Telegraph
Central banks must switch off the printing presses before it’s too late
Only a year to go now. Ben Bernanke, chairman of the US Federal Reserve, has let it be known that he won’t be seeking a third term once his present one expires in January 2014, and few can blame him.
The last seven, crisis-ridden, years would already have completely finished off a lesser man. The poor chap must be exhausted.
It is perhaps still too early to be passing judgments on his reign, but on one level it certainly doesn’t seem so bad, given the challenges faced. Bernanke has arguably done better than central bankers in Europe, Britain and Japan in terms of his crisis response. US GDP is back above pre-crisis levels, unlike the UK, and is continuing to grow at a reasonable, if quite modest, rate.
Having avoided the fiscal cliff, Congress still has to confront the separate debt ceiling. This will involve the same sort of “end of days” media frenzy we saw around the cliff, but ultimately a deal will be done and the US economic juggernaut will move on.
The negative impact on confidence of these stand-offs seems to be much exaggerated. In fact, the US economy continued to create jobs at quite a pace right through the supposed uncertainty of the fiscal cliff negotiations.
How much of this is down to the genius of “helicopter Ben” is, of course, another matter. One quite powerful contributor to recent growth has been the “fracking” gas revolution, which is delivering cheap energy worth perhaps as much as 1pc of GDP a year to the US economy. There’s no objective way of measuring the extent to which aggressive money printing by the Fed has contributed to the US turnaround.
Whatever the truth, one thing is for sure. It is really quite hard to justify further rounds of money printing given the evident recovery that is now taking place. Even so, Mr Bernanke has indicated he’ll keep the printing presses at full throttle at least until unemployment sinks below 6.5pc. This is a mistake, with some possibly quite malign unintended consequences for both the US and world economies.
Like others, I was a strong supporter of the initial burst of “quantitative easing”, both in the US and the UK, when it seemed a very necessary tool for combating the collapse in the financial system and the accompanying, violent, contraction in credit.
And by targeting the “toxic” loans of failing banks for asset purchases, the Fed seems to have practised a rather more effective form of it than we saw in either Britain or Europe. As Bluford Putnam, chief economist of CME Group, has argued in a paper for the Review of Financial Economics, buying up these assets has helped the US banking system rebuild capital and liquidity much more rapidly than has occurred in either the UK or Europe, enabling a return to balance sheet growth.
In Britain, by contrast, QE has almost exclusively targeted government debt, which has been very helpful to the Government in helping to fund a still burgeoning fiscal deficit at very low interest rates — and in keeping the bankers in bonuses — but has failed to restore health to the banking system and seems increasingly ineffective in stimulating demand in the real economy. We’ll reserve judgment on “funding for lending”.
Meanwhile, the European Central Bank largely spurned asset purchases altogether and instead focused on long-term liquidity facilities. Solvency issues in the European banking system have therefore remained substantially unaddressed, preventing meaningful economic recovery.
Even so, the injection of central bank liquidity seems to have done a relatively good job in preventing catastrophe. Yet whether QE can continue to be justified after the financial system has been stabilised is much more questionable. The trouble is that today the purpose of QE is no longer really that of depressing interest rates or preventing a collapse in the money supply, but that of attempting to support aggregate demand.
Growing concern over mountainous public debt has left governments increasingly reliant on the supposed miracle remedies of monetary policy to restore economic growth. Monetary policy has become the only game in town, so much so here in Britain that the Government has elevated faith in the easy money policies of the Bank of England to cult-like status. Britain has blazed the trail, the Prime Minister once boasted, as “fiscal conservatives but monetary activists”. Regrettably, and perhaps predictably, the cult of QE has failed to deliver the goods.
Of course, it is possible that things might have been even worse without it, but the longer it goes on, the less likely this seems, and meanwhile some quite counterproductive long-term consequences are starting to emerge.
Some of the wider adverse consequences of QE have been brilliantly elucidated in a paper for the Dallas Federal Reserve by William White, former economic adviser at the Bank for International Settlements. Since Mr White was one of the few monetary gurus to have accurately highlighted the dangers of the credit bubble when it was still possible to do something about it, his analysis deserves some attention. His main conclusion is that there are limits to what central banks can do, and that monetary stimulus has essentially already hit the buffers. The consequences of persisting are therefore quite likely to be negative from here on in.
These negatives include misallocation of capital likely to prove quite harmful to growth in the long run. For instance, easy money encourages banks to keep existing debtors afloat even though they might be insolvent, thus denying credit to new businesses and younger households. This “evergreening” of long standing debtors creates an army of weak, zombie-like customers.
What’s more, QE results in some very undesirable distributional effects. Those able to afford it are charged higher interest rates than otherwise, while debtors are constantly favoured over creditors. The previously profligate are rewarded, and the thrifty are punished, creating moral hazard on a grand scale. Easy money in response to a crisis can also generate serial bubbles, with each action setting the stage for a later crisis.
But perhaps worst of all, it encourages governments to do nothing. One possible defence of QE is that it at least buys time for governments to engage in debt reduction and structural reform to redress imbalances and increase potential growth.
Unfortunately, this time is not being well used. To the contrary, QE has become an excuse for doing nothing and carrying on as before in the Micawber-like hope that something will turn up. By allowing governments to borrow more cheaply, it also positively encourages irresponsible spending. Oh, what a tangled web we weave…
Note: How would this be financed? Well, it could be financed from the fees the developed world pays to the UN or by loans taken out by the UN and guaranteed by its richer members. Or the UN might start selling !world citizenship" to the rich which guaranteed the holders the right to reside in any UN country and conduct business there.
It would also be interesting to know who would make the decision to produce such a new monetary system or how it would be administered. RH
UN to Produce Bullion Coins as World Currency
The announcement by the United Nations this week that it will license the minting of silver and gold bullion coins bearing the UN logo may be the button that launches metal prices into orbit.
In its wide-ranging report this fall, the UN Conference on Trade and Development (UNCTAD) stated that the system of currencies and international banking practices within today’s economies were inadequate, and responsible for the present economic crisis. The report advocates that the present monetary system, wherein the dollar acts as the global reserve currency be re-examined “with urgency”.
The UNCTAD Report was the first time a major multinational institution had forwarded such a suggestion or measure, although a number of countries, including Russia and Brazil have supported replacing the dollar as the world's reserve currency. China's central bank chief Zhou Xiaochuan has mentioned that the dollar could become a basket of currencies instead.
The UN commission dismissed such a widening, saying a multiple-country system "may be equally unstable, and not transparent."
The panel is seeking more monetary balance for developing countries, and a means for them to retain their reserves and domestic savings independent of foreign agencies and arrangements.
Panel Chair US economist Joseph Stiglitz, a Nobel economics laureate, has made plain that there was "a growing consensus that there are problems with the dollar reserve system. Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz stated.
"It's indicative of the nature of the problem. It's a net transfer, in a sense, to the United States, a form of foreign aid."
A report contributor, Detlef Koffe, concluded that "Replacing the dollar with a bullion currency would solve some of the problems related to the potential of countries running large deficits and would help stability,"
Telegraph
128 million Americans are now on government programmes. Can America survive as the world’s superpower?
