Money and Spheres

Doug Nolan

Saturday, August 1, 2015

In a tiny subsection of the analytical world, analysis is becoming more pointed and poignant. I appreciate Bill Gross’s August commentary, where he concluded: “Say a little prayer that the BIS, yours truly, and a growing cast of contrarians, such as Jim Bianco and CNBC’s Rick Santelli, can convince the establishment that their world has changed.”

I’ll include the names Russell Napier, Albert Edwards and David Stockman as serious analysts whose views are especially pertinent. I presume each will exert minimal effect on “the establishment.”

Back to Bill Gross: “The BIS emphatically avers that there are substantial medium term costs of ‘persistent ultra-low interest rates’. Such rates they claim, ‘sap banks’ interest margins...cause pervasive mispricing in financial markets...threaten the solvency of insurance companies and pension funds...and as a result test technical, economic, legal and even political boundaries.’ ‘…The reason [the Fed will commence rate increases] will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up; that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history.”

Count me skeptical that central bankers are on the brink of “wising up.” These days I have less confidence in the Fed than ever. For one, they are hopelessly trapped in Bubbles of their own making. Sure, crashing commodities and bubbling stock markets incite a little belated rethink. 

Yet I’ve seen not a hint of indication that policymakers are about to discard flawed doctrine. 

Devising inflationary measures – clever and otherwise - will remain their fixation. For a long time now, I’ve identified inflationism as the root cause of precarious financial and economic dynamics that will end in disaster. It’s been painful to witness the worst-case scenario unfold before our eyes.

Ben Bernanke (and his cohorts and most of the economic community) believes much of the hardship from the Depression would have been averted had only the Fed aggressively printed money after the 1929 stock market crash. Modern-day inflationism rests on the premise that central banks (in a fiat world) can control a general price level. This view ensures that Credit and speculative Bubbles, while potentially problematic, are not to be overly feared. Discussion of mal-investment and economic imbalances is archaic and irrelevant. And somehow the view holds that Bubble risk pales in comparison to “The Scourge of Deflation.”

After all, central bankers can always reflate system Credit and spur a generalized inflation. 

Stated differently, it is believed that central bankers and their electronic printing presses have the power to inflate out of deflationary Credit and economic busts. And repeated bouts of reflationary policies over recent decades have seemingly confirmed the merit of conventional doctrine. It has evolved to the point where the primary issue is whether policymakers have the determination to reflate sufficiently.

The onus, I suppose, is on my analysis (and other “contrarians”) to convince readers that This Time Is Different. Especially over the past three years, unprecedented central bank “money” printing has corresponded with heightened disinflationary forces globally. As I note repeatedly, the upshot has been unprecedented divergence between inflating securities/asset market Bubbles and deflating fundamental economic prospects. This divergence was widened notably over recent weeks. The fact that egregious monetary inflation has been pulled to the heart of contemporary “money” and Credit – central bank Credit and sovereign debt – is as well fundamental to the “End is Nigh” Thesis.

The work of the great Hyman Minsky plays prominently throughout my analytical framework. 

In particular, I appreciate his keen focus on “financial evolution.” Over time, it is inherent in finance (i.e. Credit and markets) to gravitate from the cautious and stable to the aggressive and increasingly unstable. It’s human, Credit and market nature. Minsky’s “Financial Instability Hypothesis” and the late-stage “Ponzi Finance” dynamic are more pertinent today than ever.

Finance has evolved profoundly over the past thirty years. Evolution in central bank monetary management has been equally momentous. Over time, the increasingly unhinged global fiat financial “system” turned acutely unstable. The Fed, in particular, resorted to market intervention and nurturing non-bank Credit expansion in order to sustain booms, inflated asset markets and deep structural economic maladjustment. This required the Federal Reserve’s adoption of doctrine ensuring liquid and stable securities markets – a historic boon to leveraged speculation, the evolving (and highly leveraged) derivatives marketplace and securities prices generally.

Fed and global central bank backstops buttressed the historic expansion in market-based finance. The proliferation of interlinked global market Bubbles drove outrageous policy experimentation. In time, the resulting globalized Bubble in market-based finance and speculation ensured that bolstering securities markets developed into the chief priority for the Fed and fellow global central bankers and officials. Just look at the Chinese over recent weeks.

Long-time readers know I am particularly fond of the “Financial Sphere vs. Real Economic Sphere” framework. It is valuable to view these as two separate but interrelated “Spheres,” with contrasting supply/demand, price and behavioral dynamics. In simplest terms, throwing excess “money”/liquidity at these respective “Spheres” over an extended period will foster disparate dynamics and consequences. And, importantly, over recent decades the Fed and global central bank policies have gravitated toward increasingly desperate “Financial Sphere” intervention and manipulation. The crisis response to the 2008/2009 crisis and then again in 2012 were decisive.

From Russell Napier “Most investors still believe that we live in a fiat currency world. They believe central bankers can create as much money as they believe to be necessary. Such truths are on the front page of every newspaper, but they may contain just as much truth as the headlines of their tabloid cousins. A belief in this ability to create money is the biggest mistake in analysis ever identified by this analyst. The first reality it ignores is that money, the stuff that buys things and assets, is created by an expansion of commercial bank, and not central bank, balance sheets. The massively expanded central bank balance sheets have not lifted the growth in broad money in the developed world above tepid levels. Until that happens, developed world monetary policy must be regarded as tight and not easy.”

This is thoughtful and important analysis. I’ll approach it from my somewhat contrasting analytical framework. From CBB day one, I’ve tried to significantly broaden how we define and analyze “money” and so-called “money supply”. I draw from Mises’ “fiduciary media” and inclusion of financial instruments with the “functionality” of traditional narrow definitions of money supply (i.e. currency, central bank Credit and bank deposits). For me, the perception of a safe and liquid store of (nominal) value is critical.

Moneyness is a market perception. The epicenter of danger lies in “money’s” virtual insatiable demand. It is prone to over-issuance. There is a powerful proclivity for government intervention, manipulation and inflation. The perception of moneyness is, in the end in a world of fiat, self-destructive.

After the past almost seven years, I don’t question central banks’ capacity to create “money.” 

And my framework doesn’t ascribe special status and power to commercial bank “money” or balance sheets. Besides, U.S. M2 “money supply” has inflated about $2.5 TN in three years, or 20%. Over three years U.S. Commercial Bank Liabilities have inflated the same $2.5 TN, or almost 20%.

The past three years have witnessed historic “money” and Credit expansion on a global basis. 

The fundamental problem is that global central bank (and governmental) policies over 30 years have profoundly distorted and undermined market incentive structures. This issue is not insufficient “money” – central bank, bank or otherwise. Finance has, however, been incentivized to flow in excess chiefly into the Financial Sphere, where it enjoys comforting policymaker control and support. As global maladjustment and imbalances (which engender disinflationary pressures) mount, why invest in the Real Economy Sphere when it appears so much safer and easier to chase returns in inflating central bank-supported securities market booms?

Why would company managements not use abundant corporate cash flow to repurchase shares when waning returns make it increasingly difficult to justify Real Economy investment? Why proceed with major new investment plans when ultra-easy M&A finance favors acquisitions? 

Why not just join The Crowd throwing “money” at tech startups and biotech where real economic returns are irrelevant anyway? Why not just “invest” in ETFs shares that buy shares in companies that repurchase their shares? Better yet, why not invest in “safe” bond funds that invest in safe companies that safely borrow “money” to buy back their shares and make acquisitions? Above all, don’t just sit there in “money” that returns near zero when there’s been such a proliferation of “money-like” financial instruments and products with the promise decent yields and returns? You see, it’s just not a quantity of “money” issue.

