July 24, 2014

Goldman Goes Schizo On Gold: Boosts Price Target To $1200 Even As It Is "Selling It With Conviction"

Back in the beginning of 2014, Goldman loudly predicted that 2014 would be the year of normalization: the economy would grow by 3%, the S&P 500 would barely rise to 1900, and gold would tumble to $1066. By now it goes without saying that it has been dead wrong about the first with the economy set for a contraction in the first half of 2014 and the full year assured to have the worst GDP growth since Lehman, wrong about the second with the market now so clearly disconnected from any economic fundamentals nobody even pretends that it is anything but the Fed manipulating a rigged stock market, and has been painfully wrong about the third.

So with less than 6 months to go until the end of the year, with various gold ETFs suddenly seeing the biggest buying in years, and with gold continuing to outperform most asset classes YTD, what is Goldman to do? Why follow the trend of course, and just like David Kostin had no choice but to boost his S&P 500 price target using the idiotic Fed model as a basis, so earlier today Goldman just upgraded its gold price target from $1,066 to $1,200. Probably this means that after accumulating it for the first half of the year, Goldman is finally preparing to sell the precious metal. Not so fast: because while Goldman did just raised its price target, it continues to have a Conviction Sell rating on Gold, which is its second most hated commodity after iron ore. Go figure.

So without further ado, here is Goldman going full schizo.
Conviction views: Bearish on iron ore, gold and copper, bullish on nickel, zinc, aluminium and palladiumIn gold, we raise our LT price forecasts to $1,200/oz in $2014 terms from $1,066 earlier. Over long time horizons, the gold price has been relatively stable in real terms, keeping pace with inflation. Accordingly we use a flat real gold price forecast assuming gold is an effective inflation hedge and increase in nominal  gold prices should offset the impact from inflation. We believe iron ore (-21%), gold (-20%) and copper (-12%) are the mining commodities with the greatest downside on a 12-month view.

We have updated our long-term real gold price forecast to $1,200/oz in $2014 terms (was $1,066/oz) to make it more in-line with our marginal cost support level, see Exhibit 66. Currently gold is trading at a 9% premium to our LT real (inflation-adjusted) forecast but we believe on a long-term basis the price should revert back to the cost support level in-line with our estimates. 
 Marginal cost support at $1,200/oz level

In our view, the 90th percentile of all-in sustaining costs (defined as total by-product cash cost plus royalty expense, plus sustaining capex, exploration and corporate expenses) provides a good estimate of the floor price for gold, as it is the breakeven level for the marginal producer. At times of extreme declines in demand, it is possible for prices to fall below the marginal cost support level; however we believe such events are generally shortlived. Exhibit 67 shows our latest 2014 gold’s all-in sustaining cost curve.

 Gold price relatively stable over the long term

Over long time horizons, the real gold price has been relatively stable, keeping pace with inflation. Exhibit 68 illustrates that the real price of gold was fairly constant until the early 1970s, after which it became highly volatile. Although the real price has experienced significant volatility post the 1970s, we highlight its tendency to a mean reversion trend. The real gold price fell back to the 1950s level in 2001 after peaking in 1980, and it is currently in decline again after peaking in 2011.

Where things get downright bizarre is the last paragraph where either Goldman had a humongous typo or merely pulled the boilerplate language from a prior report where for some inexplicable reason Goldman says it has a "$1050" price target even as the table above clearly says $1,200. Oh who cares: this whole report is merely for the benefit of Goldman's prop desk, which is clearly ramping up trading, to do the opposite of whatever Goldman's few remaining clients are doing.
We continue to remain bearish on gold in 2014

We expect gold prices to drop to $1,050/oz by the end of 2014, maintaining our previous forecast. Acceleration in the US economic recovery story remains the key driver behind our lower gold price forecast. While weak economic data due to cold weather and the onset of the Crimea crisis led to a sharp rally in gold prices between January and mid-March, sequentially better US activity and easing tensions pushed gold prices lower by early April. Since then, US economic releases have continued to point to acceleration in growth while tensions in Ukraine have escalated, keeping gold prices range bound near $1,300/toz.
Sure, why not.

That said, can Goldman please also advise if its suddenly very active prop group is buying or selling gold. We promise to do whatever they are doing.

July 23, 2014

The Transatlantic Trade and Investment Partnership: Review of Economic Blogs

An early draft of the Transatlantic Trade and Investment Partnership (TTIP) sparked an intensive public debate over possible advantages and disadvantages. This column reviews some arguments in favour of the Partnership and against it. While there is some debate over how large the economic benefit could be in the face of already relatively low trade barriers, critics claim that the deal will lower standards of consumer protection, provision of public services, and environmental protection in the EU.