The economic future doesn't look bright for the US superpower
I have just read a staggering report written by my colleagues Patrick D. Tyrell and William W. Beach for the Heritage Foundation's Center for Data Analysis (I direct the Margaret Thatcher Centre for Freedom at Heritage.) It is a real eye-opener for anyone who cares about America’s future as the world’s superpower, on either side of the Atlantic. Ironically, Britain, through the tremendous determination of Iain Duncan Smith and his team at the Department of Work and Pensions, is starting to roll back the welfare state, precisely at the same time the current US administration is expanding it.
The United States isn’t just gliding towards a continental European-style future of vast welfare systems, economic decline, and massive debts – it is accelerating towards it at full speed. Or as Acton Institute research director Samuel Gregg puts it in his excellent new book published today byEncounter, America is already “becoming Europe,” with the United States moving far closer to a European-style welfare state than most Americans realize.
The number of people receiving benefits from the federal government in the United States has grown from under 94 million people in 2000 to more than 128 million people in 2011. That means that 41.3 percent of the US population is now on a federal government program.
Between 1988 and 2011, spending on dependence-creating federal government programs has increased 180 percent versus “only” a 62 percent increase in the number of people who are enrolled in federal government programs, and a 27 percent increase in the population. Not only are more people enrolled in government programs than ever before, but more US taxpayer dollars are being spent on each recipient every year.
This level of spending is simply unsustainable. “In 2010, over 70 percent of all federal spending went to dependence-creating programmes,” a figure which is likely to rise further in coming years, with the number of Americans enrolled in at least one federal programme growing “more than two times faster than the US population.” As the report’s authors argue:
The time to reform dependence-creating government programs is now. The problem is too much government subsidizing, and too much transfer of wealth from taxpayers to those who pay fewer and fewer taxes. After all, government does not create wealth by spreading it around.
Congress would do well to remember that there are no free subsidies and benefits. The government today is borrowing from future taxpayers to pay the current government program enrollees.
In terms of indebtedness, America is well on the way to financial ruin, with total national debt already exceeding 100 percent of GDP according to the OECD, with publicly held federal debt projected to exceed 100 percent of US GDP by 2024. America’s government debt as a percentage of GDP (109.8 percent) based on 2012 figures now exceeds that of the general Euro area (100.6 percent), as well as France (105.1 percent) and the UK (105.3 percent). Only Greece (181.3 percent), Iceland (124.7 percent), Ireland (123.2 percent), Italy (127 percent) and Portugal (125.6 percent) currently exceed the US in terms of government gross financial liabilities as a percentage of GDP.
Unless there is a dramatic reversal in the overall approach taken by the US government, with deep-seated entitlement reform, significant cuts in government spending and taxes, and a return to policies that advance rather than hinder economic freedom, the United States faces a bleak economic future, with devastating implications for American leadership on the world stage and the future of the free world.
It is simply unimaginable for US leadership to be replaced by that of China, with its callous disregard for liberty, human rights and democratic values. An America that ends up like much of the European Union, dominated by big government ideology, drowning in debt, over-regulation, heavy taxation and chronically high unemployment, combined with weak militaries and an unhealthy deference to supranationalism, is a nightmare scenario. Unfortunately the US presidency remains firmly stuck in denial, as it has been for the last four years. This latest report serves as another warning for an administration perilously sleep-walking America towards economic disaster. It is time for the White House to wake up.
Telegraph
Concern for US growth as trade gap widens
Fears have been raised about the strength of the US economy’s recovery after America’s trade gap with the rest of the world unexpectedly grew to its widest in seven months.
The trade deficit rose by 16pc to $48.7bn (£30bn) for November, up from $42.1bn in October, officials said. The increase was driven by an $8.4bn spike in imports on the previous month, while exports climbed by $1.7bn.
The market had been expecting a decrease in the trade gap. Analysts warned that the performance suggested growth in the final quarter of the year would be lower than hoped, as the increased trade deficit would translate into a negative contribution to overall economic output.
“This is not good news for the fourth-quarter GDP growth,” said Peter Cardillo, an economist at Rockwell Global Capital.
However, aside from the impact on headline growth, many noted that rising imports may point to strengthening domestic demand – though not all were convinced this was the case.
“November delivered an absolutely awful US trade report,” said Rob Carnell at ING Bank. “The damage was… caused entirely by imports.
He said this suggested stocks of goods had been building up, posing a threat to US growth in the current quarter.
Telegraph
Multilateral trade deals are dead, says French industry minister Arnaud Montebourg
Multilateral trade deals are "dead", France's industry minister has said, professing a preference for bilateral accords as the 27-nation European Union and the US prepare to begin talks on removing tariffs.
Arnaud Montebourg, an advocate of limited protectionism in trade and industrial policy, said deals involving several nations were impossible to broker today because competing national interests could not be squared, Reuters reported.
"Multilateralism is dead," he told a lunch with foreign journalists in Paris. "We prefer bilateral deals ... because it's not possible to find rules that are suitable to everyone, with each requiring the right to a veto."
An attempt at a global trade agreement, called the Doha Round, began in 2001 but broke down in 2008 over disagreements on issues including agriculture, services and intellectual property between the West and emerging markets.
The latest call for a broad deal is from Prime Minister David Cameron, who has urged the European Union and the US to broker a free trade deal. US and EU officials have told Reuters talks will begin in mid-2013.
The goal of such an agreement would be to stimulate economic growth in the US and the European Union, which together account for nearly a third of world trade.
Montebourg also criticised the World Trade Organisation, headed by fellow Frenchman and Socialist Pascal Lamy, saying its decision to admit China had produced negative economic effects.
France is attempting to narrow its trade deficit, which on Tuesday reached its lowest level since late-2010.
To rebalance trade with China, Montebourg said Europe needed a currency that made its exports more attractive, closer to the US dollar than the former German unit, the Deutsche Mark.
Beijing had to be pressed to allow its currency to appreciate, he added
Telegraph
Eurozone meltdown 'cannot be discarded' in dangerous mix of global risks, warns World Economic Forum
A dangerous mix of fragile economies and extreme weather has increased global risks, with a meltdown in the eurozone still a threat, the World Economic Forum said.
In its Global Risks 2013 report, the WEF said eurozone instability will weigh on world prospects in coming year and the threat of "systemic financial failure cannot be completely discarded".
The report warned that anti-austerity protests across the eurozone and the election of “rejectionist” governments this year could bring the crisis to a head, "potentially destabilising the global financial system".
As the report came out, European Union data showed the unemployment rate across the troubled eurozone rose to a record 11.8pc in November, with the number of people out of work now nudging 19m.
The survey of more than 1,000 experts and industry leaders fears that persistent global economic fragility is diverting attention of governments from longer-term solutions by limiting resources and investment.
Its more pessimistic outlook "reflects a loss of confidence in leadership from governments", said Lee Howell, the WEF managing director responsible for the report.
Respondents said the world was more at risk as persistent economic weakness sapped our ability to tackle environmental challenges.
It also highlighted a widening gap between rich and poor and unsustainable government debt as the top two most prevalent risks – as they were last January.