This vein of analysis offers layers of progressive complexity. Financial Sphere Bubbles over time engender major structural maladjustment. Throughout equities and debt markets, Bubble Dynamics ensure liquidity flows in progressive excess to the hot asset classes, sectors and products. If the Fed, central banks or the Chinese government seek to underpin such dynamics, momentum will eventually climax with precarious Terminal Phase “blow off” excess. This played prominently in techland in the late-nineties, housing/consumption during the mortgage finance Bubble period, in commodities and EM in the post-2008/09 crisis “global reflation trade,” and more recently (most conspicuously) in tech and biotech.

I have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question.

If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.

Bubbles categorically redistribute and destroy wealth, and I will turn more optimistic when policymakers finally “wise up” to this harsh reality. On the one hand, progressively destabilizing Financial Sphere monetary disorder ensures deep economic maladjustment (i.e. excessive Bubble-related spending in tech, housing related, EM, commodities and China). On the other, serial securities and asset market booms and busts spur destabilizing wealth redistributions – a boon to some and economic hardship (boom and bust collateral damage) to many. Both work to foster economic stagnation – deep structural impairment impervious to central bank reflationary measures.

Reflationary policies and attendant inflated market Bubbles can hold the consequences at bay for a while. Importantly, resulting monetary disorder works to exacerbate both Financial Sphere and Real Economy Sphere maladjustment with potentially catastrophic consequences. 

Economists have traditionally debated “money illusion” (notably Irvine Fisher and JM Keynes). 

 “Wealth illusion” is today more appropriate. The U.S. economic structure remains viable – these days the “envy of the world” - only so long as perceived wealth from securities markets remains grossly inflated. The consumption-based U.S. economy requires record household sector perceived wealth (inflated Household Net Worth). And this requires ongoing loose financial conditions, strong Credit growth and buoyant financial flows.

Because of the importance of the data, I wanted to circle back briefly to document key data released in last month’s Q1 2015 Z.1 “flow of funds” Credit report.

As a proxy for the “U.S. debt securities market,” I combine Fed data for outstanding Treasury, Agency, Corporate and muni debt securities. I then combine this with Total Equities to come to my proxy of the “Total Securities” markets. During Q1, Total Securities jumped $759bn to a record $73.195 TN. Total Securities as a percentage of GDP jumped five percentage points to a record 414%. For perspective, this ratio began the nineties at 183%, concluded 1999 at 356% and then rose to 371% to end 2007.

The value of U.S. Household (and non-profits) assets jumped $1.611 TN during Q1. By largest categories, Financial Assets jumped another $1.07 TN and Real Estate assets increased $500bn. 

And with Household Liabilities little changed for the quarter, Household Net Worth (assets minus liabilities) rose $1.6 TN to a record $84.925 TN. Over the past year, Household Net Worth inflated about $4.6 TN, with a two-year gain of $12.6 TN. Since the end of 2008, Household Net Worth has ballooned a stunning $28.4 TN, or 50%.

One cannot overstate the integral role the inflation in Household Net Worth has played in the Fed’s reflationary policymaking. Household Net Worth ended Q1 at a record 481% of GDP. 

This compares to 447% to end Bubble Year 1999 and 476% in Bubble Year 2007.

As was the case again during Q1, during the inflationary boom period, strong inflationary biases ensure that “wealth” increases a multiple of underlying Credit growth. This dynamic was on full display during both the tech and mortgage finance Bubble episodes. I recall being amazed at how $1 TN of mortgage Credit growth would fuel a $4.0 TN inflation in Household Net Worth. This “virtuous” dynamic turned vicious during the bust. The amount of new Credit required just to stabilize an inflated and maladjusted system becomes enormous.

There is now chatter of the Chinese government intervening in the stock market to the tune of $100bn in a single session. We’ve seen how, despite repeated bailouts and debt reductions, the Greek black hole grows only bigger. Meanwhile, with commodities in freefall, it was another ominous week for EM. And these examples provide apt reminders of inflationism’s biggest flaw: once commenced, it’s about impossible to rein in. I would add that “money” printing will never resolve the issue of structural maladjustment. Monetary inflation will, however, ensure only greater quantities of “money” will be required come the inevitable bust. And those quantities will eventually bring to question confidence in “money.” Read monetary history.

Are US Middle-Class Incomes Really Stagnating?

Martin Feldstein

JUL 30, 2015


CAMBRIDGE – The challenge of raising the incomes of middle-class families has emerged as an important focus of the presidential election campaign in the United States. Everyone agrees that incomes at the top have surged ahead in recent decades, helped by soaring rewards for those with a high-tech education and rising share prices. And there is general support for improving programs – such as food stamps and means-tested retiree benefits – that help those who would otherwise be poor.
But the public debate is largely about how to help the more numerous (and politically more important) middle class.
Here, much can be done by improving existing government programs: expanding market-relevant training, increasing opportunities for married women to join or rejoin the labor force, reducing the penalties in Social Security rules for continued employment by older workers, and changing tax rules in ways that will increase productivity and wages.
But, while strengthening such programs should be a high priority, we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains.
For example, it is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some US Census figures seem to support that conclusion.

But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980. And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain.
The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes. The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year.
Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015.
The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago. Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.
Consider first the changing nature of households. From 1980 to 2010, the share of “households” that consisted of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%.
When the nonpartisan Congressional Budget Office (CBO) conducted a detailed study of changes in household incomes from 1979 to 2011, it expanded the definition of income to include near-cash benefits like food stamps and in-kind benefits like health care. It also subtracted federal taxes, which fell from 19% of pretax income for middle-income households in 1980 to just 11.5% in 2010. To convert annual incomes to real incomes, the CBO used the price deflator for consumer expenditures, which many believe is better for this purpose than the consumer price index. The CBO also presented a separate analysis that adjusted for household size.
With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%.
And, again, even this more substantial rise probably represents a substantial underestimate of the increase in the real standard of living. The authorities arrive at their estimates by converting dollar incomes into a measure of real income by using a price index that reflects the changes in the prices of existing goods and services. But that price index does not reflect new products or improvements to existing goods and services.
Thus, if everyone’s money incomes rose by 2% from one year to the next, while the prices of all goods and services also rose by 2%, the official calculation would show no change in real incomes, even if new products and important quality improvements contributed to our wellbeing. Indeed, the US government does not count the value created by Internet services like Google and Facebook as income at all, because these services are not purchased.
No one knows how much such product innovations and improvements have added to our wellbeing.
But if the gains have been worth just 1% a year, over the past 30 years that would cumulate to a gain of 35%. And combining that with the CBO estimate of a gain of about 50% would imply that the real income of the median household is up nearly 2.5% a year over the past 30 years.
So the US middle class has been doing much better than the statistical pessimists assert. And with better policies, these households can do even better in the future.

We Need a Plan for the Next Euro Crisis

Recent events highlight the need for a credible rule for handling insolvent governments.

By Christoph M. Schmidt

July 29, 2015 2:55 p.m. ET


Photo: Getty Images/Ikon Images

With the Greek Parliament’s recent vote in favor of much-needed reforms, the immediate threat that for the first time a member might leave the eurozone has abated. But it will still take some time before Athens reaches a final deal with its partners about a new aid package.

Meanwhile, after a standoff lasting six months, the rest of the eurozone needs a break to tend to itself. Governments should use the time to forge ahead with further reforms to make the single currency more resilient against future economic shocks.

Investor reaction to the most recent Greek crisis showed what strides the eurozone has made since the first Greek crisis in 2010. Unlike five years ago, the recent developments did not trigger panic selling across the euro area.

