Here’s one way to fix Brexit’s Irish border problem

The government has already conceded that some rules for Northern Ireland will be set by the EU

Martin Sandbu




Amid the fallout from the UK Supreme Court’s landmark decision on the suspension of parliament, it is easy to forget that Boris Johnson’s first significant engagement with Brexit as prime minister was in a letter to Donald Tusk, president of the European Council.

In it, he reneged on the UK’s December 2017 commitment to keep Northern Ireland aligned with the EU regulations and customs rules until other ways to avoid border infrastructure and controls could be agreed. This was formalised as the “backstop” for Northern Ireland only, later extended to an all-UK version at Britain’s behest.

The commitment, undertaken in the so-called EU-UK Joint Report, had been the EU’s precondition for entering talks on long-term trade relations. By reneging, the UK went back on something the EU took in good faith. From Mr Johnson, such behaviour is hardly shocking, even if it should be. More importantly, it is counterproductive. When the UK has asked to sort out border issues after Brexit, Irish leaders are at pains to emphasise that they cannot replace a legal guarantee with a promise. Given what happened to the earlier promise, who can blame them?

While not couched in these terms, the EU now insists on recommitting the UK government to the Joint Report. That is how we should read the overture by Jean-Claude Juncker, the president of the European Commission, to alternatives to the backstop if “all” its objectives can be met by other means than aligning with EU rules.

No such means have been identified. This reality is the same as that faced by Theresa May. So Mr Johnson’s premiership started by reverting to his predecessor’s late-2016 position only to turn into a fast-forward replay of her evolution towards a softer Brexit. The question is whether he will move far and fast enough towards EU demands in the limited time left and be able to sell the concessions this entails better than she did.

By accepting the notion of a single regulatory area for agrifood, Mr Johnson and his Democratic Unionist partners have already conceded that some rules for Northern Ireland will be set by the EU. That makes extending regulatory alignment to industrial goods a simple question of scope. There is no deep reason why Britain should refuse to accept for industrial goods what it accepts for agrifood — regulatory checks on boats crossing the Irish Sea — and the prime minister now hints he may do just that.

There is a problem of democracy, in that Northern Ireland will be governed by rules decided elsewhere. But this is a problem the EU is willing to ameliorate. The Joint Report explicitly provided for an economic border in the Irish Sea if Northern Ireland’s elected institutions agree. Mrs May’s withdrawal agreement includes a Joint Committee to oversee the backstop, on which those institutions could have representatives. And models exist: non-EU countries in the single market, such as Norway, have a system for adopting EU rules that preserves formal sovereignty while protecting the single market’s integrity.

Mr Johnson was therefore right to spot a “landing zone”. In substance, it looks much like where Mrs May ended up landing. (Northern Ireland will also have to stay in the EU’s value-added tax rules, but this is so technical as to escape politics.) The thorniest problem remains: customs.

Mr Johnson, like Mrs May, will accept regulatory differentiation but insists on one trade regime for the whole UK. For her, this meant an all-UK tie-in with the EU customs union. For him, it means Northern Ireland out of it. The customs border this entails is why customs is shaping up to be the one outstanding obstacle to a deal. Even accepting alignment on all other things would create two borders rather than just one.

The UK will not convince anyone that technology can substitute for border controls. But another rejected alternative may be worth revisiting. The “customs partnership” where the UK would have its own trade deals but enforce EU tariffs on imports destined for the single market was only ridiculed because it was unrealistic to identify which goods were headed for the EU when entering the UK customs area. But it is not quite as unrealistic to identify which goods cross into Northern Ireland and end up there or return to Great Britain.

The UK could offer to enforce EU customs rules on all goods crossing the Irish Sea, but where its own future tariffs were lower, it would rebate the difference for Northern Irish consumers — on the model of VAT refunds for travellers — or for re-exports back to Great Britain. Such tariff rebates could be managed via the tax system for individuals, so only Northern Irish residents would benefit, and via VAT tracking for re-exports. Since named individuals and firms would have to claim the rebate, fraud attempts could be detected.