Following a year of extreme weather – from Superstorm Sandy and floods in China to droughts – rising greenhouse gas emissions were rated as the third most likely global risk overall, while the failure of climate change adaptation is seen as the environmental risk with the most knock-on effects for the next decade.
"These global risks are essentially a health warning regarding our most critical systems," said Mr Howell said. "National resilience to global risks needs to be a priority so that critical systems continue to function despite a major disturbance."
Axel Lehmann, chief risk officer at Zurich Insurance, said: "With the growing cost of events like Superstorm Sandy, huge threats to island nations and coastal communities, and no resolution to greenhouse gas emissions, the writing is on the wall. It is time to act."
This year's Davos meeting takes as its theme "resilient dynamism", in recognition of the need for governments and businesses to develop strategies to ensure critical systems continue to function in the face of such threats.
http://www.telegraph.co.uk/finance/comment/9763112/Chilling-economic-report-strikes-fear-into-CEOs.html#
Chilling economic report strikes fear into CEOsBy Kamal Ahmed Sunday Telegraph Business Editor9:15PM GMT 22 Dec 2012Over an early-morning coffee with the chief executive of a FTSE 100 businesslast week, talk turned to the outlook for 2013. Where I had expected someguarded optimism, instead I heard a chilling analysis.The CEO said he had been reading a new paper from Boston Consulting Groupheaded " Ending the era of Ponzi finance. Â The lessons he had taken from itwere miserable.The West was not going to find its way to the right economic path with alittle tweaking at the edges, the CEO said. What is needed is a wholesaleoverhaul of the economic system to tackle record levels of public andprivate debt. Was anyone brave enough to do it, he wondered aloud.I asked him to send me the report. He did.The BCG study by Daniel Stelter which is doing the rounds of corporateC-suites does not pull its punches. In fact, its punches are really just asoftening-up exercise for a barrage of kicks and painful blows aimed atanyone who thinks that kicking the can down the road is a suitablesubstitute for radical action.At the heart of the analysis is the issue of debt. A report by the Bank ofInternational Settlements, the study notes, found that the combined debts ofthe public and private sector in the 18 core members of the OECD rose from160pc of GDP in 1980 to 321pc in 2010.That debt was not used to fund growth - perfectly reasonable - but was usedfor consumption, speculation and, increasingly, to pay interest on theprevious debt as liabilities were rolled over.As soon as asset price rises - fuelled by high levels of leverage - levelledoff, the model imploded.The issue is brought into sharp focus by one salient fact. In the 1960s, forevery additional dollar of debt taken on in America there was 59c of new GDPproduced. By 2000-10, this figure had fallen to 18c. Even in America, that'sabout a fifth of what you'll need to buy a McDonald's burger.Coupled with the huge debt burden are oversized public sectors and shrinkingworkforces. The larger the part the Government< http://www.telegraph.co.uk/news/politics/> plays in the economy, the lowerthe levels of growth.A report by Andreas Bergh and Magnus Henrekson in 2011 - cited by BCG -found that for every increase of 10pc in the size of the state, there is areduction in GDP growth of 0.5pc to 1pc. Across Europe, the average level ofgovernment spending is 40pc of GDP or higher, and is as much as 60pc inDenmark and France. In emerging markets, it is between 20pc and 40pc. Thisgives non-Western economies an automatic growth advantage.This material should be gripping politicians in Westminster, not just CEOsin central London. The size of the workforce is falling across the developedworld, with the United Nations estimating that between 2012 and 2050 theworking-age population in Western Europe will fall by 13pc. This comes at atime when we have a pension system not much changed since the era of the manwho invented it - Otto von Bismarck.What does the West need to do to right such fundamental imbalances?Mr Stelter and his colleagues do offer some solutions. First, there has tobe an acknowledgement that some debts will never be repaid and should berestructured. Holders of the debt, be they countries or companies, should beallowed to default, whatever the short-term pain of such a process.In social policy, retirement ages will have to increase. People will have towork harder, for longer and should be encouraged to do so by changes inbenefit levels that do little - at their present level - to reward work atthe margin.The size of the state should be radically reduced and immigrationencouraged. Competition in labour markets through supply-side reforms shouldbe pursued.Where governments can proactively act - by backing modern infrastructure -they should. High-growth economies are built on modern railways, airports,roads and energy supplies. Allowing potholes to develop in your local roadsis a symptom of a wider malaise and cash-rich corporates should be pushed,through tax incentives, to invest their money in developed as well asemerging economies. Energy efficiency - to save money, not the planet -should be promoted.As Mr Stelter says, many chief executives might understand the problem butnot see it as immediately relevant to them. Profit margins across Europehave returned to the levels of 2005. Money is cheap due to the printingpresses of the central banks and ultra-low interest rates. Short-term,things look OK - there has been little real pain despite the efforts of someto portray every necessary efficiency move as a "cut" of calamitousproportions.But in the end, business needs growth in the wider economy to flourish.There needs to be a radical rethink of the way the West organises itself.Many of the ideas of Mr Stelter and his team are the right ones, althoughthe tax burden being what it is in the UK, many would find it hard tostomach the thought of more tax rises that the BCG report recommends. Atsome point the relationship between taxed income and willingness to innovateturns negative.I would suggest the UK is very near that point.BCG's arguments are, of course, not new. In a recent programme on the Bankof England for BBC Radio 4, I interviewed the Oxford economist, Dieter Helm."I think it's important to understand there are very different views aboutwhat happened in the crisis," he told me."Some people think that this was some kind of Keynesian event, that ourproblem after the crash was deficient demand and therefore what we had to dowas stimulate the economy."In other words, where we were in 2006 in terms of our consumption andspending was perfectly sustainable."[But] what's going on is a massive postponement exercise and I think thatmeans that the sustainable level of consumption we will end up with will belower than it would have been if we'd faced up to the reality of oureconomic mess that was created by the great boom of the 20th century and theenormous splurge of spending and asset bubble of the early years of the 21stcentury."As we know, George Osborne's austerity plan is not actually much of a plan,with government debt levels increasing for the rest of this Parliament. Butin politics, the choice is not simply between what is being proposed andShangri-La. It is about what is being proposed and the alternative - and theLabour alternative is more spending. Most people know which one we should bechoosing so that worried FTSE 100 CEOs can sleep a little easier.ENDGet the full Boston Consulting Group Report at :-http://www.scribd.com/doc/117792941/BCG-Ending-the-Era-of-Ponzi-Finance-Jan-2013The US 'seriously' considering $1 trillion coin to pay off debt
The US is "seriously" considering creating a $1 trillion platinum
coin to write down part of its debt to stop the world's largest
economy defaulting as early as next month, according to financial
analyst Cullen Roche.
A 'Double Eagle' gold twenty dollar coin is displayed at Goldsmith's
Hall in London. Nearly half a million of these coins were originally
minted in the middle of the Great Depression in the US. Only 13 are
known today after the rest were melted down before they ever left the US
Mint, sacrificed as part of a strategy to stabilise the American
economy. In 2002 a Double Eagle sold at auction for $7.6 million.