This is due in part to important reforms carried out in response to the crises in Greece and elsewhere in recent years. Leaders have created a backstop by instituting the European Stability Mechanism (ESM), capable of providing member countries with emergency funding.

Eurozone governments have sought to improve adherence to the existing rules on fiscal management through new sets of regulations on budgeting, the so-called two- and six-packs.

Yet to date these measures have done little to improve the budget balance in important euro members. Earlier this year, France requested a delay in achieving the deficit ceiling under the Stability and Growth Pact, and Italy failed to make sufficient progress toward compliance with the debt criterion.

Meanwhile, questions abound about the credibility of the no-bailout clause of the treaties governing the euro. This prohibition on fiscal transfers to profligate governments was supposed to be a core principle for instilling fiscal discipline and preventing the costs of national policy decisions from being reallocated to the eurozone as a whole.

The European Central Bank helped undermine the no-bailout principle by appointing itself a crisis manager. With his pledge to do “whatever it takes” to save the euro, ECB president Mario Draghi thrust the central bank into a gray area between monetary and fiscal policy.

The ECB’s ultralow interest rates and its program to purchase sovereign bonds have reduced the pressure on governments to balance their budgets by reducing the cost of funding deficits.

Too many governments are now following that path instead of exploiting easy monetary conditions to cushion the effects of real budget reform.

It’s time to instill budget discipline by restoring the meaning of the no-bailout clause. The disciplining force of markets needs to be brought back into play. This can only happen if bondholders are forced to realize that neither the ESM nor the ECB will shield them from losses should the next debt-burdened euro member get into trouble. One way to achieve this is by introducing an explicit insolvency mechanism for governments in the eurozone.

The mechanism would force bondholders to share the burden if an overleveraged country enters into crisis. Knowing this, investors would look more closely at the prudence of government fiscal policies and demand an appropriate risk premium. Market discipline would reward or censure policy makers ex ante.

Different designs of such a mechanism are possible. Ideally, an insolvency mechanism in case of crisis would kick in to impose debt restructuring at a certain ratio of public debt to gross domestic product. However, given the high public-debt ratios across the eurozone, this approach could lead to financial instability and therefore does not appear practicable for now.

Instead, a long transition period could be set, during which euro members could reduce their debt. During this period, a debt assessment—conducted perhaps by the ESM—would guide the decision on whether the insolvency mechanism is invoked in context of a crisis: If the ESM assesses public-debt repayments to be too high, ESM financing would be conditional on a maturity extension for private bondholders. This would also help reduce the financing needs and thus the volume of the needed ESM loan. This mirrors a proposal currently under discussion at the International Monetary Fund.

If a country has consistently flouted the rules of the Stability and Growth Pact that is supposed to limit budget deficits, ESM assistance would be granted only after a debt reduction by private bondholders. There should be no doubt that if debt is considered excessive, private bondholders should be expected to take a haircut. European taxpayers cannot be expected to absolve sovereign-bond holders of their entire risk.

Eurozone members should initiate work now on an orderly insolvency mechanism. The improved crisis backstops and low rates need to be harnessed to create fiscal space and reduce public debt. This would make it easier for the euro area to introduce an explicit insolvency mechanism to restore the credibility of the no-bailout clause. Getting there might be tough.

Let’s not waste any more time.

Mr. Schmidt is chairman of the German Council of Economic Experts.

Transcript of a Conference Call on the 2015 External Sector Report and Individual Economy Assessments

Washington, D.C.
Tuesday, July 28, 2015

David Lipton, First Deputy Managing Director

Olga Stankova, Senior Communications Officer

MS. STANKOVA: Good morning, and good afternoon everybody, and thank you for joining us for this Conference Call on External Sector Report of 2015. The call will be held by Mr. David Lipton, First Deputy Managing Director of the IMF. The call is under embargo until 10:00 a.m. Eastern Time, Eastern Standard Time.

MR. LIPTON: Hello, everybody. Good to be with you. I'm going to begin by saying a few words about our new External Sector Report, and then I'll be happy to answer questions, and have a discussion. This is the fourth year in a row, that we've put forward our External Sector Report, it's something we started in 2012, to deepen our work on and analysis, in looking at countries’ external positions. In this work we start with individual country analyses. But we put together the multilateral picture to make sure that we are analyzing how the external positions of one country affects the external positions of another, and that there is, in essence, multilateral consistency in our analysis.

Our analysis is about exchange rates, but also about current accounts and we've deepened the work that we've done in looking at the adequacy of international reserves and looking at countries' balance sheets, external positions, what their net international asset or liability position is.

We've covered 28 of the world's largest economies plus the Euro Area, and so as they are the largest that capture the bulk of global economic activity.

What you have before you today are two papers, an overview paper that emphasizes the multilateral issues that we see facing the world, and shows how individual economic situations fit into the global picture, and explains our assessments from a multilateral perspective what kind of needs there are for policies to reduce global imbalances.

Then the second document is a set of individual country external assessments. You have those before you. I won't discuss the details of those country assessments. We've written a good, careful report, and I want to give you an incentive to read all those pages, so if you have questions about what we think about individual countries, I'll direct you to those country pages.

This is a report that we put out at this time every year, because this is also the time of year where we are finishing up our country dialogues with some of the most systemically important countries in the world, what we call our Article IV consultations. And having a broad picture of the global composition of balances and imbalances is a very important input into that process.

Let me go through what I think are four main messages of this year's report, and then I'll take some questions. The first messages is that really there's been little progress lately in reducing imbalances and that includes in the most recent period we've looked at 2014.

Imbalances are much lower than they were in the pre-crisis and immediate post-crisis period.

And the ESR, this year finds that the imbalances are too large. But they are much lower than they were, but they are still too large. We have established norms for each country to try to capture what we think are the “proper” current account surpluses over the medium term.

The last few years really have not shown much progress in reducing the size of the gaps between the present imbalances and what we see as the norms.

At the individual country level there are some countries that have made some progress but setbacks in others. We've seen some rotation on the side of excess deficits, while progress on reducing surpluses in surplus countries, has stalled.

Our second message is that the problem and the solution really are multilateral; this is not just a matter of individual countries. Many of the economies that we cover have current accounts that diverge from their norms, each of these contributes to a global picture, and every country makes some contribution to that global set of imbalances, but obviously the largest contribution tend to come from the largest countries, China and the U.S., whether you measure it in the dollar size of imbalances or the percentage of global GDP to capture the scale of countries.

China and the U.S. are still the most relevant from the standpoint of the pattern of global imbalances and excess imbalances, although in both those two cases, imbalances are much lower than they were in the pre-crisis period, they still remain major contributors to the global picture because of the size of their economies. There are other countries that contribute significantly, on the surplus side, Germany and Korea have significant surpluses, and on the deficit side the U.K., Brazil and France.

For a number of other countries we, in the report, suggest that adjustment would be desirable, from the country's own standpoint, even though, because the countries are somewhat smaller, that adjustment is less systemically important. Because all the countries' current accounts relate to one another, and one country's deficit is another country's surplus, and vice versa, the challenge in addressing external imbalances really is a multilateral one.

And we want to see reductions of imbalances both positive and negative; those reductions would be self-reinforcing and be helpful for global growth and global stability.

Our third message is about what needs to be done, and pointing to the risks from lack of action.

In our report we try to address in each individual country situation what we think is needed in that country's case, and there is discussion of that in the second paper I refer to the individual economy assessments paper.

In general, obviously there's a need for policies to boost demand in excess surplus countries, and to control the growth of demand, in excess deficit case countries.

