May 14, 2015 7:55 pm

Draghi warns central banks against ‘blind’ risk-taking

By Claire Jones in Frankfurt

Mario Draghi, President of the European Central Bank, ECB addresses the media during a press conference following the meeting of the Governing Council in Frankfurt/Main, central Germany, on November 6, 2014. European Central Bank chief Mario Draghi dismissed media speculation of deep differences on the ECB's policy-setting governing council. AFP PHOTO / DANIEL ROLAND©AFP

Mario Draghi has warned central banks to beware of the risk that aggressive monetary easing, including mass bond buying, could lead to financial instability and worsen income inequality.

The European Central Bank president said the apparent success of policies such as the ECB’s landmark €1.1trn quantitative easing package should not “blind” policy makers to the potential consequences of their actions on risk-taking in financial markets and in exacerbating wealth disparities.
“Because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated,” Mr Draghi said at the International Monetary Fund.
Central banks around the world have faced criticism that their response to the financial crisis is stoking asset-price bubbles and increasing inequality.

However, this is the first time Mr Draghi has spoken in depth about some of the biggest concerns about aggressive action by the world’s central banks.

The ECB president defended the decision to launch QE and other easing measures unleashed over the past year and claimed there was little to suggest imbalances in the financial system had already emerged. He also noted that all monetary policies had effects on wealth distribution and inaction by the ECB would have incurred other costs.
Mr Draghi argued that while the impact of QE on asset prices and economic confidence had been substantial, what ultimately mattered was what happened to investment, consumption and inflation in the eurozone.

In an attempt to play down talk that the ECB could slow the pace of its €60bn per month asset purchase plan before the planned cut-off point of September 2016, Mr Draghi said: “To that effect, we will implement in full our purchase programme as announced and, in any case, until we see a sustained adjustment in the path of inflation.”

There was no inflation in the eurozone in the year to April 2015. The ECB targets a level of below but close to 2 per cent.

The commitment to QE follows weeks of volatility in the market for benchmark German bonds.

They suffered a dramatic sell-off amid speculation the ECB would taper its bond-buying following signs of economic improvement in the eurozone. Figures published earlier this week showed the region’s economy outpacing its US and UK rivals in the first quarter on the back of a spending spree fuelled by cheap energy prices and low inflation.

“After almost seven years of a debilitating sequence of crises, firms and households are very hesitant to take on economic risk,” said Mr Draghi. “For this reason quite some time is needed before we can declare success, and our monetary policy stimulus will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis.”

The ECB president said policy makers had “to be mindful that too prolonged a period of very low real rates can have undesirable consequences in the context of ageing societies.”

In such societies, monetary easing may have the opposite effect from what central banks intended. “For pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward,” the ECB president said. “They may on the contrary become an inducement to save more, to compensate for a slower rate of accumulation of pension assets.”

Violent bond moves signal tectonic shifts in global markets

'It is absolute pandemonium in the fixed income markets. Everybody has been trying to get out at the same time but the door is getting smaller,' says RBS

By Ambrose Evans-Pritchard

8:35PM BST 07 May 2015

A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange in New York

The sharp moves have been exacerbated by a lack of liquidity as traditional dealers withdraw from the market to comply with stricter rules Photo: Reuters
A wave of turmoil is sweeping through sovereign bond markets, setting off the most dramatic gyrations seen in recent years and threatening to spill over into over-heated equity markets.

Yields on German 10-year Bunds spiked violently by almost 20 basis points to 0.78pc in early trading on Thursday as funds scrambled to unwind the so-called “QE trade” in Europe, with powerful ripple effects reaching Japan, Australia, Brazil and even US Treasuries.
“It is absolute pandemonium in the fixed income markets,” said Andrew Roberts, head of European credit at RBS. “Everybody has been trying to get out of long-duration positions at the same time but the door is getting smaller.”
German yields fell back just as fast to 0.58pc later, as bargain-hunters came back into the European debt markets, but are still unrecognisable from the historic lows of 0.07pc two weeks ago.
Ructions of this magnitude are extremely rare in government bond markets. Investors are nursing almost half a trillion dollars in paper losses in two weeks, a staggering sum in what is supposed to be a rock-solid repository for institutional investors.
French, Italian, Spanish and Portuguese bonds have all sold off sharply over the past two weeks, obliterating the gains in yield compression since the European Central Bank unveiled a bond purchase programme of €60bn a month in January.