A legal loophole means the US Treasury is able to mint a platinum coin
and assign any value to it. Photo: Peter Macdiarmid/Getty Images
<http://www.telegraph.co.uk/journalists/>
By Rebecca Clancy <http://www.telegraph.co.uk/journalists/rebecca-clancy/>
12:45PM GMT 07 Jan 2013
Speaking to the BBC's Today programme, Mr Roche, founder of Orcam
Financial Group and *blogger at Pragmatic Capitalism*
<http://pragcap.com/explaining-the-silliness-of-the-debt-ceiling-and-platinum-coin-to-the-rest-of-the-world>,
said the idea was being taken "somewhat seriously" in Washington.
"I know it's been spoken about at the White House and a number of
prominent people, including congressman, are talking about it," he said.
In theory the US Treasury would mint the coin and deposit it into its
own account at the Federal Reserve, which would allow the government to
write down or cancel $1 trillion of its $16.4 trillion debt pile.
The Treasury began shuffling funds in order to pay government bills
after the country hit its $16 trillion debt limit on December 31.
However, the Treasury's accounting maneouvres will last only until
around the end of February as the latest *fiscal cliff*
<http://www.telegraph.co.uk/finance/financialcrisis/9774988/US-Congress-backs-deal-to-avert-fiscal-cliff.html>
deal gives *US politicians two months*
<http://www.telegraph.co.uk/finance/economics/9782716/Barack-Obama-fires-warning-over-debt-ceiling.html>
to raise the debt limit before the country defaults.
The idea, which was raised last year, has been floated by several
financial analysts in the States over recent days as Congress and the
government approach the key fiscal vote.
Mr Roche said the idea was an "accounting gimmick", but noted it was
just "one really silly idea [being used] to fight another silly idea".
"The idea of the US willingly defaulting on debt is beyond crazy," he said.
"We started kicking the idea around a year ago and it was really a joke
and the fact it's become something sort of serious, well it's a sad
state of affairs that it's become so dysfunctional in Congress that this
is something we're having to resort to."
Writing in his *New York Times blog, economist Paul Krugman*
<http://krugman.blogs.nytimes.com/2013/01/02/debt-in-a-time-of-zero/>,
said that while he did not expect the Treasury to go ahead with this
"gimmick", there could be a case for it.
"This is all a gimmick --- but since the debt ceiling itself is crazy,
allowing Congress to tell the president to spend money then tell him
that he can't raise the money he's supposed to spend, there's a pretty
good case for using whatever gimmicks come to hand," he said.
Mr Roche also did not expect the Treasury to go ahead and mint a
$1trillion coin, but said President Obama could use it as threat.
"I don't think it's something that will end up being used but I think
that if it comes down to it we could potentially see the President use
this as something where he says, 'look if you're going to threaten to
default on debt then I'm going to threaten to use the coin loophole'."
There are limits on how much paper money the US can circulate and rules
that govern coinage on gold, silver, and copper.
But, the Treasury has broad discretion on coins made from platinum, and
in theory, it is allowed to mint a platinum coin and assign any value to
it.
However, it is worth noting that this was intended to issue
commemorative coins and not as a fiscal measure, Mr Krugman said.
http://www.telegraph.co.uk/finance/financialcrisis/9784898/US-seriously-considering-1-trillion-coin-to-pay-off-debt.html
TelegraphThe Last Days of Detroit by Mark Binelli: review
Mick Brown is captivated by a harrowing portrait of a once-influential US city now in a state of decay.
4 
7:00AM GMT 07 Jan 2013
Anybody visiting the once-great city of Detroit for the first time is likely to be struck by a single, powerful reaction: complete and utter disbelief. The derelict factories; the burnt-out houses; the abandoned office blocks in the very heart of the city’s business district; and the vast tracts of rubble and rubbish-strewn wasteland, fast being reclaimed by nature and turned into what is known locally as “urban prairie”. For more than 40 years, Detroit, once the hub of America’s motor industry, has been America’s basket-case – a Petri dish of the country’s most intractable problems: urban blight, the decline of manufacturing, racial tension, the growing divide between rich and poor. How, you find yourself asking, has it come to this?
Mark Binelli is a journalist for Rolling Stone, who grew up in the city. Like 25 per cent of its population over the past 10 years, he left it, and more recently returned – somewhat in the spirit of a reporter off to cover a foreign war – to offer this sobering tour d’horizon of his old home town.
Detroit has always had its troubles, be it the bitter labour disputes which have characterised the motor industry more or less since its birth, or the seam of racism that ran through the city from its very beginnings. In 1833, following the arrest of a runaway slave, the military was called in to put down what was referred to as Detroit’s “first Negro insurrection”.
In the Forties, Life magazine was describing a city “seething with racial, religious, political and economic unrest” – a combustible melting pot as migrants poured into the city to man the assembly lines of “the armoury of America”. The riots of 1967, in which 43 people died, more than 7,000 were arrested and 3,000 buildings were burned down, exacerbated the so-called “white flight” to the suburbs, destroying the city’s tax base. In 1950, Detroit was America’s fourth largest city, with a population of nearly two million. The population is now less than 900,000.
It is a city where the mayor’s electoral pitch is not putting up more buildings, but demolishing them; where city planning means denying the implementation of basic services such as sewage in devastated neighbourhoods, in order to encourage residents to leave; where in some areas residents carry rape alarms to scare off the packs of wild dogs; and where, mindful of the 1,100 shootings a year, nobody with any sense stops at a petrol station after dark.
From Detroit’s staggering compendium of ghastly crime, he chooses to focus on just one, in which two crack-dealers were accused of murdering a customer and distributing his body parts around the neighbourhood. Binelli talks to the families and friends of both perpetrators and victim, painting a harrowing portrait of dysfunction, poverty and an indifference to violence and the sanctity of life. In this horrifying accumulation of detail, one is particularly telling: Binelli was the only journalist in the city who thought the case even worth reporting.
This book could easily be an epitaph, but Binelli finds green shoots of optimism sprouting up amid the detritus. Detroit’s collapse could be the start of what he describes as an unintentional experiment in “stateless living”, a canvas for resilience and enterprise, with urban farmers, homesteaders and artists remaking the city.
Vigilante demolition teams such as the Motor City Blight Busters have been tearing down abandoned homes, for the land to be turned back to agricultural use. Some have argued that Detroit has the potential to become the first city on the planet producing all its own food within its borders. And while thousands abandon the city, there is a minor growth surge among two separate groups: Iraqi immigrants (“Dire though things had become,” Binelli observes, “Detroit apparently remained a more desirable place to live than post-war Baghdad”) and college-educated “creatives” and urban pioneers, colonising the abandoned buildings in the downtown area, with a view to remaking Detroit as a hub for media and tech industries.
Paradoxically, it is the city’s very dereliction that has become one of its principal attractions. Nobody who visits Detroit can fail to be struck by the fact that there is something hauntingly beautiful in its decay; an eerie stillness that inevitably provokes thoughts about man’s hubris and the ephemerality of all things. It is a fact that the photographer Camilo Vergara recognised when he suggested, not altogether in jest, that the city should stop razing its abandoned skyscrapers and turn the downtown area into “an urban Monument Valley”. As Binelli wryly notes: “This is not exactly a question of gentrification; when your city has 70,000 abandoned buildings, it will not be gentrified any time soon. Rather it’s one of aesthetics.”