In some cases, fiscal policy may be part of that demand adjustment that’s needed, but we also are calling for structural policies, the kind of policies that would affect the savings and investment rates of the private sector, as well as of the public sector, and in that way contribute to the adjustment of the current account which is, after all, the gap between savings and investment.

Adjustment of real exchange rates is an essential part of this adjustment process although it's only a part in the other policies to adjust, demand and supply are also important.

I would say that to make reference to the G20 exercise that’s been ongoing for a couple of years. We've helped the G20 with its initiative to boost global growth; it's an effort to try to raise growth by 2 percentage points over five years. And in preparing that work we've stressed that boosting growth in the world requires some efforts to raise demand especially where there're unemployed resources, efforts to carry out structural reforms that will boost supply, but also a need to reducing balances, and in that we create a more balanced growth in the world economy.

And the work in this report this year and in past years is an emphasis on that third part of the global growth effort and we think it's a significant part. In action, will lead to an unbalanced situation and that carries risks, it can mean a lost opportunity in pursuing balanced growth, it can contribute to a new mediocre, to mediocre global outcomes, both in terms of growth and stability.

Clearly the multilateral aspect of this analysis and of this report, is meant to help countries understand that action only on one side, say, reducing deficits without action on the excess surplus side would potentially lead to a global reduction in demand. If only the deficit countries are lowering demand, and the surplus countries are not raising demand, you would end up with global reduction in demand, and that would be contractionary, coming at a time when the world as a whole needs, on balance, more demand. I think inaction here is really the enemy of progress on the growth and stability agenda.

The fourth message of the work is that there are developments over the course of the last year that signal some of the issues that we are going to face in the future. We've seen sharply lower oil prices last year, and up to the present we've seen divergent monetary policies in major economies with some countries continuing to pursue unconventional monetary policies, and the Fed ending the unconventional monetary policies and beginning to move forward a process of normalization.

We've seen major currencies move somewhat against each other, and these new developments don't entirely change the picture, but going forward we will have to analyze the effects that they have, and look at the new issues that they raise, and I think that those may well be quite significant. Obviously the change in the oil price affects exporters and importers, asymmetrically, but has direct effects on current account positions.

Those are partly offset by the related currency movements that the shift in current account positions that comes from the oil price changes tend to lead to. So that’s on oil.

As far as the movements of major currencies, we think that the movement of major currencies have been beneficial for the global economy, that they are part of the broad adjustment picture. They have been following from monetary policy, monetary policies that have been set in a way that they ease global financial conditions. And so when one takes this as a whole, we think that the monetary policy is being followed and the exchange rate movements that have come with that have been, for the most part, helpful.

But all in all, the bottom line message is that we see the current account positions and the exchange rate positions as requiring further action on the part of surplus and deficit countries in order to help create a basis for more balanced and stronger growth, and for continued global stability. Our emphasis has been on the growth side of the picture, in light of the need for global growth and on the stability side of the picture for now.

So, those are the introductory comments I wanted to make, and let me stop with those, and happy to entertain questions.

QUESTIONER: Hi, appreciate you doing this and thank you for describing very succinctly the potential damaging impacts on the global economy. That was very helpful. Have you quantified the potential drag on global growth, how much these imbalances are dragging on growth? And if I may, is the decline temporary? Could we see a pickup or an expansion of the imbalances if the global economy were to pick up again? Finally, it seems that your advice, having covered this issue for a while, appears to -- there is rhetoric issued in the G-20’s statements, there was some mutual assessment process, et cetera -- but it appears to be largely unheeded. Am I wrong?

MR. LIPTON: Well, let me go through it. You’ve asked several questions. First, we don’t have a single number for the drag on global growth that comes not from the imbalances, but from the gaps between the present positions and what we consider to be the norms. But we do think that this is significant and significant enough to warrant policy action on the part of individual countries. Yes, we are concerned about whether imbalances may reemerge. We sort of take into account cyclical matters in the way we do our analysis, but certainly good policies supportive of balanced and sustained growth are necessary in order to keep imbalances from reemerging.

We certainly will be watching for that and considering the affected countries’ policies on their external positions as we have our dialogue with countries in the course of the year.

Whether the advice goes unheeded, well, all I can say is I think imbalances reduced very substantially from the pre-crisis levels, but there really has been more limited progress in the last couple of years, over the course of the last two reports that we’ve written. So we do think that there’s more that countries could be doing. And when we have these discussions at the G-20 about growth, it is true that much of the discussion is about boosting demand in countries that have idle resources and about structural reform, and there’s much less discussion about policies aimed as a general matter across the whole G20, policies aimed at limiting external imbalances. And so we are the ones who are continuing to put emphasis on this subject.

Now there are particular countries where we feel countries are engaged in discussion with us in trying to create more balanced growth, so I don’t want to create the impression that my general comment is universal. But I do think that as a broad matter, we would like to see more attention to the reduction of imbalances across the major countries.

QUESTIONER: Okay, thank you. I have more questions, but I’ll let my colleagues go.

QUESTIONER: Hi. Thanks for doing the call. You mentioned the G-20. I’m wondering what more could be done to spur countries to take action. I mean it just seems like a lot of these imbalances are deeply entrenched from an economic perspective and also from a policy perspective. So is there anything that could be done on the G-20 front, like does there need to be more of a push to have stronger language in the communiques? I’m just wondering.

MR. LIPTON: We have a process underway in the G-20 that has a direct bearing on this. This G-20 process started during the Australian Presidency and it’s carried forward into this Turkish Presidency. The first step was countries identifying reforms that they were going to take that would be boosting growth. And, of course, they put forward literally hundreds and hundreds of policies that would have a bearing on growth. We then, working with the 20 countries, have identified in each country some 5 to 10 most pertinent and most important policies that would have a bearing on growth. Those were identified so that we together with the OECD, and the countries, could identify the effects of policies and monitor how the work was going. Now, any effort to boost growth is going to have some effect on the imbalances as well that depends on whether it’s the demand side or a supply side policy and how it affects savings and investment. So we’ll be looking at both the growth impacts and the effects on external balances.

So in the course of this year, the Turkish Presidency, there is that effort. Could the efforts be stronger? Yes, and that’s where we feel our role is both to monitor what’s being done, gauge the contributions that those policy changes will make to moderating imbalances, and then urge countries to do more where that’s necessary.

QUESTIONER: Hi. Andrew and I must be the only ones fascinated by this. Is there a place you can point me to where the list of those 5 to 10 new reform proposals has been collated?

MR. LIPTON: I don’t know whether there’s literally a list, but the description is in the Brisbane Action Plan, which was the concluding document from the Australian Presidency.

We’ll be also doing this year, we’re in the process of doing, sustainability updates that look at key countries’ situations. I suppose those are published at the end of the Turkish Presidency once the Leader Summit has happened, so that’s not for a bit. But those will be not only assessing policies that affect growth, but assessing the imbalance situation and the contributions that policies will be making to that. It’s a sustainability update, so it’s meant to look at sustainability of both growth and imbalances. So there’ll be some information in the course of the year.

QUESTIONER: So if we look at the largest -- you have a graph here that shows the systemic importance of the current account imbalances. If we think about China and the U.S., China appears to be acknowledging an effort to boost domestic consumption as a greater percentage of GDP and move away from its export reliance. And there’s some sort of discussion, some might say dysfunctional, but still discussion about dealing with some of the liabilities, the longer term liabilities, on the fiscal side.

But the other major player here, Germany and the deficit side of that in Europe, there’s a discussion in Italy about structural reforms. There have been major movements in Portugal, Spain, and elsewhere about fiscal consolidation and structural reforms. But there still is an argument put forward by Berlin that look, our current account surplus is a sign of our health. We don’t really need to change anything. Is that really -- would it be fair to say that Germany is really the thorn in the side of the global economy at this point?