A study by the Centre for Economic Policy Research (CEPR 2013) for the European Commission models the effects of the Transatlantic Trade and Investment Partnership (TTIP) in a computable general equilibrium model. An ambitious deal, consisting of tariff barriers being lowered to zero, non-tariff barriers lowered by 25%, and public procurement barriers reduced by 50%, would lead to an increase in EU GDP by 0.5% by 2027. Growth effects for the rest of the world will be positive, on average, 0.14% of GDP due to increased demand from the EU and US. Because of different compositions of trade, particularly low income countries will not be negatively affected by the TTIP.

Another, less frequently cited study by the Bertelsmann Foundation (2013) finds larger long-term GDP per capita effects of 5% for the EU and 13.4% for the US as a result of dismantling all tariff and non-tariff barriers. Here, gains would largely come at the expense of third countries. For Canada and Mexico, whose free trade agreements with the US would lose value, TTIP would in the long run imply a 9.5% and 7.2% decrease in GDP per capita over the baseline scenario.

The EU Trade Commissioner Karel de Gucht (2014a), citing the CEPR numbers, writes that TTIP offers significant benefits to the EU and the US over ten years during times of hesitant economic recovery. As shared values will facilitate negotiations, results should be reached in three dimensions: Market access, regulatory cooperation, and trade rules. Improved market access will benefit European companies and consumers alike. Standardisation in regulation would avoid unnecessary costs for global producers.
Dean Baker (2014a) argues that calls to support TTIP for its beneficial impact on jobs and growth are lies: The CEPR model assumes full employment anyway, and a GDP raise of only 0.5% over 13 years will not have a discernible impact on employment. Growth effects may in fact even go in the opposite direction — stronger patent and copyright protections may result in higher prices for goods.
Figure 1. Annual output gains from TTIP by type of liberalisation
transatlantic trade and investment chart on gains from various featuresSource: LSE USAPP
Gabriel Siles-Br├╝gge and Ferdi De Ville (2013) challenge the proclaimed benefits of this much-vaunted deal. Most of the economic benefit outlined in the CEPR study is due to the dismantlement of non-tariff barriers. Yet, the Commission has itself pointed out that only 50% of non-tariff barriers are at all ‘actionable’, i.e. within the reach of policy. Eliminating half of these, as assumed by the CEPR, seems already highly ambitious. Furthermore, due to strong inter-sector linkages, these benefits will only materialise if liberalisation is successful in all sectors.

The Global Significance of Bilateral Agreements

Pascal Lamy (2014) writes that preferential trade agreements (PTAs), such as TTIP, could be very beneficial if they helped to bring down remaining tariff barriers. However, most PTAs focus more on regulatory issues than tariffs. Some non-tariff barriers, such as consumer protection, serve legitimate objectives. And there exists a risk that PTAs may lock various groups into different regulatory approaches, increasing transaction costs. In the end, a functional multilateral trade system through the WTO remains vital to avoid economic fragmentation and set globally sensible rules.

Michael Boskin (2013) points out that the TTIP may have consequences that extend beyond the US and the EU. After NAFTA was signed, the Uruguay round of trade talks was revived. Similarly, a successful TTIP may be a major impetus for rekindling the moribund Doha Round. It will be of great importance whether compromises can be found in the truly contentious issues between the EU and the US. One of the most difficult is the EU’s limitation of imports of genetically modified foods, which presents a major problem for US agriculture. Another is financial regulation, with US banks preferring EU rules to the more stringent framework emerging at home. This is of interest to countries outside the deal, too; if the EU relaxed its rules on genetically modified food imports and translated this with careful monitoring to imports from Africa, this could be a tremendous boon to African agriculture.

Hans-Werner Sinn (2014) is not surprised that bilateral trade agreements have been lately gaining traction globally, as there is no real progress on multilateral trade negotiations. The Doha round of WTO talks basically was a flop. Currently, fear of negative effects on consumer protection in the EU is distorting the debate. In reality, consumer protection standards in the US are often much higher than in the EU where, following the Cassis de Dijon ruling of the European Court of Justice, the minimum standard applicable to all countries is set by the country with the lowest standards. TTIP could bring significant economic benefits while scrapping some misguided EU regulations, such as the capping of CO2 emissions on cars, which is a covert industrial policy aimed at protecting Italian and French manufacturers of smaller cars.

Non-Tariff Barriers to Trade and the Protection of Intellectual Property in TTIP

Paul Krugman (2014) writes that if the Trans-Pacific Partnership (TPP) agreement of the US with 11 countries throughout the Asia-Pacific region were to fail, it wouldn’t be a major disaster. Real trade barriers – tariffs – already are pretty low. The International Trade Commission in their latest report put the cost of American import restraints at 0.01% of GDP. What these agreements tend to be really about are issues such as intellectual property rights – with far less certain advantages. Intellectual property rights create temporary monopolies. These may be necessary to spur innovation but are not connected to classical arguments in favour of free trade.