Residents of Detroit apparently have come to resent the voyeurism of photojournalists, and perhaps it is sensitivity on Binelli’s part that is responsible for the absence of any photographs of Detroit’s most celebrated ruins. It is a curious omission in an otherwise excellent book.
Telegraph
Central banks hand lenders more time to meet liquidity rules
Banks will be given several years to meet new rules governing the amount of liquid assets they must hold on their books to see them through a short-term market crash.
Banks will be given several years to meet new rules governing the amount of liquid assets they must hold on their books to see them through a short-term market crash.
The Basel Committee on Bank Supervision, which brings together the world’s top central bankers and regulators, said banks would only need to have 60pc of the necessary short-term funding in place when the rules become effective in three years’ time - and would have until 2019 to fully implement the so-called liquidity coverage ratio (LCR).
In a statement last night,(Sun) the Basel Committee, which is overseen by Bank of England Governor Sir Mervyn King, said it had decided to opt for a “graduated approach” to avoid “disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity”.
The LCR is a key part of the reform Basel III reform package agreed by regulators across the world that is designed to make banks more robust in the event of a future crisis.
In a move that mirrors the Bank of England’s decision last year to relax the amount of liquidity banks must keep in reserve, the Basel Committee that lenders would in future be able to run down their pool of liquid assets below the minimum threshold “during periods of stress”.
Sir Mervyn, who will stand down this year as Governor, described the new agreement on the LCR as a “very significant achievement”.
“For the first time in regulatory history, we have a truly global minimum standard for bank liquidity - a standard that reflects actual experience during times of stress,” he said.
In the immediate wake of the crisis in 2008 there was widespread agreement over the need for new capital rules, but in the intervening four years this consensus has frayed with the US considered unlikely to fully implement the Basel III rules.
In its latest accounting survey, Deloitte’s warned that a similar breakdown was occuring in accounting standards. Nearly 90pc of global banks surveyed by Deloitte’s said they did not think the world’s accounting setters were on track to agree new standards that would lead to a greater convergence in the way lenders account for the performance of their businesses.
Telegraph
This 2013 share rally has nothing to do with the time of year
It usually comes later in the month, but I wasn’t surprised to be asked the question this week. After a barnstorming start to the year, can markets keep up the pace?
There is something about January that has us all eyeing next New Year’s Eve and predicting where we’ll be in 12 months’ time. And when the first three trading days have already put 3pc to 4pc in the bag thanks to investors’ enthusiastic response to the fiscal cliff fudge, it’s not unreasonable that the speculation should begin early.
There are plenty of reasons why we are prone to crystal ball gazing in January but few of them are very good. Most obviously we tend to think in discrete calendar years, even if this makes no more sense than our pretence that what we call the Sixties, for example, coincided with the calendar decade.
We also tend to have the time to look at our investments over the Christmas break and hit the new year with all sorts of financial as well as lifestyle resolutions. Share trading volumes are on average 20pc higher in January than the average, while those in November and December are 20pc below it.
But the appearance at this time of year of a rush of articles about investment seasonality suggests there is more to it than this. The January Effect gets its annual airing (shares tend to rise in the first month of the year more than the overall rising trend of stock markets would imply) and so, too, does its close cousin the January Barometer (as January goes, so goes the year). What both of these have in common (alongside Sell in May, Go Away) is a desperate desire to spot patterns where arguably none exist.
This week Goldman Sachs joined the party with a number-crunching analysis of sector rotations. The past two years have seen cyclical stocks and financials pick up the baton in January from more defensive sectors, the bank said, although it doesn’t expect the same this year for a few reasons.
Theirs is not the silliest attempt to find causality in correlation, however. The biscuit here is taken by American Football’s Super Bowl, which is always staged in January and allegedly has investors rooting for the National Football Conference team in the belief that when the winner comes from the old NFL the stock market goes up for the rest of the year. It doesn’t.
The best book I’ve read on behavioural finance – Jason Zweig’s Your Money and Your Brain – has a good expression for this need to impose order on our investments: the “Prediction Addiction”. It’s not just a rhyming metaphor. Experiments have shown that the neurological impact of spotting patterns or sets of circumstances that in the past have made us money is exactly the same as that triggered by a hit of cocaine. We make stock market predictions because it feels as good as making the profit itself.
What is interesting is just how little it takes to make us think we have spotted a valid pattern. To see how this works, imagine flipping a coin six times for the following sequence of heads and tails: H,T,T,H,T,H.
So what, you might say, that’s just the kind of random series you would expect. But now imagine how you feel when the coin flips result in this sequence: H,H,H,H,H,H. Now that really is a pattern.
Or is it? The chance of both series occurring is 1 in 64 but the streak of heads makes you feel quite differently about what is going on. It’s this desire to spot patterns that lies behind adages like the January barometer. But the reality is less exciting. Over the past 25 years, the S&P 500 moved in the same direction in the full calendar year as it did in January on 17 occasions, a 68pc hit rate. Better than flipping a coin, it is true, but, as the market rises more than it falls in the long run, two out of three is hardly a basis for investment.
So what’s this got to do with where markets are headed this year? Well, what it says to me is that the strong start to the year is irrelevant. I can make a good case for 2013 being a reasonable year for equities – valuations, worries about bonds, reduced tail-risks in Europe, monetary stimulus and a sustainable US recovery, to name five – but none of them has anything to do with the time of year.
Telegraph
US job growth cools as recovery grinds on
America's employers added 155,000 jobs to the US economy last month, official data show, pointing to a stagnant pace of economic growth that was unable to make further inroads in the country's still high unemployment rate.
Payrolls outside the farming sector grew 155,000 last month, the Labor Department said on Friday. That was slightly above analysts expectations of 153,000, but below the revised 161,000 level for November.
Gains in employment were distributed broadly throughout the economy, from manufacturing and construction to health care.
The jobless rate held steady at 7.8pc in December, down nearly a percentage point from a year earlier but still well above the average rate over the last 60 years of about 6pc.
The Labor Department also raised its estimate for the unemployment rate in November by a tenth of a point to 7.8pc, citing a slight change in the labor market's seasonal swings.
Several economists said the data showed that the US economy was "muddling through"
Marcus Bullus at MB Capital, added: "December's jobs report will have disappointed some but the US economy is still moving in the right direction. In-line is just fine."
Most economists expect the US economy will be held back by tax hikes this year as well as by weak spending by households and businesses, which are still trying to reduce their debt burdens.
The US Congress this week passed legislation to avoid most of the tax hikes and postpone the spending cuts.
Even with the last-minute deal to avoid much of the "fiscal cliff," most workers will see their take-home pay reduced this month as a two-year cut in payroll taxes expires.
The Federal Reserve has kept interest rates near zero since 2008, and in September promised open-ended bond purchases to support lending further.