MR. LIPTON: We have just finished our consultation with Germany as well as our discussion of the whole Eurozone situation, and so there are papers out with all of the details of both what we’ve recommended and what the authorities’ positions are. I think the bottom line in Germany is that we consider the current account surplus in Germany to be above the norm.

We’ve had a discussion with them about that. We’ve recommended some policies that we think would go in the direction of addressing that imbalance. In that report you can read the authorities’ views. I don’t want to characterize it beyond that. But to say that you’re right in reading the charts that -- and as I said in my introductory comment -- some of the larger countries because of their size and the size of their imbalances are major contributors to global imbalances from a quantitative standpoint. So it is hard really to imagine too much progress on the front of reduction of external imbalances without seeing some significant changes or movements towards the norms in those cases.

QUESTIONER: All right. Thank you very much. If I may, if there’s not any other follow up, I have one more question.

MR. LIPTON: Shoot.

QUESTIONER: So as your charts show, over the past decade there’s been a huge increase in FX reserves for a number of different reasons. There’s been a case made by Raghu Rajan and others that the IMF should provide a short-term liquidity facility much as the fed provided during the crisis to help reduce the need for excessive FX reserves. I think that your study here seems to underscore that argument. Where is that discussion, and is that a fair point?

MR. LIPTON: Well, I think it is a concern and a concern that we have had that the accumulation of reserves not contribute to a global slowdown by encouraging imbalances that are too large. You don’t want countries running surpluses to accumulate reserves beyond their need for reserves or a time when that accumulation could potentially be harmful to global growth. So we do have resources available that countries can draw upon if they have difficulty, so they can count on that. We also have as you know precautionary facilities for countries -- and I should say the first category is conditional lending. We have our flexible credit line and precautionary line where countries can arrange ahead of time to have access to funding if they face risks and avoid accumulating reserves to provide themselves with insurance against all of the risks that they face. We think that that is a contributing factor.

But I think the conceptual question that is hard to deal with is that Fund lending really has to be conditional. We are not just providers of liquidity. And so unless a country is in the category that some of our flexible credit line borrowers are where their policies are judged to be at a level where they can draw on these lines, we really can only lend in conjunction with conditions of policy adjustment. So I think there are limits under the present way we operate. There are limits to the extent to which we can be a provider of reserves along the lines of what you were suggesting. But it certainly is an international issue and one that gets discussed from time to time.

QUESTIONER: Hi, thank you for doing this. To the extent you are worried about Brazil’s external position, in the 2013 report it described it as moderate, weaker than the level consistent with medium-term fundamentals and desirable policy settings. And now it’s described as weaker than the level. Are you worried about the growing in 2014 and do you expect gradual improvement this year? How do you feel?

MR. LIPTON: Well, let me say first as I said at the top, I am not going to recharacterize what we said in our report about any particular country because it’s carefully worded. It speaks for itself. I mean I can read it to you if you’d like, but you can look at the country I think you have in front of you, and it looks like you have been looking at the country page. More generally we are concerned about the economic situation in Brazil and the dilemma that they faced of slowing growth, but still the need to be adjusting budget and monetary policies, a budget deficit that’s too large and a monetary policy in the face of inflation that’s too high. We are hopeful that action on those two fronts will be suitably supportive of growth and content in the country that it can be helpful. But let me leave the question of the external aspect to what we’ve written in the paper, which I think speaks for itself.

QUESTIONER: Okay, thank you very much.

OPERATOR: We have no further questions.

MR. LIPTON: Well, thank you all. Thanks very much for participating. It’s been good to be with you.



miércoles, agosto 05, 2015


Rule, Germania

Harold James

JUL 30, 2015

Wolfgang Schauble

PRINCETON – A persistent theme – indeed the leitmotif – of the way that German leaders discuss the eurozone is their insistence on the importance of following the rules. That refrain is followed by a chorus from the rest of the monetary union demanding to know why Germany is taking such an inflexible approach. The answer, it turns out, reflects the way Germany’s federal system of government has shaped its decision-making, as well as Germany’s historic experience with debt crises.
Germany’s obsession with rules long predates the current eurozone crisis. The country’s policymakers always insisted that Europe could not have a common currency without first achieving economic convergence. But that looked like it would never happen. So, in the 1990s, as the eurozone was being established, Germany argued for rigorous enforcement of the “convergence criteria,” the requirements necessary for adopting the euro.
Economists in every other country ridiculed the Teutonic fixation on firm rules. There is no reason, for example, why a debt-to-GDP ratio of 59% should be considered safe, but 62% regarded as irresponsibly dangerous. But the Germans insisted – and ultimately got what they wanted.
That approach stemmed in part from Germany’s political structure. The more federal a country’s system of government is, the more rules are needed to ensure its smooth functioning.

When the responsibilities of different levels of government are not clearly delimited, there is the danger that officials will try to pass burdens to higher levels. In order to avoid this, federations often adopt a legalistic approach.
Indeed, there is a strong correlation, historically, between successful federations and a stable monetary policy undergirded by clear rules. In the late twentieth century, Switzerland, Germany, and the United States – all federal countries – were pioneers in applying a stability-oriented monetary policy. Given that the eurozone is in many ways federal in its structure, a clear commitment to the rules seemed to Germany to be a prerequisite for its success.
To be sure, even Germans know that rules sometimes need to be bent. Thinkers as far back as Aristotle have argued that rules fail when they are too rigid. In the Nicomachean Ethics, Aristotle pointed to the use by sculptors on the island of Lesbos of rulers made from flexible lead – rather than rigid iron – for cutting curved lines in stone. The ability to reshape the rulers to fit the stone served as a metaphor for the need to adjust laws when circumstance change.
But when it comes to debt, Germans have insisted on using the most rigid of rulers. Since the beginning of the eurozone crisis, the German government dug in its heels on European treaty provisions that it interprets as forbidding bailouts and monetary financing of government debt.
Recently, Germany reacted to a proposal to forgive a portion of Greece’s debt by maintaining that the treaty provision that proscribes bailouts also rules out state bankruptcies and debt forgiveness.
The lesson that Germany has taken from its history is that debt is an area in which flexibility must be steadfastly avoided. This might come as a surprise to American commentators, who have argued that Germany is acting hypocritically, having defaulted on its debts in 1923, 1932-1933, 1945, and 1953, only to insist today that others do differently.
The truth is that Germans viewed nearly all of those defaults as destabilizing. The internal default in 1923, conducted via hyperinflation, weakened the German financial system and helped cause the Great Depression. The defaults in the early 1930s became inevitable when Germany could not access private capital markets and the country had lost faith in its future.

Rather than set the stage for a sustainable economic recovery, deflation and default fanned the flames of nationalism – to disastrous effect.
The default of 1945 was the consequence of losing World War II. Indeed, the tradition of so-called Ordoliberalism that has shaped Germany’s post-war economic policy was a response to the Nazis’ destructive arbitrariness.
Only the debt cancellation of 1953 is viewed in a positive light in Germany, and a look at the circumstances in which it occurred reveals much about the country’s approach to the eurozone crisis.
As the Yale economist Timothy Guinnane has shown, the debt that was canceled was not the principal, but accumulated interest arrears that had not been paid between the Great Depression and WWII.
More important, from Germany’s perspective, was the political context in which the negotiations took place. For starters, there had been a complete regime change in Germany.
The victorious Allies had removed those responsible for the destructive, destabilizing policies of the past, providing the country with a clean break and its debtors with confidence that Germany was on a new course.
Furthermore, Germany’s new policymakers had demonstrated their financial seriousness. In 1950, the country had undergone a severe balance-of-payments crisis. Some officials were in favor of capital controls, but the government instead implemented monetary austerity.
This experience explains another of Germany’s obsessions: reforms in debtor countries.