Ryan Avent (2014) thinks that Krugman hasn’t done his homework on this issue. Firstly, tariffs are not universally low. Even if the macroeconomic impact may be limited, reducing high tariffs on some goods would be microeconomically desirable. Secondly, one of the ambitions of both TPP and TTIP is the reduction in non-tariff barriers. In most cases, such as agricultural imports, these barriers are much costlier than tariff barriers.

Dean Baker (2014b) is highly sceptical of the usefulness of increased protection of intellectual property: The possibility of silly patents such as one on a peanut butter sandwich in the US only raises prices and impedes competition. The big winner may be the pharmaceutical industry, which may extend the unchecked patent monopolies it enjoys in the US to the EU, resulting in higher drug prices and lower quality healthcare. Other companies see TTIP as a way of promoting their particular interests, for example, by being able to use free trade arguments to circumvent the democratic process on issues such as fracking.

Investment protection – a threat to national sovereignty?

TTIP is not about the interests of the US dominating those of the EU, but of the interests of capital owners prevailing over those of ordinary citizens, writes Jens Jessen (2014). Investor protection clauses in TTIP would be a vast threat to national policies on culture and education — public universities could no longer be supported to be more affordable than private ones. Support to a local film industry would be impossible as big companies would have the same rights to subsidies. Production companies for popular entertainment could sue states to extend to them their support for local operas and symphony orchestras, and public radio stations would be under threat as well.

Karel de Gucht (2014b) sharply retorts that these allegations are unfounded — the EU treaties and the UNESCO convention on cultural diversity require member states to protect cultural diversity and explicitly permit schemes such as support to local film industries, whereas audio-visual services are not at all in the scope of TTIP anyway. Investment protection treaties, of which Germany alone has signed 130, have never included compensation rights for firms in case of profit reductions. And after Poland signed an investment protection treaty with the US in the early 1990s, its right to offer subsidies in the sector of culture or education was never called into question.

The investment chapter in TTIP is less of a threat to EU and US democracy than often alleged, writes Robert Basedow (2014). Critics claim that investor-state dispute settlement clauses will allow investors to sue states before supranational arbitrational tribunals for the annulment of social, health or environmental protection laws. However, due to the existence of a multiplicity of bilateral treaties with financial hubs like Hong Kong or Singapore, investors with holdings in these jurisdictions already have this right today. Indeed, TTIP offers the chance to make such arbitration proceedings more transparent and legitimate.

July 22, 2014

The Manipulated Dialectical Destiny of the BRICS

The dollar's 70-year dominance is coming to an end ... Within a decade, greenback's could be replaced as the world's reserve currency ... The dollar's hegemony continues to be cemented by the operations of the International Monetary Fund and World Bank. Founded at Bretton Woods, they're both Washington based, of course, and controlled by America, despite some Francophone windowdressing. The advantages this system bestows on the US are enormous. "Reserve currency status" generates huge demand for dollars from governments and companies around the world, as they're needed for reserves and trade. This has allowed successive American administrations to spend far more, year-in year-out, than is raised in tax and export revenue. By the early Seventies, US economic dominance was so assured that even after President Nixon reneged on the dollar's previously unshakeable convertibility into gold, amounting to a massive default, dollar demand kept growing. So America doesn't worry about balance of payments crises, as it can pay for imports in dollars the Federal Reserve can just print. – UK Telegraph 

Dominant Social Theme: The dollar is going down. An unavoidable tragedy. 

Free-Market Analysis: This pernicious elite meme amply illustrates what we call directed history. In this case endless articles are appearing to explain why the dollar is in terminal decline as the BRICS (including South Africa) are ascending. 

We last wrote about this issue here: 

Don't Be Fooled by Transcontinental Rivalries 

We made a number of points about the reality of the BRICS emergence and how when one examines the reality of the global economic system a good many questions emerge. Skepticism is advised. 

Here's more: 

Last week, seven decades on from Bretton Woods, the governments of Brazil, Russia, India and China led a conference in the Brazilian city of Fortaleza to mark the establishment of a new development bank that, whatever diplomatic niceties are put on it, is intent on competing with the IMF and World Bank. ... 

The new BRICs Development Bank, modelled on the IMF, will have a $100bn currency reserve available to lend around the world, giving distressed debtor nations an alternative to the "Washington consensus". For a long time, the BRICs have been paying in to the IMF, yet been denied additional influence over what happens to the money. Belgium has more votes than Brazil, Canada more than China. 

The institutions governing the global economy have failed to keep pace with reality. Modest reforms giving the large emerging markets more power, agreed with much fanfare in 2007 and again in 2010, have been stalled by Washington lawmakers. The BRICs have now called time, setting up their own, rival institution based in Shanghai. 

The key to the dollar's future is petrocurrency status – whether it's used for trading oil and other leading commodities. Here, too, change is afoot. China's voracious energy appetite and America's increased focus on domestic production mean the days of dollar-priced energy look numbered ...That would undermine the US Treasury market and seriously complicate Washington's ability to finance its vast and still fast-growing $17.5 trillion of dollar-denominated debt. ... 

