared at a depth of 87 feet at the corner of Nassau and Liberty streets (south-west). The presence of this bedrock meant that the gold vault couldn’t be much lower than about 80-85 feet below street level (curb), even though the rock undulated lower over other parts of the site.

Because it’s so far down, there was also the problem of the water table to deal with, especially in an area (Manhattan) surrounded by rivers. The water issue was most problematic on the three sides away from the Nassau/Liberty corner.

Page 41 of the FRBNY 1921 Annual Report states that:

The rock underlying the site has proved to have an undulating surface. At the corner of Liberty and Nassau streets it is 87 feet below the curb. At other parts of the site it is as much as 117.3 feet below this same curb. Owing to this condition, to the varying kinds of foundations which support the adjacent buildings, and to the depth of the excavation, the construction of the foundation is considered to be one of the most difficult and exacting pieces of foundation engineering ever undertaken.“

Page 40 of the same FRBNY annual report states:

The vault is a three story structure with its lowest floor 80 feet below the curb at Liberty and Nassau streets. The entire vault is below tidewater level.” 

A 1930 edition of Popular Mechanics expands on the water issue while constructing the main vault:

eighty-five feet below high curb line of the street and fifty-six feet below ground water level. On one side of what used to be a hole there is a piece of the solid rock of Manhattan. The other three sides are held against the pressure of underground water from the East and North rivers by walls of iron rods and concrete, ten feet thick, even stronger than the natural rock.

This is the hull of the bank’s vault, a massive vessel, five stories deep, protected on three sides by a terrific pressure of muck and water. Within that buried hull is the vault itself, a structure of three levels contained within walls of steelcrete – a combination of metal and concrete – a construction developed particularly to protect the treasure of the federal reserve banks.

(The World’s Greatest Treasure Cave”, Popular Mechanics, January 1930, Volume 50, Number 1, by Boyden Sparks)

With such treacherous and water problem surroundings, especially in the surroundings away from the corner of Nassau and Liberty, any extension of space in those directions would be challenging. The easier option would be to excavate or extend to the south from the area near the Nassau / Liberty corner.

With the Chase vault being built to the south under Liberty, the only construction work to do from the Fed side would be the construction of a link corridor or tunnel to connect the two facilities.

The effort and cost put in by the Fed in the 1920s in researching the structure and strength of the main vault should not be underestimated, as this somewhat humorous quotation demonstrates (1921 FRBNY Annual Report):

During 1920-21 the Federal Reserve Board conducted a series of tests of different types of vault construction by attacking them with explosives and other modern implements, at the conclusion of which this and other Federal Reserve Banks were enabled to add greatly to the strength of their vaults, and at the same time greatly to reduce their cost. It is believed that the vault of the Federal Reserve Bank of New York will be not only by far the strongest, but by far the cheapest for its size ever built.”

Presumably the Fed Board didn´t carry out these vault attacks themselves. In fact, Popular Mechanics suggests hat they outsourced this job:

the vault was built in accordance with the findings of a group of scientists of the bureau of standards, army engineers and architects. Previously there had been tests in which every known type of construction was subjected to attack with explosives, oxyacetylene torches that cut steel as a knife cuts cheese, and pneumatic hammers and chisels which are equally effective on concrete. As a result it was found that a fabric of concrete and steel formed an alliance which best resisted all these forms of attack.

On a more serious note, the above shows that the construction of a standalone auxiliary vault on Basement Level E by converting an existing space within the basement isn´t the simple task of putting a vault door on to a store room. The vault walls would also have to be built up and strengthened substantially.

Would it not be as easy to just burrow through a linked tunnel under Liberty, near the Nassau / Liberty corner and fit out a corridor to the environs of the Chase vault? In that case the aux vault would still be very near the main vault and at the same subterranean level, and substantial construction work in the tight space of the existing E level basement would be avoided.

One Chase Manhattan Plaza - the model

Why the Secrecy?

When JP Morgan’s 1 CMP B5 vault became a licensed depository of NYMEX/COMEX in 2011, COMEX’s owner, the CME Group, submitted to the CFTC a summary of requirements document as part of the vault application. This summary of requirements (for the JP Morgan vault to act as a licensed vault) took the form of two appendices (Appendix A and Appendix B). This would have included a vault inspection description and vault classification report.

As part of the application, the CME also requested confidential treatment of the vault details from the CFTC on the grounds that disclosure of Appendix A and/or Appendix B would reveal confidential commercial information of the submitters (NYMEX and COMEX) and of other persons.

The CME also requested that this confidential treatment continue “until further notice from the Exchanges”, and that if any Freedom of Information Act (FOIA) requests were received by the CFTC about the vault that the CFTC should notify the CME “immediately after receiving any FOIA request for said Appendix A, Appendix B or any other court order, subpoena or summons for same.

Unbelievably, the CME also requested that they “be notified in the event the Commission intends to disclose such Appendix A and/or Appendix B to Congress or to any other governmental agency.

So why would JP Morgan, as a commercial precious metals vault operator, be asking for an FOIA exemption when two other vault operators, namely Brinks and Scotia Mocatta, submitted vault licensing applications, here and here that did not see the need to ask for confidential treatment on the basis of “confidential commercial information”?

Looking at a list of possible FOIA exemptions, there is nothing in the list that would apply to JP Morgan but not to Scotia Mocatta and/or Brinks, except perhaps the first type of FOIA exemption in a scenario in which, were the aux vault at level B5 in the Chase Manhattan Plaza complex, then it could be included under foreign policy considerations i.e. “Those documents properly classified as secret in the interest of national defense or foreign policy”. i.e. that the Chase vault facility conducts business for a ´Federal´client and on behalf of foreign central banks and international monetary organisations.

In summary, there is a lot of circumstantial evidence to suggest that the Fed’s aux vault is indeed located at 1 Chase Manhattan Plaza, B5, accessible from the Fed’s Vault E via a link corridor or tunnel structure.

Until the FRBNY writes publicly about its auxiliary vault, which seems unlikely, then circumstantial evidence remains as the only evidence on which to go on.