Germany needed a complete change of its domestic regime to break out of its cycle of debt and default. That might be a bit much to ask in the context of the eurozone; but, without a fundamental reorientation of a country’s politics, the thinking in Germany goes, debt forgiveness will always remain a futile exercise.

European 'alliance of national liberation fronts' emerges to avenge Greek defeat

For the pony-tailed leader of Spain's Podemos movement, the Leninist lesson of Greece is that revolutionary forces must show an iron fist

By Ambrose Evans-Pritchard

9:40PM BST 29 Jul 2015

Podemos secretary general Pablo Iglesias speaks during a meeting in Oviedo, Spain Photo: Reuters
It has come to this. The first finance minister of a eurozone country to draw up contingency plans for a possible euro exit is under investigation for treason.
Greece's chief prosecutor is examining criminal charges against a five-man "working group" in the country's finance ministry for the sin of designing a "Plan B", a parallel system of euro liquidity and bank payments that could - in extremis - lead to a return of the drachma.
It is hard to see how a monetary union held together by judicial power, coercion and fear in this way can have a future in any of Europe's ancient nation states.
The criminalisation of any Grexit debate shuts off the option of an orderly return to the drachma, even though there is a high probability - some say a near certainty - that the latest EMU loan package for Greece will prove unworkable and precipitate the country's exit from the single currency within a year. As a matter of practical statecraft, this is sheer madness.
The Greek newspaper Kathimerini - the voice of the oligarchy - reported that the charges would include "breach of duty, violation of currency laws and belonging to a criminal organisation", as well as violating data privacy by hacking into the Greek tax base.

The prosecutor appears to have latched onto a legal suit by a private lawyer accusing Yanis Varoufakis of treason. It is nothing less than an attempt to destroy the mercurial former finance minister, lest he return as an avenging political force.

The Greek "Plan B" was approved from the outset by prime minister Alexis Tsipras. It was designed originally to create an alternative source of euro liquidity if the European Central Bank cut off emergency funding for the Greek banking system.

The ECB did in fact do exactly that - arguably violating the ECB's Treaty to uphold financial stability, and acting ultra vires in a purely political move as the enforcer of the creditors - when the Syriza government threw down the gauntlet with an anti-austerity referendum.

Mr Varoufakis insists that his plan was based on California's IOU scheme in 2009 to cover tax rebates and to pay contractors when liquidity dried up after the Lehman crisis. His purpose was to reflate the economy within the eurozone, not to leave it. Yet it had a double function, and there lies the alleged treason. "At the drop of a hat it could be converted to a new drachma,” he said.

Pablo Iglesias, the pony-tailed leader of Spain's Podemos movement, has drawn his own conclusions after watching Europe's first radical-Left government in modern times brought to its knees by liquidity asphyxiation, and then further crushed by internal forces within Greece.

Brothers in arms: Alexis Tsipras and Podemos's Pablo Iglesias

He accused Germany of imposing a Carthaginian settlement as punishment for daring to call a referendum, and warned that the "limits of democracy in Europe" are now brutally clear.

The lesson to be learned is that if Podemos is elected in Spain it must expect a trial of strength ("medir fuerzas") and make sure it takes power in the fullest sense. You can interpret this how you will, but there is a hint of Leninist defiance in these words, a warning that Podemos may feel compelled to launch pre-emptive strikes against the entreched positions of the Spanish establisment, in the media, the judiciary, the security forces and the commanding heights of the economy.

The fate of Syriza has clearly tainted the radical-Left brand. The EMU creditor powers have shown all too clearly that if you buck the system, your country will pay a bitter price. It is hard to explain to Spanish voters - or indeed to anybody - how Mr Tsipras could accept a package of draconian demands rejected by the Greek people in a landslide vote just a week earlier.

Podemos has lost its electoral lead and has dropped to 17pc in the polls, trailing the Socialists by a wide margin. But it would be premature to conclude that this is the end of the story. The deeper message - still entering the collective consciousness - is that no Leftist government can pursue sovereign policies within the constraints of EMU.

Professor James Galbraith from Texas University - who played a key role in the Greek plans and is now himself under fire - said Syriza's experiment over the past five months has demonstrated for all to see that it is impossible for a state on the EMU periphery to change the policy regime by force of argument alone, even if the prescriptions of debt-deflation and fiscal overkill imposed upon them have been self-evidently calamitous.

Speaking to the Left, prof Galbraith said Spanish voters should not delude themselves that they would secure better terms merely because their country is bigger. The creditors have shown themselves to be fanatically rigid, insisting on the exact terms of their Memorandum regardless of economic science and common sense.

For Spain, there would be the same sudden-stop in capital flows from EMU banks, leading to the same liquidity rationing by the ECB, the same internal bank-run, ending in the same "death spiral".

Personally, I doubt that radicals will sweep Spain (or Portugal) in elections later this year. It is too soon. The country is enjoying a cyclical upswing, creating an illusion of recovery even as the current account deficit creeps up again. The worry is what will happen in the next global downturn when the Spanish people discover that they were never really cured.

Italy is another matter. There is no such mini-boom. Output is still 11pc below its pre-Lehman peak. It has dropped back to the levels of 2000. This is far worse than Japan's Lost Decade, or Italy's own experience in the 1930s. It is unprecedented in a large modern economy, and it stems from an irreversible loss of labour competitiveness in the early years of EMU.

Stefano Fassina, the ex-deputy finance minister in the ruling Democratic party of Matteo Renzi, is already proposing a "controlled disintegration of the eurozone" to break free from what he calls a neo-liberal mercantilism imposed by Germany. "We are at a historical watershed. The choice is dramatic," he said.

"Syriza and the Greek people have the undeniable historical merit of having ripped away the veil of Europeanist rhetoric," he said

Evoking the language of guerrilla warfare, Mr Fassina is calling for "an alliance of national liberation fronts" on the Left, acting in concert with "souverainist" parties on the democratic Right.

"We need to admit that the Left loses its historical function as a force committed to dignity and social citizenship in the neo-liberal cage of the euro. It is dead. The irrelevance and collusion of the European socialist parties are manifest," he said.

Beppe Grillo, the leader of Five Star Movement and still a major force in Italian politics, has long been equivocal about Italy's euro membership. Disgusted by events in Greece, he has issued a full-throttle "Plan B" for a return to the lira.

"It is hard to defend the interests of the Greek people more destructively than Tsipras has done. Thinking he could break the link between the euro and austerity, he has ended up consigning his country like a vassal into the hands of Germany," he said.

The lesson for Italy - he argues - is that it must draw up its own battle lines to prevent neo-colonial occupation and seizure of its national assets. It must take the fight pre-emptively to the creditors and force an exit from the euro on Italian terms.

This ideological rearmament is the unintended result of the eurozone's refusal to seek any modus vivendi with Syriza even where there was plenty of common ground. They were so determined to chastise Greece for lese majeste that they completely lost sight of the greater European interest.

Donald Tusk, the EU president, concedes that a pre-revolutionary mood is taking hold across much of Europe, comparing it to the Left-Right alliances of the late 1930s. “It was always the same game before the biggest tragedies in our European history," he told the Financial Times.

Yet he could not bring himself to admit that the root cause of the populist uprising is the deformed structure of monetary union that has led to six years of mass unemployment and incubated this new tragedy. Nor could he admit that the deal he himself brokered after "water-boarding" Mr Tspiras in Brussels for 17 hours perpetuates the same vicious cycle.