While convoluted, such a system is not unworkable, and it would tick a number of important boxes. It would secure the correct tariff revenue for the EU and enforce its commercial policy. It would allow the government to promise — honestly — that Northern Ireland would share the benefits of trade deals. It would keep the Irish land border open.

The question for the UK government is not whether to concede but how to defend its concessions. A politically sellable customs solution is at the crux of whether it delivers a broken Brexit or an orderly one.

Explosive Silver Prices Will Be Mind Boggling

by: Bob Kirtley


Summary
 
- Gold has been ignored for 6 years and silver has been totally forgotten about by the majority of the investment community.

- This chart depicts the sudden rise in silver prices from around $14.50/oz to a high of $19.50/oz in just 4 months.

- Silver has been moving faster than gold as the gold/silver ratio shows that it now stands at a reduced level of 83.

All in all, the scene is set for an exodus from some of the large investment classes and into the precious metals sector, particularly silver.


Introduction

Gold has been ignored for 6 years and silver has been totally forgotten about by the majority of the investment community. This was evident when the gold/silver ratio rose to almost record levels at 95 which was reached in July 2019. The situation has started to change over the last few months as we have seen both gold and silver prices spring to life and increase in value. In particular, silver has been moving faster than gold as the gold/silver ratio shows that it now stands at a reduced level of 83.
 
This chart depicts the sudden rise in silver prices from around $14.50/oz to a high of $19.50/Oz in just 4 months. We can also glean that during that period of rapid movement, silver formed a number of higher lows which is usually a positive indication of a strong advance.
 
 
 
 
Gold/Silver Ratio chart
 
This chart shows that the gold/silver ratio rose to 95 when silver was out of favor and has subsequently reversed as silver prices gained some traction. Over the last 20 years, the average has been around 60 for this ratio so there is still room for silver to move to higher ground before it hits that average. There are some who are calling for the ratio to drop to around the 15 level.

These predictions generate vastly different prices for silver as per the following:
 
Gold at $1,500/Oz, the ratio at 83, Silver priced at $18.00/Oz. Gold at $1,500/Oz, the ratio at 60, Silver priced at $25.00/Oz. Gold at $1,500/Oz, the ratio at 15, Silver priced at $100.00/Oz.
 
The above calculations assume that gold will not increase in price, but we are firmly of the opinion that the new bull market in precious metals has started and will surpass previous all-time highs for both metals. If the price of gold continues to gain momentum, then the estimates shown for silver will be superseded by a considerable amount.
 
 
 
 
Reasons Behind This Move
 
There are a myriad of reasons that will drive this bull market, the two main reasons in our very humble opinion are the demise of fiat currencies and an economic recession which is long overdue.
 
A quick look at the currencies shows us that the central banks around the world are driving interest rates down to zero and in some cases negative territory, so there is no longer a return for savers who keep cash in a bank. They will need to do something else or sit and watch as their hard-earned wealth shrinks before their eyes.
 
We know that the European Central Bank has just re-introduced Quantitative Easing and we suspect it won’t be very long before other central banks follow suit. The constant printing of money only serves to weaken a currency and reduce its purchasing power.
 
The current economic recovery has been one of the longest in history and now looks to be exhausted as the S&P 500 struggles to retake the 3,000 level. The pullback could be severe as investors will move their funds out of the general markets in order to preserve their gains and avoid losses. Again, they too will be looking for a new home for their investment funds.

Other assets such as property have been in a bubble for some time in many parts of the world, and should that bubble burst, investors will look to liquidate their positions.
 
Conclusion
 
All in all, the scene is set for an exodus from some of the large investment classes as mentioned above and the precious metals sector has bottomed and is now heading for higher ground. The higher gold and silver go, the more airtime they will receive, and more and more investors will take an interest followed by taking an active part in this sector of the market.
 
Furthermore, it must be remembered that gold and silver and their associated stocks are tiny compared to the stock or bond markets, so even a small reallocation of funds will make a big impact on the demand side for these assets.
 
Silver prices will accelerate faster than gold prices so please give it some serious consideration along with the good quality silver producers that are due to experience a ballistic price rise before this bull market reaches its conclusión.