Although the dollar's reserve status won't end overnight, the global payments system is now moving inexorably towards that outcome. The US currency accounted for just 33pc of all foreign exchange holdings in 2013, on IMF numbers, down from 55pc in 2001. Within a decade or so, a "reserve currency basket" may emerge, with central banks storing wealth in a mix of dollars, yuan, rupee, reals and roubles, as well as precious metals. ... 

The dollar's status is a big question. Judging the outcome is more akin to star-gazing than scientific economics. But the establishment of this BRIC Development bank, timed to coincide with the anniversary of Bretton Woods, is an audacious and significant move. The world's emerging giants now have thumbscrews on the West. 

This is a serious article in a serious paper and the announcement at the end that "the world's emerging giants now have thumbscrews on the West" is a momentous statement. 

Reading the article, the demise of the dollar seems both evident and inexorable. And yet, having lived through the period that has yielded this conclusion, we are in a position to say with some authority that the end of the dollar is a manipulated occurrence, not an inevitable one. It is directed history, in other words. 

You have to begin with the nomenclature itself. The name was coined by a banker at Goldman Sachs over ten years ago and eventually gave rise to a rivalry – created to begin with by the mainstream media – between the BRICS and the West. 

Once the name was applied, it became logical for the four (five really) emergent economic powers to create various economic policies in concert with one another. In reality, there was no reason why Brazil would consult with Russia, or India with Brazil. It only seemed logical because the name predicted the outcome. 

Take a step back, please, and observe the dialectic. That's how globalist elites work, by creating conflicts that move a given argument or sociopolitical strategy forward. Sometimes the dialectic is accomplished via a war. Other times, it is created via supposed economic necessity.

Of course, the necessity in such cases is manufactured; and we would argue that is the case when it comes to this suddenly polarized economic world. Just look at this: ... 

Although the dollar's reserve status won't end overnight, the global payments system is now moving inexorably towards that outcome. The US currency accounted for just 33pc of all foreign exchange holdings in 2013, on IMF numbers, down from 55pc in 2001. Within a decade or so, a "reserve currency basket" may emerge, with central banks storing wealth in a mix of dollars, yuan, rupee, reals and roubles, as well as precious metals. 

This is simply too neat. The alternative media has been predicting this outcome for decades, virtually ever since Keynes suggested his globalist bancor after World War II. But now that this "global payment system" is almost a reality, we're supposed to believe it is merely an "inexorable outcome." 

In the US, the Obama administration is fragmenting the border between the US and Mexico. Waves of immigrants are sweeping into the US as part of what is shaping up to be the seeming deliberate implementation of a North American Union that is eventually supposed to encompass Canada as well. 

The US stock market is being shoved into the stratosphere in order to create what we call a "Wall Street Party" that will create enormous faux-prosperity before a destined crash. But the crash itself will simply add more impetus to monetary globalism. Out of chaos ... order, in this case an international money-regime. 

For a decade, this Internet Era has revealed the plans of internationalist bankers in more and more detail. Every significant monetary or military event points the way toward this ongoing consolidation. That's why articles like this one in the Telegraph are so surprising. We can see clearly that the dollar's destabilization was a manipulated event, one that the Bush regime pursued through several regional wars and a plethora of "security" spending as they secured the fundaments of a massively expensive surveillance state. 

There was nothing natural or inevitable about any of this. The concept of the BRICS was created by Goldman Sachs; its evolution is convenient, even suspicious. The dollar's destabilization was an act of political orchestration as well. And now we are to believe that a "reserve currency basket" is the obvious destination. 

Conclusion If it is destiny, it is a manipulated one. 

Source

July 21, 2014

More Challenges to “More ‘Free Trade’ is Always Better” Orthodoxy

One way to induce a Pavlovian reflex in mainstream economists is to invoke the expression “free trade”. Conventional wisdom holds that more trade is always better; only Luddites and protectionists are against it. That’s one big reason why the toxic TransPacific Partnership and its evil twin, the Transatlantic Trade and Investment Partnership, have gotten virtually no critical scrutiny, save from more free-thinking economists like Dean Baker. They have been sold as “free trade” deals and no Serious Economist wants to besmirch his reputation by appearing to be opposed to more liberalized trade.

“Free trade” boosterism runs two parallel arguments: the “’free trade’ increases wealth and therefore we should all go along” and and the “more open trade is inevitable, you better be on this bus or you will be under the bus.” Too often, these arguments rest on the assumption that coming close to the economists’ fantasy of frictionless ‘free trade’ is better. But that was debunked in 1953, in the Lipsey-Lancaster theorem, which demonstrated that trying to move to closer to an unattainable state was not only not assured to produce better outcomes, it could very well produce worse ones. You actually need to do the work of evaluating various “second best” alternatives, rather than assuming more is better. But even though economists know about Lipsey/Lancaster, they dismiss its inconvenient implications.