“Anything over-populated is being cleared out. People got too exuberant and they’re coming back to reality,” said David Bloom, currency chief at HSBC.

Peter Schaffrik, at RBC Capital Markets, said rising yields can be a healthy development if the global economy is picking up speed. It is a different matter if they suddenly jump at a time of sluggish growth and disappointing figures in the US.

“It is potentially dangerous. What worries me is that we don’t have a good macro-economic back-drop driving yields higher. We don’t see a reflationary recovery,” he said.

Real interest rates in Italy are rising fast

Investors already face a changed world from early April, when deflation was still on everybody’s lips and Mexico was able to sell €1.5bn of 100-year bonds at a rate of 4.2pc.

The worm turned two weeks later when bond king Bill Gross, at Janus Capital, declared that Bunds had become unhinged and were the “short of a lifetime”, quickly followed by warnings from Berkshire Hathaway’s Warren Buffett that bonds were “very overvalued”.

The sharp moves have been exacerbated by a lack of liquidity as traditional dealers withdraw from the market to comply with stricter rules. The Institute of International Finance said this week that thin liquidity had become the top issue in talks with central banks and regulators. It said the new rules amounted to a “dramatic revolution” that had re-engineered the global financial system and pushed risk out into the shadows, storing up outcomes that are likely to be “pretty painful and certainly unknowable”.

Global bourses have so far shrugged off the bond market crash but this may be untenable over time and there are already signs of jitters as the spring rally runs out of steam. Equity prices and bond yields tend to feed off each other, though the relationship is not always mechanical and there can be lags.

Janet Yellen, chair of the US Federal Reserve, issued an implicit warning that Wall Street has got ahead of itself and may be vulnerable to monetary tightening. Markets have priced in a far slower pace of rate rises over the next 18 months than the Fed itself.

“Equity market valuations at this point are generally quite high. They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low. But the potential dangers are there,” she said.

Confusion now reigns in financial markets. Brent oil prices have surged by more than 30pc since January to $67 a barrel and copper has risen in lockstep, normally a sign that the global economy is coming back to life and that inflation will follow in short order. The broad M3 money supply has been growing at a brisk rate on both sides of the Atlantic, reaching an annual rate of 7pc in the eurozone over the past six months.

Yet closely-tracked indicators for inflation expectations - such as the “5/year 5/year forward rate” - remain depressed, especially in Europe. “There is no global reflation story. If I were able to find it I’d be doing cartwheels down the dealing floor but it is not there,” said Mr Bloom at HSBC.

Investors piled into EMU sovereign debt late last year and in early 2015 in the belief that the ECB’s bond blitz would soak up the available supply, leading to a scarcity. Bunds became the favourite trade as the German government prepared a budget surplus of 0.5pc of GDP this year, eliminating roughly €18bn of existing bonds.

This degenerated into a momentum trade. German yields continued dropping below zero as far out as eight years maturity, even as the deflation scare abated and Europe began to eke out modest growth. “We are seeing the unwinding of an enormous bull rally in the bond markets,” said Anthony O’Brien, at Morgan Stanley.

“There was some complacency and a lot of lazy longs and bond prices have tumbled, but we don’t think this is enough to snuff out recovery."

Barclays said the moves in the Bund market threaten to repeat events in Japan in 2003, when 10-year Japanese yields rose 110 basis points in six months after touching unprecedented lows on deflation fears. Investors were left nursing paper losses of 8pc, but the shock was not enough to derail economic recovery.

Mr Roberts, at RBS, said the bond rout is likely to short-circuit once it becomes clear that the world economy is not out of the woods and that China’s leaders will continue to engineer a deliberate slowdown.

All the forces that combined to fuel the eurozone recovery are already slowing or in reverse. “Oil is up, the euro is up, rates are going up in Germany and the core, and spreads in the periphery are rising. This is absolutely terrible for the eurozone,” he said.

“There is going to be a monumental trade getting back into Bunds. All we are waiting for is a technical trigger,” he said.

Why NATO is terrified of Russia

Pepe Escobar is the roving correspondent for Asia Times/Hong Kong, an analyst for RT and TomDispatch, and a frequent contributor to websites and radio shows ranging from the US to East Asia.     
Published time: May 01, 2015 06:07
Image from
The twin-pronged attack - oil price war/raid on the ruble – aimed at destroying the Russian economy and place it into a form of Western natural resource vassalage has failed.