Free Exchange

Repo-market ructions were a reminder of the financial crisis

Soon enough post-crisis reforms will face serious tests

 

FOR ANYONE who lived through the global financial crisis, trouble in the market for repurchase agreements, or repos, induces a cold sweat. During the week of September 16th the repo market—the epicentre of the crisis 12 years ago—ran short of liquidity, forcing the Federal Reserve to intervene suddenly by injecting funds.

By the following week fears of a reprise of the global crisis were easing, though banks remained eager recipients of Fed liquidity. But the episode was a reminder that financial dangers lurk. At some point one will give post-crisis reforms a real-world stress test. It is unclear whether they are up to the challenge.

The financial crisis combined several storms into a single maelstrom. It was part debt-fuelled asset boom. A long run of rising home prices in America led to complacency about the risks of mortgage lending. Ever more recklessness fuelled the upward march of prices, until the mania could no longer be sustained. Borrowers began to default, saddling lenders with losses and creating a widening gyre of insolvency. Painful enough on its own, America’s housing bust became truly explosive thanks to an old-fashioned bank run.

Banks fund themselves on a short-term basis via demand deposits, but also on money markets, such as that for repos. Many bank assets, by contrast, are illiquid and long-term, such as loans to firms and homebuyers. This mismatch leaves banks vulnerable. During the Great Depression, many failed when nervous depositors demanded their cash all at once.

Though government-provided deposit insurance now protects against this hazard, it did not extend to money markets. In 2008, then, questions about the health of banks and their collateral triggered a flight from those markets, leaving healthy and unhealthy banks alike unable to roll over short-term loans and at risk of imminent collapse.

These twin woes were amplified by the global financial system’s interconnectedness. Cross-border capital flows soared in the years before the crisis, from 5% of global GDP in 1990 to 20% in 2007, spreading financial excess and outstripping regulators’ capacity for oversight.

Money from around the world poured into America’s mortgage market, and the resulting pain was correspondingly global. The Fed’s first crisis intervention, in August 2007, was in response to money-market turmoil prompted by financial difficulties at funds run by a French bank, BNP Paribas.

Chastened by the near-death experience, governments introduced regular stress-testing and made banks adopt “living wills”: plans to wind themselves down in the event of failure without endangering the system as a whole. Central banks added credit-risk indicators to their policy dashboards.

Regulators increased banks’ capital and liquidity requirements: bigger buffers against losses and liquidity droughts, respectively. In advanced economies bank balance-sheets look stronger than in 2007, and no obvious debt-fuelled bubbles have inflated.

Yet all that is less reassuring than might be hoped. Post-crisis, both governments and markets have proved surprisingly tolerant of risky borrowing. Despite household deleveraging, companies have taken on enough debt to keep private borrowing high; at 150% of GDP in America, for instance, roughly the level of 2004.

In America the market for syndicated business loans has boomed, to over $1trn in 2018, and loan standards have fallen. Many loans are packaged into debt securities, much as dodgy mortgages were before the crisis. Regulators have declined to intervene—remarkably, considering how recent was the crisis.

Just as the threat of bank runs migrated from depositors to money markets, so systemic risk may now be building up in non-bank institutions. Investment funds, pension managers and insurance companies have been eager buyers of securitised bank loans. As recently noted by Brad Setser of the Council on Foreign Relations, an American think-tank, some have begun to take on an ominously bank-like maturity mismatch.

Insurers in some countries, including Japan and Korea, have been hoovering up hundreds of billions of dollars of foreign bonds, hedging the exchange-rate risk on a rolling, short-term basis. If, in a crisis, these funds cannot renew their hedges, they could be exposed to significant losses. The vulnerabilities of supposedly staid firms may be an underappreciated source of risk for big banks.

These obscure dangers arise because finance remains extraordinarily globalised. Outstanding cross-border financial claims, though lower than just before the crisis, remain well above the historical norm. Money continues to slosh around the global economy, seeping into cracks beyond the reach or outside the view of national regulators. It is impossible to be sure that unanticipated turmoil in one corner of the financial system cannot spiral into something catastrophic.

The gyre next time

Troubles in repo markets illustrate the threat posed by this opacity. Market-watchers blamed the cash crunch on firms’ need to pay corporate-tax bills at the same time as sucking up more new government debt than usual. But banks were aware of these factors well ahead of time. Other, as yet poorly understood, forces seemed to have provided the nudge that tipped repo markets into disarray.