Moreover, there are other sound critiques of our “more ‘free trade’ is every and always better” regime. William Greider has long pointed out that we do not operate under a free trade regime, but a managed trade system, and virtually all of our trading partners negotiate them from a mercantilist perspective: that they aim to run trade surpluses and protect their workers. Dani Rodrik has described a trilemma: that you can’t simultaneously have deep integration of markets, national sovereignity, and democracy. At least one of them has to give. And we can see in Europe that it is democracy that is being sacrificed.

But these criticisms have been treated as fringe phenomena. What is noteworthy, however, that it is suddenly acceptable to question the ‘free trade’ orthodoxy, although the critics take great care to distance themselves from any populist or labor-favoring taint.

We took note of one last week, of a hand-wringing piece in that bastion of correct economic thinking, Project Syndicate, in which Ian Goldin lamented that globalization had increased systemic risk on numerous fronts: environmental, financial, political, technological. Goldin wasn’t willing to buck conventional wisdom and use his observation to suggest that “free trade” may have gone past its point of maximum advantage. But the fact that the only solution he could envision was the pipe-dream of better governance was telling.

A fresh article, again at Project Syndicate, has the former head of the FSA, Adair Turner, making a more direct, but short of head-on, challenge to “free trade” orthodoxy. Turner’s point is that trade is unlikely to do much to drive further growth, and economists and policymakers have much better focuses for their energies. He also points out that to the extent that further liberalization of trade does increase GDP, it is likely to come at a cost.
Key sections of his article (hat tip David L):
[F]or 65 years, rapid trade growth has played a vital role in economic development… 
But there is no reason why trade should grow faster than GDP forever. Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods. Several factors make it possible that we are entering such a period. 
For starters, there is the changing pattern of consumption in the advanced economies. Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services)… 
In addition, as the economists Erik Brynjolfsson and Andrew McAfee of MIT have argued in their book The Second Machine Age…the advantages of proximity to customers and lower transport costs outweigh decreasingly important differences in labor costs… 
With industrial tariffs already dramatically reduced most potential benefits of trade liberalization have already been grasped. Estimates of the benefits of further trade liberalization are often surprisingly low – no more than a few percentage points of global GDP.. 
The main reason for slow progress in trade negotiations is not increasing protectionism; it is the fact that further liberalization entails complex trade-offs no longer offset by very large potential benefits. The Doha Round’s failure has been decried as a setback for developing countries. And some liberalization – say, of advanced economies’ cotton imports – would undoubtedly benefit some low-income economies. But full trade liberalization would have a complex impact on the least developed economies, some of which would benefit only if compensated for the loss of the preferential access to advanced-economy markets that they currently enjoy. 
This implies that further progress in trade liberalization will be slow. But slow progress is a far less important challenge to growth prospects than the debt overhang in developed economies, or infrastructure and educational deficiencies in many developing economies. That reality often goes unacknowledged. The importance of past trade liberalization has left the global policy establishment with a bias toward assuming that further liberalization would bring similar benefits.
This is an important argument, which sadly is likely to get little traction: at this stage of economic development, trade deals are largely beside the point. And that reality is perversely acknowledged in the TTP and the TTIP. They are not about “free trade”. They are, in the case of the TTP, to advance US geopolitical aims by isolating China, and in the case of both proposed pacts, to weaken national sovereignity to make the world safer for multinationals. The revolving door payoffs for the members of the US Trade Representative’s office must be really juicy for them to be so eager to engage in treason.

July 18, 2014

Six Years After the Global Financial Crisis, What Have We Learned?

Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time, the players on the chessboard have changed.

But our Governments are turning a blind eye.

They have yet to acknowledge why the global financial crisis happened, or put policies in place to prevent it happening again.

Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early-1990s, did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.

Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie that “there is no bubble.”

The IMF, and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation, which they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments:
“……our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014
The IMF claims the ‘neglect of house price booms is over’, but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see.

They ignore the role that rent (unearned income,) debt and the financial sector play in shaping the economy.

They have a colourful history of recurrent boom-bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet:
“The macroeconomic models available at the time of the crisis typically ignored the banking system…” (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014)
In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals.’

Neo-liberal policy made matters worst.

Less government interference protecting labour or redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, reducing state influence though privatization and fiscal austerity – was termed by American scholar Robert Waterman McChesney as “Capitalism with the gloves off.”

It promised to lead to efficient markets and lower unemployment.

But at the onset of the global financial crisis, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.

“This should be a wake-up call…” concluded the UN in their annual Trade and Development report that revealed the findings:
“There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.” Annual report by the UN Conference on Trade and Development 2012, Ch 11. Section C (analysing the effects of “labour market flexibility.”)
In the UK, the Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.