On Thursday, however, minutes from the Fed's December meeting showed that some members of the Federal Open Market Committee - which sets bank rates and the size of the asset-purchasing programme - were increasingly worried about the potential risks of the Fed's money-printing programme, with some members feeling uncomfortable for the Fed buying bonds beyond mid 2013.
In a statement, the FOMC said: that "several" members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.
"One member viewed any additional purchases as unwarranted," it added.
The Fed said last month that it would keep interest rates near zero until the unemployment rate fell at least to 6.5pc, as long as inflation does not rise above 2.5pc.
Telegraph
US economy adds 155,000 jobs in December - reaction
The US economy added a modest 155,000 jobs in December, the Labor Department said Friday, in line with market expectations and the unemployment rate held steady at 7.8pc. Here are economist and analyst reaction.
Tom Di Galoma, managing director at Navigate Advisors
"The job's report shows that nothing has truly changed on the economic front. The U.S. economy is just muddling through."
Yelena Shulyatyeva, US economist at BNP Paribas
"It's basically in line with our GDP forecast that we don't see much of an acceleration or growth in the economy. This was December, companies were very worried about the fiscal cliff, so it's a good number that they were still hiring.
"Participation rate held steady, so it kind of looks like it was stabilizing, it was declining as we know, quite substantially, but it's looking like it's beginning to stabilize."
"The nonfarm payroll number, keep in mind the strength in it was probably partly Sandy rebuilding, so kind of a mixed picture."
Paul Ashworth, chief US economist at Capital Economics
"The 155,000 increase in US non-farm payrolls in December is yet another month of job growth that is just about enough to keep pace with the underlying growth in the labour force, but not enough to drive the unemployment rate markedly lower.
"The overall picture is that the labour market remains lacklustre.
"If this state of affairs continues throughout most of this year, as we expect, then it is hard to see the Fed dialing back or stopping its QE purchases as some officials currently envisage.
Justin Wolfers, economist and professor at the University of Michigan
<noframe>Twitter: Justin Wolfers - This may well count as the most boring payrolls report ever. The recovery is proceeding at pretty much the pace we all thought it was.</noframe>
<noframe>Twitter: Justin Wolfers - There is news in this payrolls report. Yet another month of solid-but-not-spectacular job gains confirms the recovery's momentum.</noframe>
Marcus Bullus, trading director at MB Capital
"December's jobs report will have disappointed some but the US economy is still moving in the right direction. In-line is just fine.
"The unemployment rate will niggle but on a positive note it will give the markets a much-needed reality shot.
"I suspect the overall conclusion of the markets will be that this is a positive dataset.
Tom Porcelli, chief US economist at RBC Capital Markets
"There was a lot of excitement headed into this jobs report so this number may be disappointing. This shows the economy is chugging along, with payroll gains at about the average it has been over the past year."
Richard Gilhooly, interest rate strategist at TD Securities
"Private sector payrolls at 168,000 were fairly robust in December and the general view is that the recent numbers were likely depressed by fiscal cliff issues, such that improvement should be seen in coming months."
Telegraph
FTSE slips as US Fed hints at end of QE
London's FTSE 100 edged lower on Friday as investor caution returned after the US Federal Reserve "surprisingly" hinted it would end its quantitative easing programme ahead of time
The FTSE 100 was down 0.1pc, falling 8.3 points to 6039.04, having closed 0.3pc higher on Thursday hitting a 17-month high after a 2.2pc surge on Tuesday following the news that the US had reached a deal to stop the world's largest economy falling over the fiscal cliff.
Other European markets also fell in early trading, with the DAX in Frankfurt and the IBEX in Madrid down 0.1pc, while the CAC in Paris was down 0.2pc.
Markets in Asia were mixed, as Tokyo and Shanghai stocks advanced on their first trading day of 2013, but other Asian markets were hit by profit-taking after the US fiscal cliff deal and fears over the Fed's bond-buying scheme.
Sydney's ASX shed 0.4pc, as did the Korea Stock Exchange KOSPI, while Hong Kong's Hang Seng fell 0.3pc
Tokyo's Nikkei 225, however, closed the day up 2.8pc, having surged more than 3pc at one point.
The Fed released the minutes from its December meeting after markets closed on Thursday which showed that some members of the Federal Open Market Committee - which sets bank rates and the size of the asset-purchasing programme - were increasingly worried about the potential risks of the Fed's money-printing programme, with some members feeling uncomfortable for the Fed buying bonds beyond mid 2013.
The Fed said last month it would keep interest rates near zero until unemployment -- expected to have stayed steady at 7.7pc in December -- fell at least to 6.5pc, as long as inflation does not rise above 2.5pc.
US Job figures are due out later today, and the non-farm payroll figures are expected to rise to 150,000 in December, after a 146,000 increase in the previous month, with the unemployment rate seen unchanged month-on-month at 7.7pc.
Angus Campbell, head of market analysis at Capital Spreads, said the "surprisingly hawkish" minutes from the latest FOMC meeting last night indicated the likelihood the US policy makers will end the $85 billion asset purchasing program sometime this year.
"Such language has not been heard from the Fed for a number of years and yesterday it kept the buyers in check halting the rally.," he said.
"The concern amongst investors seems to be that there is no real reason behind the Fed’s hinting a possible end to QE, is it because the economy doesn’t need it or is it because QE simply isn’t working?
"If the economy doesn’t need it then that’s not such a bad thing, however if QE isn’t working, which we are continually told by our own Bank of England this side of the Atlantic that it is, then we have more things to worry about, especially if the US does go through some more serious fiscal tightening sometime this year.
Paul Reilly at Clear Currency noted that the Fed chairman Ben Bernanke said QE would not stop until the unemployment rate hit 6.5pc, "so maybe we are still a long way away from an end to QE".
"Regardless, today's US payrolls data will now take on more significance," he added.
Telegraph
Japan approves £73bn stimulus package
Japan's cabinet approved on Friday 10.3 trillion yen (£73bn) economic stimulus package in the biggest spending boost since the financial crisis as Prime Minister Shinzo Abe pursues an ambitious agenda to spur growth and end nagging deflation.
The government will spend the funds on public works, incentives for corporate investment and financial aid for small firms to help the economy emerge from a mild recession triggered by falling exports last year.
It expects the stimulus to raise real economic growth by 2 percentage points and create 600,000 jobs.
The stimulus package is part of a 13.1 trillion yen extra budget for the current fiscal year to March due to be approved by the cabinet next week.
"We'll build a framework for strengthening cooperation between the government and the Bank of Japan. We strongly expect the BOJ to conduct aggressive monetary easing with a clear price target," the government said in a statement.
The strategy is not without its risks as Japan's debt burden is already the worst among major economies and government bond yields have been on the rise as investors fret about excess bond sales to fund fiscal spending.
The government will sell around 5 trillion yen more bonds than originally planned for the current fiscal year to fund the stimulus, a government official said.
The stimulus package is a combination of construction projects, such as repairing ageing roads and school buildings, subsidies to encourage companies to develop new technologies and loan guarantees for small firms.
The government will front load some spending on reconstruction from a record earthquake and nuclear disaster almost two years ago and for strengthening defences against natural disasters.