So we now have a Europe where the political temperature is rising to boiling point: where the EMU elites are refusing to shift course; and where mischievous lawyers are concocting criminal charges against anybody daring to explore a way out of the trap.

This is a recipe for a European civil war.

UBS Deal Shows Clinton’s Complicated Ties

Donations to family foundation increased after secretary of state’s involvement in tax case

Then-Secretary of State Hillary Clinton appeared with Swiss Foreign Minister Micheline Calmy-Rey, left, at the State Department on July 31, 2009, announcing a deal in principle to settle a legal case involving UBS. Photo: J. Scott Applewhite/AP 

A few weeks after Hillary Clinton was sworn in as secretary of state in early 2009, she was summoned to Geneva by her Swiss counterpart to discuss an urgent matter. The Internal Revenue Service was suing UBS AG to get the identities of Americans with secret accounts.

If the case proceeded, Switzerland’s largest bank would face an impossible choice: Violate Swiss secrecy laws by handing over the names, or refuse and face criminal charges in U.S. federal court.

Within months, Mrs. Clinton announced a tentative legal settlement—an unusual intervention by the top U.S. diplomat. UBS ultimately turned over information on 4,450 accounts, a fraction of the 52,000 sought by the IRS, an outcome that drew criticism from some lawmakers who wanted a more extensive crackdown.

From that point on, UBS’s engagement with the Clinton family’s charitable organization increased. Total donations by UBS to the Clinton Foundation grew from less than $60,000 through 2008 to a cumulative total of about $600,000 by the end of 2014, according the foundation and the bank.

The bank also joined the Clinton Foundation to launch entrepreneurship and inner-city loan programs, through which it lent $32 million. And it paid former president Bill Clinton $1.5 million to participate in a series of question-and-answer sessions with UBS Wealth Management Chief Executive Bob McCann, making UBS his biggest single corporate source of speech income disclosed since he left the White House.

There is no evidence of any link between Mrs. Clinton’s involvement in the case and the bank’s donations to the Bill, Hillary and Chelsea Clinton Foundation, or its hiring of Mr. Clinton. But her involvement with UBS is a prime example of how the Clintons’ private and political activities overlap.

UBS is just one of a series of companies that engaged with both the Clinton family’s charitable organization and the State Department under Mrs. Clinton. And it is an unusual one: Unlike cases in which Mrs. Clinton went to bat for American companies seeking business abroad, such as General Electric Co. and Boeing Co. , the UBS matter involved her helping solve a problem for a foreign bank—not a popular constituency among Democrats—and stepping into an area where government prosecutors had been taking the lead.

The flood of donations and speech income that followed exemplifies why the charity and its fundraising have been a running problem for the presidential campaign of Mrs. Clinton, the Democratic front-runner. Republicans as well as some Democrats have raised questions about potential conflicts of interest.

“They’ve engaged in behavior to make people wonder: What was this about?” says Harvard Law Professor Lawrence Lessig, who is a Democrat. “Was there something other than deciding the merits of these cases?”

Critics also have hit the charity for accepting donations from foreign governments, which they say could pose problems for her if she is elected, potentially opening her to criticism that she is obligated to foreign donors.

The Clintons have said accepting donations posed no conflicts of interest and broke no rule or law. To address the criticism, the Clinton Foundation decided to release donation information more frequently, and the foundation said earlier this year that the first disclosure is expected by the end of July.

UBS officials deny any connection between the legal case and the foundation donations. “Any insinuation that any of our philanthropic or business initiatives stems from support received from any current or former government official is ludicrous and without merit,” a bank spokeswoman said. UBS said the speeches by Mr. Clinton and the donations were part of a program to respond to the 2008 economic downturn.

A Clinton campaign spokesman said Mrs. Clinton is proud of the foundation’s work and her record as secretary of state. “Any suggestion that she was driven by anything but what’s in America’s best interest would be false. Period,” he said. He referred questions about the UBS matter to the State Department.

A State Department spokesman said that “UBS was a topic of serious discussion, among other issues, in our bilateral relations at that time” with the Swiss government. A spokeswoman in the Swiss embassy in Washington said the government had no comment.

In a CNN interview last month, Bill Clinton was asked if any foundation donors ever sought anything from the State Department. “I don’t know,” he replied. “I know of no example. But I—you never know what people’s motives are.”

Tax avoidance

UBS’s troubles began in 2007 when an American banker working in Switzerland told the U.S. Justice Department that UBS had recruited thousands of U.S. customers seeking to avoid U.S. taxes. The disclosure led UBS to enter into a deferred-prosecution agreement with the Justice Department in 2009. The bank admitted to helping set up sham companies, creating phony paperwork and deceiving customs officials. It paid a $780 million fine and turned over the names of 250 account holders.

The agreement left unresolved a separate legal standoff over whether UBS—in response to a summons from the IRS—would turn over the names of U.S. citizens who owned 52,000 secret accounts estimated to be worth $18 billion. “We should get all the accounts,” IRS Commissioner Dan Shulman maintained at a Senate hearing in 2009.

After a federal judge indicated he would rule quickly, UBS enlisted the Swiss government to approach the State Department.

“UBS believes this dispute should be resolved through diplomatic discussions between the two governments,” Mark Branson, then chief financial officer of UBS Global Wealth Management and Businesses, said at a separate congressional hearing.

John DiCicco, then the Justice Department’s top tax lawyer on the case, responded at the same hearing: “We are not going head-to-head with the Swiss government, but UBS.”

Mrs. Clinton’s role in resolving the matter was more extensive than previously reported. She didn’t initiate her involvement in the case, but was drawn into it by separate diplomatic concerns, according to interviews with people involved in the case and diplomatic cables first published by WikiLeaks.

On March 6, 2009, two days after the congressional hearing, Mrs. Clinton met Swiss Foreign Minister Micheline Calmy-Rey for the first time. Ms. Calmy-Rey suggested settling the UBS matter through the U.S.-Swiss treaty process.

But Mrs. Clinton also wanted to talk about other matters of concern to the U.S. She brought up a U.S. journalist jailed in Iran, the State Department said. The U.S. hadn’t had direct diplomatic relations with Iran since 1979, and the Swiss embassy in Tehran represented U.S. interests in Iran.

She also wanted to discuss a Swiss-based energy-consulting company, Colenco AG, that allegedly was violating international sanctions by providing civilian-nuclear technology to Iran, according to a State Department cable that July 1. And Mrs. Clinton wanted Switzerland to take some low-risk detainees from the prison in Guantanamo Bay, which President Barack Obama has vowed to close, according to the cable.

After the meeting broke up, Ms. Calmy-Rey spoke to reporters about the importance of resolving the UBS problem: “It was not in our common interest for the situation to escalate further as UBS is responsible for 30,000 jobs in the U.S., and the bank’s difficulties could weaken the international financial system.”

A State Department official wrote after the meeting in another cable that the UBS case was “a dark cloud over bilateral relations, with concerns it could escalate to a seriously damaging event.” The State Department declined to comment on any of the cables made public by WikiLeaks.

The Swiss appeared to act on Mrs. Clinton’s concerns. That May, the U.S. journalist was released. On July 1, the Swiss trade minister told the U.S. that Colenco would shut down its Iran operations. (The company said none of its activities violated international sanctions.) Economy Minister Doris Leuthard also expressed Switzerland’s willingness to accept Guantanamo detainees.

Ms. Leuthard, referring to Guantanamo and Iran, “made it clear that these two activities were linked to the achievement of a political settlement in the case of Swiss banking giant, UBS,” the July 1 cable said.