Natural resources were also essentially the reason for reducing Iran to a Western vassalage. That never had anything to do with Tehran developing a nuclear weapon, which was banned by both the leader of the Islamic revolution, Ayatollah Khomeini, and Supreme Leader Ayatollah Khamenei.

The ‘New Great Game’ in Eurasia was always about control of the Eurasian land mass. Minor setbacks to the American elite project do not mean the game will be restricted to a mere “war of attrition”. Rather the contrary.

All about PGS

In Ukraine, the Kremlin has been more than explicit there are two definitive red lines. Ukraine won’t join NATO. And Moscow won’t allow the popular republics of Donetsk and Lugansk to be crushed.

We are coming closer to a potentially explosive deadline – when EU sanctions expire in July. An EU in turmoil but still enslaved to NATO – see the pathetic “Dragoon Ride” convoy from the Baltics to Poland or the “Atlantic Resolve” NATO show-off exercise - may decide to expand them, and even try to exclude Russia from SWIFT.

Only fools believe Washington is going to risk American lives over Ukraine or even Poland. Yet let’s plan a few steps ahead. If it ever comes to the unthinkable – a war between NATO and Russia in Ukraine – Russian defense circles are sure of conventional and nuclear superiority on sea and land.

And the Pentagon knows it. Russia would reduce NATO forces to smithereens in a matter of hours.

And then would come Washington’s stark choice: accept ignominious defeat or escalate to tactical nuclear weapons.

The Pentagon knows that Russia has the air and missile defense capabilities to counter anything embedded in the US Prompt Global Strike (PGS). Simultaneously though, Moscow is saying it would rather not use these capabilities.

Major General Kirill Makarov, Russia’s Aerospace Defense Forces’ deputy chief, has been very clear about the PGS threat. Moscow’s December 2014 new military doctrine qualifies PGS as well as NATO’s current military buildup as the top two security threats to Russia.

Unlike non-stop Pentagon/NATO bragging/demonizing, what Russian defense circles don't need to advertise is how they are now a couple of generations ahead of the US in their advanced weaponry.

The bottom line is that while the Pentagon was mired in the Afghanistan and Iraq quagmires, they completely missed Russia’s technological jump ahead. The same applies to China’s ability to hit US satellites and thus pulverize American ICBM satellite guidance systems.

The current privileged scenario is Russia playing for time until it has totally sealed Russia’s air space to American ICBMs, stealth aircraft and cruise missiles – via the S-500 system.
NATO Secretary General Jens Stoltenberg (Reuters / Francois Lenoir)
NATO Secretary General Jens Stoltenberg (Reuters / Francois Lenoir)

This has not escaped the attention of the British Joint Intelligence Committee (JIC) – as it gamed sometime ago whether Washington might launch a first strike against Russia.

According to the JIC, Washington might go rogue if "a) an extreme government were to take over in the United States, b) and there was increased lack of confidence by the United States in some if not all of her Western allies owing to political developments in their countries, c) and there was some sudden advance in the USA in the sphere of weapons, etc. that the counsels of impatience may get the upper hand."

US ‘Think Tankland’ spinning that Russian military planners should take advantage of their superiority to launch a first strike nuclear attack against the US is bogus; the Russian doctrine is eminently defensive.

Yet that does not exclude Washington doing the unthinkable the next time the Pentagon thinks of itself to be in the position Russia is now in.

SWIFT changes

The whole game used to be about who ruled the waves – the geopolitical gift the US inherited from Great Britain. Control of the seas meant the US inheriting five empires; Japan, Germany, Great Britain, France, the Netherlands. All those massive US carrier task forces patrolling the oceans to guarantee “free trade” – as the hegemonic propaganda machine goes – could be turned against China in a flash. It’s a mechanism similar to the carefully choreographed “leading from behind” financial op to simultaneously crash the ruble/launch an oil war and thus smash Russia into submission.

Washington’s master plan remains deceptively simple; to “neutralize” China by Japan, and Russia by Germany, with the US backing its two anchors, Germany and Japan. Russia is the de facto only BRICS nation blocking the master plan.