No obvious disaster looms. But the world did not appreciate the peril it faced in 2007 until too late. There are ways to keep financial risk in check. The Great Depression convinced many people that financial capitalism was inherently dangerous, but in the 40 years that followed, crises were infrequent—a testament to draconian financial regulation and capital controls.

Since the deregulation of the 1970s and 1980s, crises have been depressingly common. Just how far back the pendulum has swung will be clear only decades from now, when it becomes possible to look back and count the consequent misfortunes. Rattled once more by repo gyrations, it is tempting to say not far enough.

Over the line

America signs a limited trade agreement with Japan

The deal shows how hard it is for the Trump administration to rewrite the rules of world trade




PRESIDENT DONALD TRUMP teased trade-watchers on September 25th when he reannounced a deal with Japan (just weeks after announcing an agreement in principle). He promised it would mean “really big dollars for our farmers and for our ranchers”.

A White House press release boasted about the extra access American exporters of beef, pork and cheese would get to the Japanese market.

Robert Lighthizer, the United States Trade Representative, told journalists that American tariff reductions would arrive by January 1st. But despite all the fanfare, the text of the deal remained unpublished.

There had been hopes that Mr Trump might sign a mini-deal with India, too, during his meeting with the country’s prime minister, Narendra Modi, on September 24th. American companies complain that India’s price controls on heart stents and knee implants force them to sell at below cost price.

The hope was that, in return for a package that solved that problem, India might be reinstated as a member of America’s Generalised System of Preferences, which offers lower tariffs on some products. But negotiators failed to resolve their differences in time.

The mismatch between the demand for photo opportunities and the supply of worked-out trade deals explains both anticlimaxes. Such agreements are complex legal documents, and the language needs to be clear enough that neither side can squeeze out more concessions on the sly.

This is trickier when neither trusts the other. The deal with Japan was as difficult as any other, even though the negotiators had relatively recently sealed the Trans-Pacific Partnership (TPP), an agreement including America and Japan negotiated by the Obama administration, only to be rejected by Mr Trump.

Despite the lack of detail, one thing is clear: the deal will be narrow. Apart from some rules on digital trade, it seems to be focused on tariff barriers. It omits cars and car parts, even though these account for around two-fifths of Japanese goods exports to America. This has drawn criticism. Myron Brilliant of the US Chamber of Commerce, a lobby group, described the agreement as “not enough”.

The narrow scope is partly because the Trump administration wants to avoid having to seek full congressional approval. (American trade law allows small tariff concessions to be made without it.)

But it raises questions about whether the agreement complies with the rules of the World Trade Organisation, which say deals must include “substantially all the trade” if they are to withstand legal challenge.

The WTO does permit smaller interim agreements—and, mirabile dictu, that is how the Trump administration describes this one. The leaders’ joint statement said that within four months of the mini-deal coming into force, the two countries hope to finish consultations and “thereafter” start negotiating a deal that would address issues including barriers to trade in services and investment.

Some are sceptical. Wendy Cutler, a former negotiator on the TPP, fears “negotiating fatigue”.

Even with domestic pressure from American producers to whom the interim deal offered nothing, “it’s difficult to see how the second stage would be concluded on an expedited basis,” she says.

Further doubts stem from the leverage that has been granted to Japanese negotiators. They were brought to the table after America walked away from the TPP by the threat of tariffs on cars and car parts.

Now they have concessions they can roll back if the Trump administration enacts those.

Threats have worked once. But they could be less use in securing the big concessions needed if this supposed staging post is not to become the final destination.

Global economy is at risk from a monetary policy black hole

Governments should borrow more to stave off secular stagnation

Lawrence Summers

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), pauses while speaking ahead of the IMF and World Bank Group Annual Meetings in Washington, D.C., U.S., on Tuesday, Oct. 8, 2019. Georgieva, in her first major address as head of the IMF, painted a downbeat picture of the world economy and said a more severe slowdown could require governments to coordinate fiscal-stimulus measures. Photographer: Andrew Harrer/Bloomberg
The new managing director of the IMF, Kristalina Georgieva, has warned that economic growth globally is decelerating © Bloomberg


New IMF managing director Kristalina Georgieva’s first speech makes bracing reading for the global financial community as it gathers this coming week in Washington for the annual IMF and World Bank meetings. Ms Georgieva noted that while two years ago growth was accelerating in 75 per cent of the world, the IMF now expects it to decelerate in nearly 90 per cent of the global economy in 2019 to the lowest level in a decade.