But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.

By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.

But stemming inflation or deterring speculative activity is not, and never will be, Central Bank policy:
Carney – “These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view,” (i.e. up) 
Guardian – “Bank of England will not act on house prices yet” 27 June 2014
In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars. In Australia, the ‘Big Four’ command 80% of the market and 88% of residential mortgages.

‘These are the men who have the most economic power in the world’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “..and they derive it from land, minerals, and credit, in combination.”

Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt.

Milton Friedman meanwhile tutored that societies are structured on greed.

But greed means taking something from another, grasping for a larger slice of the pie. (see pareto efficiency.)

Greed is not a natural feature of a well functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.

It remains that the economy is fueled by what is termed the FIRE sector – Finance, Insurance, and Real Estate.

The FIRE Economy is dependent on rising asset prices – on you and me buying houses – so it can extract economic rent.

The three sectors work together – they’re intrinsically linked.

The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs – insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices – making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.

The Government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.

For example, between 1998 and 2008 the banking industry spent $3.4 billion lobbying the US government.

In Australia, the ICAC investigations into illegal donations from developers and “wealthy property tycoons” reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.

It should, therefore, be of no surprise that ‘affordable housing policy’ always seems to work in reverse.
Generous subsidies are handed over to investors – all of which are capitalised into land prices.

Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, exempt from State Land Tax until subdivision at the owner’s pleasure.

To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.

“Only the little people pay taxes” (i.e. work for a living) – we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.

Of course, first homebuyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.

So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the pay cheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.

Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.

The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds.

You will never be told the system can fail.

Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’

However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.

This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains,’ calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent.)

Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree. Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.

Never, throughout the course of history, has such a process been economically sustainable.

At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008 (see Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos).

“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in March – a message he has repeatedly reiterated since appearing on Seven Network’s Sunrise in 2010.

But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth,’ and entrepreneurs “piling into property faster than ever.”

Banks remain disturbingly under-capitalised.

“I’ve had land that has doubled in value in the past 12 months,” said Harry Triguboff … (BRW Rich 200: Fatter profits for property barons – 27th June 2014)

But while Triguboff paid a lot for his land, he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.

His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people.’

This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced-out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process.

The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.

Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.

No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.

When the Henry Tax Review in 2008 concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”, it was onto something important.

Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do. Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important. It would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.

However, it remains that every effort in history to effect the changes suggested above have been fought by the establishment. In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.

But until such a time, it’s business as usual – and we have a way to go yet, but be well aware, the date for the next global financial crisis has been set.

July 17, 2014

Germany Bucking Toxic, Nation-State Eroding Transatlantic Trade and Investment Partnership

We’ve inveighed against the dangers of two Orwellianlly-branded “trade” deals, the TransPacific Partnership and its ugly twin, the Transatlantic Trade and Investment Partnership. Both negotiations have been shrouded in a deeply troubling level of secrecy, with their draft terms being given classified status and Congressmen kept largely in the dark as to their content (summaries provided by the US Trade Representative aren’t remotely adequate, since as in all contracts, much hinges on exact language).

The business press in the US has tended to amplify Administration messaging, that both deals are moving forward. In fact, as we’ve covered in some detail, the TransPacific Partnership is in quite a lot of trouble, and as we’ll discuss below, the Transatlantic Trade and Investment Partnership is also going pear shaped.

So far, it’s the TransPacific Partnership that has gotten the press in the US, due in part to its strategic role (it’s meant to isolate China) as well as the heated opposition of some of the intended partners to key terms (such as Chile and Malaysia to provision that would prevent them from having the sort of capital controls that reduced the damage that they suffered during the financial crisis).

Congress, in a remarkable show of spine, has gone into opposition over the TPP due to the Administration’s refusal to provide remotely adequate information about the negotiations, as well as concern over what they can see of the provisions.

The controversy over the TPP increased when Wikileaks exposed some draft chapters, one on intellectual property and the other on the environment. They which how bad the deals were as well as how the “partners” oppose many of the sections of the drafts.

But heretofore, the assumption has been that the Transatlantic Trade and Investment Partnership is moving towards completion, and the only risk is whether Congress will dig in its heels as it has with the TPP. That assumption now looks questionable, since Germans are wildly opposed to the deal, and the souring of US/German relations over US wiretapping and spying (and its refusal to commit to a big change in conduct) means the German government is much more likely not to stand up to the US and refuse to go along with provisions that are destructive to national interests, namely, secret “investor” panels that supercede national laws and regulations.