This was the case until Beijing launched the New Silk Road(s), which essentially mean the linking of all Eurasia into a “win-win” trade/commerce bonanza on high-speed rail, and in the process diverting freight tonnage overland and away from the seas.

So NATO’s non-stop Russia demonizing is in fact quaint. Think about NATO picking a fight against the constantly evolving, complex Russia-China strategic partnership. And in a not so remote future, as I indicated here, Germany, Russia and China have what it takes to be the essential pillars of a fully integrated Eurasia.

As it stands, the key shadow play is Moscow and Beijing silently preparing their own SWIFT system while Russia prepares to seal its air space with S-500s. Western Ukraine is doomed; leave it to the austerity-ravaged EU – which, by the way, doesn’t want it. And all this while the same EU tries to handicap the US commercially with a rigged euro that still doesn’t allow it to penetrate more US markets.

As for an irrelevant NATO, all it can do is cry, cry, cry.

Op-Ed Columnist

Ideology and Integrity

Paul Krugman

MAY 1, 2015

The 2016 campaign should be almost entirely about issues. The parties are far apart on everything from the environment to fiscal policy to health care, and history tells us that what politicians say during a campaign is a good guide to how they will govern.
Nonetheless, many in the news media will try to make the campaign about personalities and character instead. And character isn’t totally irrelevant. The next president will surely encounter issues that aren’t currently on anyone’s agenda, so it matters how he or she is likely to react. But the character trait that will matter most isn’t one the press likes to focus on. In fact, it’s actively discouraged.
And that’s a virtue in very short supply.
As you might guess, I’m thinking in particular about the sphere of economics, where the nasty surprises just keep coming. If nothing that has happened these past seven years or so has shaken any of your long-held economic beliefs, either you haven’t been paying attention or you haven’t been honest with yourself.

Times like these call for a combination of open-mindedness — willingness to entertain different ideas — and determination to do the best you can. As Franklin Roosevelt put it in a celebrated speech, “The country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.”
What we see instead in many public figures is, however, the behavior George Orwell described in one of his essays: “Believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right.” Did I predict runaway inflation that never arrived? Well, the government is cooking the books, and besides, I never said what I said.
Just to be clear, I’m not calling for an end to ideology in politics, because that’s impossible. Everyone has an ideology, a view about how the world does and should work. Indeed, the most reckless and dangerous ideologues are often those who imagine themselves ideology-free — for example, self-proclaimed centrists — and are, therefore, unaware of their own biases. What you should seek, in yourself and others, is not an absence of ideology but an open mind, willing to consider the possibility that parts of the ideology may be wrong.

The press, I’m sorry to say, tends to punish open-mindedness, because gotcha journalism is easier and safer than policy analysis. Hillary Clinton supported trade agreements in the 1990s, but now she’s critical. It’s a flip-flop! Or, possibly, a case of learning from experience, which is something we should praise, not deride.
So what’s the state of intellectual integrity at this point in the election cycle? Pretty bad, at least on the Republican side of the field.
Jeb Bush, for example, has declared that “I’m my own man” on foreign policy, but the list of advisers circulated by his aides included the likes of Paul Wolfowitz, who predicted that Iraqis would welcome us as liberators, and shows no signs of having learned from the blood bath that actually took place.
Meanwhile, as far as I can tell no important Republican figure has admitted that none of the terrible consequences that were supposed to follow health reform — mass cancellation of existing policies, soaring premiums, job destruction — has actually happened. 

The point is that we’re not just talking about being wrong on specific policy questions. We’re talking about never admitting error, and never revising one’s views. Never being able to say that you were wrong is a serious character flaw even if the consequences of that refusal to admit error fall only on a few people. But moral cowardice should be outright disqualifying in anyone seeking high office.
Think about it. Suppose, as is all too possible, that the next president ends up confronting some kind of crisis — economic, environmental, foreign — undreamed of in his or her current political philosophy. We really, really don’t want the job of responding to that crisis dictated by someone who still can’t bring himself to admit that invading Iraq was a disaster but health reform wasn’t.
I still think this election should turn almost entirely on the issues. But if we must talk about character, let’s talk about what matters, namely intellectual integrity.

What Happens When You Hand Over Your Gold To The Bank Of England For "Safekeeping"

By Tyler Durden

05/01/2015 - 23:29