This shift into reverse comes as central banks in Europe and Japan have embraced negative interest rates and investors expect further rate cuts from the US Federal Reserve. Bonds worth more than $15tn are trading with negative yields.

If the primary problem were on the supply side, one would expect to see upward price pressure. Instead, despite loose fiscal and monetary policy, central banks in the industrialised world have as a group fallen well short of their inflation targets for a decade and markets project that this will continue.

Europe and Japan are engaged in black hole monetary policy. Without a major discontinuity, there is no prospect of policy rates returning to positive territory. The US appears to be one recession away from entering the same black hole. If so, the whole industrialised world would be providing at best negligible and often negative returns to risk-free savings and falling short of growth and inflation targets. It would also have to maintain financial stability amid increased incentives for leverage and risk-taking.

All this requires new thinking and new policies, much as the rapid inflation of the 1970s forced a reset back then. Once economies are in the monetary black hole, central banks that focus on inflation targeting will be ineffectual in hitting their immediate goal and unable to stabilise output and employment. The policy action has to shift elsewhere.

Today’s core macroeconomic problem is profoundly different from the problem any living policymaker has seen before. As I have been arguing for some years now, it is a version of the secular stagnation — chronic lack of demand — that terrified Alvin Hansen during the Depression. In today’s global economy, private investment demand is manifestly unable to absorb private savings even with negative real interest rates and limited restraints on financial markets. That is why even with burgeoning government debt and unsustainable lending, growth remains sluggish and below target.

Since 2013, when I first argued that we were seeing more than simple “economic headwinds”, interest rates have been much lower, fiscal deficits have been much larger, and leverage and asset prices have been much higher than expected.

Yet growth and inflation have fallen short of forecasts. That is exactly what one would expect from secular stagnation: a chronic shortage of private sector demand.

What is to be done? To start it would be helpful if policymakers acknowledged this week that the policy problem is not smoothing cyclical fluctuations or preventing profligacy. Rather the fundamental issue is assuring that global demand is sufficient and reasonably distributed across countries.

The place to start is by dampening down trade wars — deeds, threats and rhetoric. Trade warriors think they are participating in zero-sum games globally with one country gaining demand at the expense of another by opening markets or imposing protection.

In fact trade conflicts are negative-sum games because there is no winner to offset the demand that is lost when uncertainty inhibits and delays spending decisions.

Given the risk of a catastrophic deflationary spiral, central banks are probably right to attempt to ease monetary conditions. But diminishing returns have surely set in with respect to monetary policy and there is risk of doing real damage to the health of the banks and other financial intermediaries.

Most important governments need to rethink fiscal policy. Government debt or government support for private debt is needed to absorb savings flows. With real rates near zero or even negative, the cost of debt service is very low and low rates can be locked in for decades.

That means that the debt levels that were prudent when rates were at 5 per cent no longer apply in today’s zero interest rate world. Governments that run chronic surpluses are failing to do their part to support the global economy and should be the object of international scrutiny.

There are other possible interventions. Increasing pay-as-you-go public pensions would reduce private saving without pushing up deficits. Public guarantees could spur private green investments.

New regulations that prompt businesses to accelerate their replacement cycles will increase private investment. Measures to create more hospitable environments for investment in developing countries can also promote the absorption of global saving.

Spurring sound spending is the antidote to secular stagnation and monetary black holes. It should be an easier technical problem to solve and much easier to sell politically than the austerity challenges of earlier eras. But problems cannot be solved until they are properly diagnosed and the global financial community is not there yet. Hopefully that will change this week.


The writer, a former US Treasury secretary, is a Harvard economics professor. The article draws on collaborative work with Anna Stansbury, PhD candidate at Harvard