By way of background, we described how these panels work in a 2013 post:
Even though no one has seen the exact language of the text, since it is being kept under wraps, both deals are believed to strengthen and extend investor rights, which means give them easier access to the courts. Consider this description from a July presentation by Public Citizen:
What is different with TAFTA [pending Trans Atlantic Free Trade Agreement] (and TPP) is the extent of “behind the border” agenda
• Typical boilerplate: “Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements.” … 
• These rules are enforced by binding dispute resolution via foreign tribunals with ruling enforced by trade indefinite sanctions; No due process; No outside appeal. Countries must gut laws ruled against. Trade sanctions imposed…U.S. taxpayers must compensate foreign corporations. 
• Permanence – no changes w/o consensus of all signatory countries. So, no room for progress, responses to emerging problems 
• Starkly different from past of international trade between countries. This is diplomatic legislating of behind the border policies – but with trade negotiators not legislators or those who will live with results making the decisions. 
• 3 private sector attorneys, unaccountable to any electorate, many of whom rotate between being “judges” & bringing cases for corps. against govts…Creates inherent conflicts of interest…. 
• Tribunals operate behind closed doors – lack basic due process
• Absolute tribunal discretion to set damages, compound interest, allocate costs
• No limit to amount of money tribunals can order govts to pay corps/investors
• Compound interest starting date if violation new norm ( compound interest ordered by tribunal doubles Occidental v. Ecuador $1.7B award to $3B plus
• Rulings not bound by precedent. No outside appeal. Annulment for limited errors.
And that’s alarming in light of some of the cases already brought before these panels in existing trade agreements like NAFTA. For instance:
Eli Lilly is suing the Canadian government for not having the same extremely pro-drug-company patent rules. It is seeking $500 million in damages for two drugs that Canada approve to be sold as generics. If Eli Lilly prevails, other drug companies are sure to follow suit. 
Vattenfal, a Swedish company, is a serial trade pact litigant against Germany. In 2011, Der Spiegel reported on how it was suing for expected €1 billion plus losses due to Germany’s program to phase out nuclear power:
According to Handelsblatt, Vattenfall has an advantage in seeking compensation because the company has its headquarters abroad. As a Swedish company, Vattenfall can invoke investment rules under the Energy Charter Treaty (ECT), which protect foreign investors in signatory nations from interference in property rights. That includes, according to the treaty’s text, a “fair and equitable treatment” of investors. 
The Swedish company has already filed suit once against the German government at the ICSID. In 2009, Vattenfall sued the federal government over stricter environmental regulations on its coal-fired power plant in Hamburg-Moorburg, seeking €1.4 billion plus interest in damages. The parties settled out of court in August 2010.
Now consider what this means. These companies are not suing for actual expenses or loss of assets; they are suing for loss of potential future profits. They are basically acting as if their profit in a particular market was guaranteed absent government action. And no one else enjoys these rights. Consider highly paid workers in nuclear plants. Will they get payments commensurate with the premium they’ve lost over the balance of their working lives from the phaseout of nuclear power? Will cigarette vendors in Australia get compensated for the decline in their sales? Commerce involves risk, which means exposure to loss, yet foreign investors want, and seem able to get, “heads I win, tails you lose” deals via these trade agreements. 
And it’s even worse than you imagine once you understand how these panels work. Recall how Public Citizen mentioned the role of the panelists who go between working for the companies and serving on the panels? A small and tight-knit group has disproportionate influence (click to enlarge):
Consider the implications of the fact that the 15, and the larger community of panel “regulars,” work both sides of the street. They draw cases that go before the trade panel, as well as hear them. Thus it’s in their interest to issue aggressive rulings in order to facilitate more cases being filed.

Not surprisingly, this self-reinforcing system is, as expected, producing more claims even before its gets its hoped-for turbo-charging through the pending trade deals:

Back to the current post. You may have noticed the suit against Germany for phasing out nuclear power. That has brought the issue of the investor panels to the attention of the press and public. In the Huffington Post, Larry Cohen describes the widespread opposition to the Transatlantic Trade and Investment Partnership in Germany:
As negotiations move forward on the Transatlantic Trade and Investment Partnership (TTIP), a wide range of German elected and civic leaders are in disbelief that the U.S. remains serious about including Investor-State Dispute Settlement (ISDS). From the German perspective, that’s a failed 20th century approach…. 
By most benchmarks, Germany is the most successful large economy in the world, with a rising standard of living, an educational system that creates real opportunity to move from school to work, a deep economic safety net, and worker participation in economic decision making…. 
Much more could be said about the divergent paths of our two nations in the past 60 years. But thanks to a suit brought by the Swedish energy firm Vattenfall against the German government, opposition to ISDS is nearly universal… 
Ironically back in the U.S., proponents of TTIP and the more imminent Trans Pacific Partnership (TPP) criticize those of us who oppose ISDS as anti-trade Neanderthals. But in my discussions with German leaders last week, it is clear that the U.S. looks like the Neanderthal by supporting ISDS, coupled with dramatic increases here in economic inequality and nearly unlimited influence by corporate America in all aspects of our lives. If [US Trade Representative Michael] Froman proceeds with ISDS in the final version of the TPP, Germans and most other Europeans will never trust a future TTIP, even if there are ISDS carve outs for certain national legislation. They can read the handwriting on the TPP wall very clearly.
Yves here. This is priceless. Even though Japan and other prospective TPP partners have serious reservations about the investor panels, along with numerous other provisions, Froman appears to be operating as if he can bulldoze them, when the Japanese media indicates that this is a non-starter (and if Japan is not in the deal, there is no deal). But the US messaging (and the US media readings are likely to get more play in Europe than the Asian accounts) are that the talks are on track. So the overhyping of the state of play with the TPP may backfire with the TTIP talks. It would be delicious to see the Obama Administration hoist on its propaganda petard.