After the cable became public, Ms. Leuthard told a Swiss newspaper there was “no direct connection” between UBS and the Iran and Guantanamo issues. A Swiss embassy spokeswoman said Ms. Leuthard had no comment.

Out-of-court negotiations to settle the case intensified, according to lawyers involved in the case.

In mid-July, Ms. Calmy-Rey told a Swiss reporter she expected a resolution by the time she met with Mrs. Clinton in late July in Washington. She said the U.S.-Swiss relationship was at stake.

On July 31, Ms. Calmy-Rey appeared with Mrs. Clinton at the State Department to announce a deal in principle. The Justice Department and IRS agreed to dismiss the lawsuit and settle the disagreement under a U.S.-Swiss tax treaty, as Ms. Calmy-Rey had sought. UBS would turn over information on about 4,450 accounts, not 52,000.

“Our governments have worked very hard to reach this point,” Mrs. Clinton said.

Ms. Calmy-Rey called the agreement a “Peace Treaty” and UBS praised it.

Then-Sen. Carl Levin (D., Mich.), a longtime advocate of cracking down on tax avoiders with offshore accounts, criticized the deal. “It is disappointing that the U.S. government went along,” he said.

Carolyn Schenck, a senior counsel at the IRS, said at a conference earlier this year that many U.S. citizens with overseas accounts escaped IRS scrutiny in the settlement.

An IRS spokesman defended the deal, saying it had “resulted in criminal prosecutions, produced billions in penalties and taxes and forced a dramatic shift in the use of offshore banks to hide money.”

A Justice Department spokeswoman said the department has criminally charged 66 people who had UBS accounts, though she couldn’t say whether any of those cases were related to the settlement.

State warning

Mr. DiCicco, the senior Justice Department tax lawyer on the case who has since retired, said the State Department didn’t get involved in details of the settlement, but did warn about the ramifications of taking a tough line.

“There is a risk that if a large bank is indicted it would lose its ability to do business in the U.S.,” he said. “That was a consideration.” He said there was no “pressure” from the State Department on that issue.

As loose ends of the deal were being tied up in late 2009, UBS began making plans to create a small-businesses program. In early 2010 it decided to team up with a Clinton Foundation project called the Clinton Economic Opportunity Initiative.

UBS started a pilot entrepreneurs program in New York City in June 2011 with a $350,000 donation to the foundation, according to the bank. Its only previous donations were “membership fees” of about $20,000 a year. The 2011 donation also paid for an earlier appearance by Mr. Clinton at a UBS event where he discussed the economy, the bank said.

In 2012 the entrepreneurs program was listed as one of three of the Clinton Economic Opportunity Initiative’s most significant achievements of the year. UBS ultimately offered $32 million in loans to dozens of businesses in six cities. (The money didn’t go to the foundation.)

The bank dubbed the program Elevating Entrepreneurs and packaged it with appearances around the country by Mr. Clinton and former President George W. Bush.

Mr. Clinton earned $1.5 million for 11 appearances in New York, Dallas, Miami, Pittsburgh, San Francisco, Nashville and other cities. Mr. McCann, the UBS Wealth Management executive, conducted the panel discussions with Messrs. Clinton and Bush. Spokesmen for Mr. Bush and UBS declined to comment on how much Mr. Bush was paid.

UBS also gave $100,000 to the Clinton Foundation for a charity golf tournament.

Stu Gibson, who litigated the lawsuit against UBS for the Justice Department, said in a recent interview that he was unaware that the bank had increased its donations to the Clinton Foundation in the wake of the settlement.

“It raises questions that need to be addressed, or should be addressed,” said Mr. Gibson, who has left the government and now is editor of Tax Notes International. “Maybe there’s nothing to it. Maybe there is something to it.”

miércoles, agosto 05, 2015



Read This, Spike That

Piling on Gold

Several financial Websites appear to be ratcheting up the criticism of owning the declining metal. Is this justified?

By John Kimelman

July 29, 2015 6:02 p.m. ET

With the price of gold down about 6% in the last month, following almost four years of declines, the gold bears have become emboldened.

Could it be that all the piling on in the financial press has merit? It certainly seems that way, even if it might rub contrarians the wrong way.

A fresh trend piece by Bloomberg makes the case that gold is down in part because it has lost its “charisma.”

To be sure, there are many concrete, fundamental reasons for gold to be lagging, including the prospect of a rising dollar (gold tends to trade inversely to the greenback) and weak demand from China, a major consumer of the metal.

But part of gold’s decline, the article points out, is due to a profound sentiment shift.

“Sentiment means a lot in the bullion market, where only about 60% of what gets mined or recycled each year is used in jewelry and industrial applications,” writes Bloomberg. “The rest is sold as coins or bars, so when demand from investors dries up, there can be painful consequences for the bulls who remain.”

Gold, currently trading at around $1,100 an ounce, will drop to $984 an ounce before January, according to the average estimate in a Bloomberg News survey of 16 analysts and traders.

“That would be the lowest since 2009 and a 10 percent retreat from Tuesday’s settlement,” the article asserts. “Speculators are shorting the metal for the first time since U.S. government data began in 2006, and holders of exchange-traded products are selling at the fastest pace in two years.”

The piece quotes Robin Bhar, an analyst with Societe Generale in London, who says, “Gold is out of fashion like flared trousers: no one wants it. It’s not going to collapse, but we think it is going to be at a lower level in the not-too-distant future.”

Moreover, a fresh piece on this Website makes a solid case for why gold will fall to $1,020.

The piece was written by Victor Thianpiriya, a commodities analyst with Australia and New Zealand Banking Group (ticker: ANZ ), who cut his gold-price forecast amid dollar strength and Chinese weakness.

To be sure, one bullish argument for buying gold that never goes away is the notion that a modest portion of the metal can serve as portfolio insurance in the event of black swan events. But that apparently isn’t enough of an argument to send gold spiraling upward.

In other words, few are playing offense with gold the way they were in the years of the financial crisis and in the years immediately following.

Even articles that are bullish on gold and the companies that mine it can ring hollow.

A piece on by Allan Roth, a respected fee-based certified financial planner, makes a “contrarian” case for gold miners, which have fallen far harder in the past five years than the metal they seek to produce.

Roth still believes in holding precious-metal mining stocks despite all the good reasons not to like them. But if you read his piece, the arguments against these stocks seem far more compelling than the bullish ones.

For example, the profitability of these miners are much more sensitive than the price of the metals themselves. “Since there are costs to mine, a 10% decline in the price of gold could have a 20-30 percent hit to their profitability,” Roth writes. “Next, these stocks are typically levered, so their debt service adds more stress to the bottom line. Further, many of these mining companies are located in South Africa and have gone through violent strikes. Finally, many of these companies have been called poorly managed. When gold prices surged, many built a cost structure that assumed they would stay high or continue to surge.”

Howard Gold, a columnist with MarketWatch and the former editor of, doesn’t think that this market is close to hitting bottom.

“As gold breaks down near support levels, technician Michael Kahn of asks whether capitulation is here,” Gold writes, referring to that moment where bearish sentiment is exhausted.

“Not quite. After the 1970s bull market, gold lost two-thirds of its value. At this point it has fallen ‘only’ 40% from its 2011 peak,” adds Gold. “John LaForge, commodities strategist for Ned Davis Research, thinks gold has to fall to $660 before it reaches its bear market bottom. Shawn Driscoll of T. Rowe Price, who said oil would fall to $50 a barrel, thinks gold will tumble to $800 an ounce. I’m looking for a bear market bottom somewhere between those two prices.”

Who knows where gold will end up before it turns around? But the bearish sentiment doesn’t seem close to being exhausted.