The government will establish several funds involving the private sector and state-backed lenders, including one to encourage private-sector lending to Japanese firms looking to acquire companies overseas and one to lend to companies establishing new product or business lines.
The extra budget expected next week will allocate 2.8 trillion yen to help make up for a shortfall in reserves for the pensions system.
Mr Abe has made reviving the economy his top priority after his Liberal Democratic Party (LDP) won elections last month, returning the party to power after three years in opposition.
His spending promises have raised concerns that Japan's public debt burden, already the worst among major economies at more than twice the size of its $5 trillion economy, could deteriorate further.
The LDP returns to government after more than half a century of nearly non-stop rule. During this time, excessive public works spending was the hallmark of LDP economic policy, which helped contribute to the country's large debt burden.
Telegraph
Timothy Geithner said to depart before debt ceiling talks
US Treasury Secretary Timothy Geithner is reportedly preparing to leave his postion by the end of the month, before politicians sit down for another gruelling round of talks over the country's debt ceiling.
Mr Geithner, 51, is the last remaining member of President Barack Obama’s original economic team and was played a key role in the taxpayer-funded bailouts during the 2008 financial crisis.
He’s also had a principal role in negotiations with Congress on the "fiscal cliff" deal and in past deliberations over the country's debt limit.
Jack Lew, White House Chief of Staff remains the leading contender for the Treasury job, according to sources cited by Bloomberg, who also said that Mr Geithner was preparing to leave his post before the end of January.
Kenneth Chenault, the chief executive of American Express, and Erskine Bowles, a former White House Chief of Staff, are also said to be in the running.
However, a spokesman for the company insisted that Mr Chenault had "no plans to leave American Express.”
US politicians will meet again as soon as next month to try debate raising America's $16.4 trillion debt limit.
Telegraph
Switzerland and Britain are now at currency war
It seems you can’t debase your coinage these days even if you try.
The Bank of England is straining every sinew to drive down sterling with quantitative easing, and what happens?
The Swiss National Bank trumps Threadneedle Street with an outright blitz of Gilt purchases. They just print it, and buy.
The Swiss and UK central banks are effectively fighting a "low intensity" currency war against each other. It has come to this.
Here is the offending chart from the IMF (Picture editor's note: apologies for poor quality, unable to find better version):
And this is what the Swiss did to Euroland a quarter earlier:
One awaits with curiosity to see what will happen when Japan – fifteen times the size – kicks in with its own nuclear plans to drive down the yen, and Asia follows suit.
The latest IMF data of central bank holdings (`COFER’) shows the biggest jump in sterling bonds by advanced central banks ever recorded. It jumped from $79bn to $98bn in the third quarter.
These holdings are usually stable so it is obvious that the SNB is responsible. The Swiss are already sated on eurobonds as they frantically intervene to hold the franc at €1.20. By their own admission, they have been diversifying energetically.
Analysts say the SNB has already bought $80bn of EMU bonds, enough to cover half the budget deficits of Euroland over the last year. It has been acting essentially as a conduit for capital flight from Italy to Germany.
It has since branched out, allegedly into Aussies, Loonies (Canada), Scandies, Won?, Real? but above all pounds. "There aren’t many places to go in this ‘ugly contest’ if you don’t like the euro, dollar, or yen," said David Bloom, currency chief at HSBC.
"Everybody is trying to weaken their currency at the same time. The Swiss have got away with it and now the Japanese want to try. The Sandinavians are pulling their hair out. The Turks are cutting rates even though the economy is overheating, and putting in credit controls instead because they don’t want the currency to rise."
"Policymakers are doing things that if you had suggested four years ago they would have put you in a straitjacket and thrown you in a cell. I don’t rule out anything any longer in this market. Desperate times lead to desperate acts," he said.
Mr Bloom said sterling will wilt soon enough as Britain loses its AAA and graples with its debts. "We have dramatically downgraded our sterling forecast this year to $1.52 on Cable and €0.88 on the euro. The pound is going to come under a lot of pressure."
Good.
This blog is not intended to be an attack on the Swiss, valiant defenders of the democratic nation state. What they are doing is entirely understandable. Such intervention creates net global stimulus and does more good than harm in a deflationary world.
Still, we have a very odd situation. Much of the world needs a lower currency and a higher interest rate structure to right the ship. But they can’t all have lower currencies.
Such is the deformed structure bequeathed to us from the Greenspan era. Or is it the China effect, or are they the same thing?
The brilliant Bernard Connolly (ex currency director at the European Commission and later global strategist at AIG) says the rot began in the mid-1990s when the Fed made its Faustian Pact and opted for ever falling real interest rates.
Any thoughts on how we get out of this mess?
Telegraph
Bond bubble fears and why I took the biggest bet of my life
If the bond bubble bursts, many pension savers will suffer
Last month I took the biggest bet of my life and, without wishing to overstate the downside, put 26 years’ savings at risk. Contrary to the conventional wisdom that people should raise their exposure to supposedly low-risk bonds and reduce shareholdings as they get older, I did the opposite and sold all the bonds in my company pension to buy shares.
That might be regarded as a recklessly risky thing to do for several reasons. First, bonds – a form of IOU issued by countries and companies – provide investors with a promise to pay income and repay their capital at fixed dates in the future, whereas shares give no guarantees at all.
Second, bonds have delivered higher total returns than shares for more than 20 years now. Third, bonds issued by the British Government, sometimes called gilts, are the basis of the annuities that most “defined contribution” or “money purchase” pensioners use to fund retirement.
So what on earth possessed me to sell all my bonds and beef up exposure to shares? The short answer is that I expect bond prices to fall when interest rates rise and suspect that shares offer much better long-term value. One reason bonds beat shares over the past two decades is that interest rates have plunged, pushing up the relative attraction of the fixed income that most bonds promise to pay.
It is quite mistaken to imagine that investments in gilts are as safe as the Bank of England; their stock market value can fall without warning. For example, when the Federal Reserve unexpectedly raised interest rates in 1994, bond prices – including those of UK gilts – suffered double-digit falls.
Never mind the history, though, what about the future? Robin Geffen, chief executive of Neptune Investment Management, predicts that bondholders could lose up to 40pc of their money when interest rates and inflation rise. He said: “The inevitable consequence of quantitative easing is that at some stage we are going to get high inflation, as central banks cannot print money forever to stimulate growth.
“When the cycle turns and we move from where we are now to interest rates rising, the long end of the bond market will go down by 30pc to 40pc.
“There are risks in both bond and equity markets, of course, but the risks in equity markets are well known. We believe that at some point a wave of money will flood out of bonds and into equities. If you are invested in the wrong part of the market, you will incur big losses.”
Several other senior City figures fear capital destruction among risk-averse investors if the bond bubble bursts. Max King, portfolio manager atInvestec Asset Management, told me: “The overvaluation of government bonds means that there is a risk of a sharp correction if the economic outlook improves, especially in America, but central banks appear determined to keep interest rates low and negative in real terms.
“A return of interest rates and bond yields to their historic trading range would be a clear sign of a return to normality for the global economy but could be disruptive for investors in the short term. We have very low exposure to developed economy government bonds as they offer plenty of downside risk without any upside.”