July 16, 2014

BRICS Announce $100 Billion Reserve To Bypass Fed, Developed World Central Banks

As we suggested last night, the anti-dollar alliance among the BRICS has successfully created a so-called "mini-IMF" since the BRICS are clearly furious with the IMF as it stands currently: this is what the world's developing nations just said on this topic "We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness."

 As Putin explains, this is part of "a system of measures that would help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies." Initial capital for the BRICS Bank will be $50 Billion - paid in equal share among the 5 members (with a contingent reserve up to $100 Billion) and will see India as the first President. The BRICS Bank will be based in Shanghai and chaired by Russia. Simply put, as Sovereign Man's Simon Black warns, "when you see this happen, you’ll know it’s game over for the dollar.... I give it 2-3 years."
  • BRICS MINISTERS SIGN DEVELOPMENT BANK AGREEMENT
  • INITIAL SUBSCRIBED CAPITAL OF BRICS BANK IS $50 BLN: STATEMENT
A quick take on existing monetary policy.
  • MONETARY POLICY MUST BE CAREFULLY CALIBRATED: BRICS STATEMENT
The punchline, however, is that using bilateral swaps, the BRICS are effectively disintermediating themselves from a Fed and other "developed world" central-bank dominated world and will provide their own funding.
We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements.... The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures. 
Incidentally, the role of the dollar in such a world is, well, nil.

For those who have forgotten who the BRICS are, aside from a droll acronym by a former Goldman banker, here is a reminder of the countries that make up 3 billion in population.

Key excerpts from the Full statement:
We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund's resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.

BRICS, as well as other EMDCs, continue to face significant financing constraints to address infrastructure gaps and sustainable development needs. With this in mind, we are pleased to announce the signing of the Agreement establishing the New Development Bank (NDB), with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies. We appreciate the work undertaken by our Finance Ministers. Based on sound banking principles, the NDB will strengthen the cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to our collective commitments for achieving the goal of strong, sustainable and balanced growth.

The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be of US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters. We direct our Finance Ministers to work out the modalities for its operationalization.

We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. We appreciate the work undertaken by our Finance Ministers and Central Bank Governors. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures.
Goodbye visions of an SDR-world currency. As for the USD...

July 15, 2014

Anti-Dollar Alliance Prepares Launch Of BRICS Bank

Three months ago we discussed in detail the growing anti-dollar hegemony alliances that were building across the BRICS countries (Brazil, Russia, India, China and South Africa). Their efforts at the time, to create a structure that would serve as an alternative to the IMF and the World Bank (which are dominated by the U.S. and the EU), appear to be nearing completion. As AP reports, Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth across the BRICS and hope to produce an agreement on the proposed institution at this week's BRICS Summit.

Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth in Brazil, India, China, Russia and South Africa.

Rousseff received Putin in the presidential palace in Brasilia on Monday, a day before leaders of the five emerging BRICS nations meet in the northeastern city of Fortaleza.

Rousseff told reporters the bank would top the summit's agenda, adding she hoped the event would produce an agreement on the proposed institution.

She said the five countries "are among the largest in the world and cannot content themselves in the middle of the 21st century with any kind of dependency."

Brazil and Russia also signed bilateral accords on air defense, gas and education

The leaders who will be present (not so many big fans of the US there)...

They seem serious:
  • *BRICS DEVELOPMENT BANK KEY TO FOSTER GROWTH IN GROUP: BORGES
  • *BRICS BANK AT 1ST TO FINANCE EXCLUSIVELY INFRASTRUCTURE:BORGES
  • *RUSSIA'S PUTIN SAYS COOPERATION WITH CHINA IS GROWING
  • *PUTIN SAYS RUSSIA TO PROMOTE CURRENCY SWAP WITH CHINA: XINHUA
As we concluded previously, as RBTH reports, it seems the BRICS are not slowing down efforts to create their own IMF-alternative...
The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.

Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.

In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. "Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory," Lukov said.

It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries' economies.

The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. "It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests," points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.
Perhaps the following sums it all up perfectly...
Economists warn the IMF's legitimacy is at stake, and they say U.S. standing abroad is being eroded.
"Eroded" indeed...

If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.
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