For example, most buyers of gilts today must accept “redemption” yields – those that reflect the total return – below inflation and a guaranteed capital loss on maturity. At current historic high prices and low yields, gilts do not offer a risk-free return so much as a return-free risk.
Even leading bond fund experts such as Stewart Cowley of Old Mutual Asset Managers are suffering bouts of vertigo.
He said: “If you look back on the history, bond yields have fallen from about 14pc in the early Eighties to eye-wateringly low levels today; a five-year maturity bond now yields about 0.7pc.
“This should be a sobering thought for investors in government bonds. At the very least nobody should be messing around with government bonds with maturities greater than about five years.”
Lest all this sound a tad macroeconomic, it’s worth pointing out that many company pension funds now routinely transfer members’ assets from shares into bonds as they near retirement. This is done with the best possible intentions, to reduce their exposure to the risk that share prices will fall shortly before retirement.
It’s called “lifestyling” in the jargon and I remember voting to introduce this safeguard when I was a trustee of our company pension scheme in the Nineties.
However, the balance of risk and reward – plus equity and bond prices and yields – was very different then from what it is today.
That’s another reason for me to reject lifestyling, while the FTSE 100 index of Britain’s biggest shares pays dividends averaging 3.7pc net of basic-rate tax – or nearly double the redemption yield on medium-dated gilts.
I don’t know if or when the bond bubble will burst. But I strongly suspect it will happen before I have finished enjoying my retirement fund – which I hope will be many years’ hence.
Here and now, I remain uneasy about having made such a contrarian switch in asset allocation. However, some of my best investment decisions felt uncomfortable at the time – such as buying emerging market shares 20 years ago. This week’s sharp rise in share prices, after fears of the US fiscal cliff proved overblown, provides some short-term comfort. Let’s hope it lasts. Happy New Year!
Telegraph
Switzerland's oldest bank Wegelin to close after pleading guilty to aiding US tax evasion
Wegelin & Co, the oldest Swiss private bank, said it would shut its doors permanently after more than two-and-a-half centuries, following its guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.
The plea, in US District Court in Manhattan, marks the death knell for one of Switzerland's most storied banks, whose original European clients pre-date the American Revolution.
It is also potentially a major turning point in a battle by US authorities against Swiss bank secrecy.
A major question was left hanging by the plea: Has the bank turned over, or does it plan to disclose, names of American clients to US authorities? That is a key demand in a broad US investigation of tax evasion through Swiss banks.
"It is unclear whether the bank was required to turn over American client names who held secret Swiss bank accounts," said Jeffrey Neiman, a former federal prosecutor involved in other Swiss bank investigations who is now in private law practice in Fort Lauderdale, Florida.
"What is clear is that the Justice Department is aggressively pursuing foreign banks who have helped Americans commit overseas tax evasion," he said.
Wegelin admitted to charges of conspiracy in helping Americans evade taxes on at least $1.2bn (£743m) for nearly a decade. Wegelin agreed to pay $57.8m to the United States in restitution and fines.
Otto Bruderer, a managing partner at the bank, said in court that "Wegelin was aware that this conduct was wrong."
He said that "from about 2002 through about 2010, Wegelin agreed with certain U.S. taxpayers to evade the U.S. tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS."
When Wegelin last February became the first foreign bank in recent memory to be indicted by U.S. authorities, it vowed to resist the charges. The bank, founded in 1741, was declared a fugitive from justice when its Swiss-based executives failed to appear in US court.
The surprise plea effectively ended the US case against Wegelin, one of the most aggressive bank crackdowns in US history.
"Once the matter is finally concluded, Wegelin will cease to operate as a bank," Wegelin said in a statement on Thursday from its headquarters in the remote, small town of St. Gallen next to the Appenzell Alps near the German-Austrian border.
But the fate of three Wegelin bankers, indicted in January 2012 on charges later modified to include the bank, remains up in the air. Under criminal procedural rules, the cases of the three bankers - Michael Berlinka, Urs Frei and Roger Keller - are still pending.
Although Wegelin had about a dozen branches, all in Switzerland, at the time of its indictment, it moved quickly to wind down its business, partly through a sale of its non-US assets to regional Swiss bank Raiffesen Gruppe.
A corporate indictment can be a death knell. In 2002, accounting firm Arthur Andersen went out of business after being found guilty over its role in failed energy company Enron Corp. A 2005 Supreme Court ruling later overturned the conviction, but it was too late to save the company.
Wegelin, a partnership of Swiss private bankers, was already a shadow of its former self - it effectively broke itself up following the indictment last year by selling the non-US portion of its business.
Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS, the largest Swiss bank, to enter into a deferred-prosecution agreement, turn over 4,450 client names and pay a $780m fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.
William Sharp, a tax lawyer in Tampa, Florida, with many US clients of Swiss banks, said Wegelin's plea "should serve as a wake-up call" to the world banking community servicing US clients to takes steps to ensure compliance with U.S. law.
Sharp called Wegelin's change of heart "shocking."
Banks under US criminal investigation in the wider probe include Credit Suisse, which disclosed last July it had received a target letter saying it was under a grand jury investigation.
In a statement after the plea, Assistant US Attorney General Kathryn Keneally said it was a top Justice Department priority "to find those who continue to shirk their tax obligations," as well as those who help them and profit from it.
"The best deal now for these folks is to come in and 'get right' with the IRS, before either the IRS or the Justice Department finds them," she said.
Under its plea, Wegelin agreed to pay the $20m in restitution to the IRS as well a civil forfeiture of $15.8m, the Justice Department said.
Wegelin also agreed to pay an additional $22.05m fine, the Justice Department said. US District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.
Since Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for US-based clients.
Telegraph
Congressmen attack Shell over 'alarming blunders' in Arctic
Royal Dutch Shell should be investigated for a “series of alarming blunders” in its Arctic drilling campaign, a group of US congressmen said, as salvage workers battled the weather to try to reach the oil major’s grounded drilling rig off Alaska.
The Anglo-Dutch oil major on Friday refused to comment about the long-term future of its controversial Arctic programme, which has so far seen it invest nearly $5bn (£3.1bn) without even drilling into potentially oil-bearing rocks.
Salvage teams were yesterday preparing to attempt to regain access to the rig, which ran aground off Sitkalidik Island on New Years’s Eve after being hit by a storm while it was being towed to Seattle for maintenance.
Snow, which was falling yesterday morning in Alaska, could hinder the attempts, a spokesman for the Unified Command managing the incident said.
Salvage visits to the rig earlier in the week revealed water-tight hatches had been breached, and both the service and emergency generators had been damaged, leaving it without power.
“There is still a lot of work to do to bring a safe conclusion to this incident,” Shell’s incident commandeer Sean Churchfield said on Thursday, adding he was unable to give a timetable for moving the rig because plans were “unclear”.
The US Coast Guard has begun investigating the incident but the SEEC called for a wider joint investigation by the US Department of the Interior and US Coast Guard. “The recent grounding of Shell’s Kulluk oil rig amplifies the risks of drilling in the Arctic,” it said.
“This is the latest in a series of alarming blunders, including the near grounding of another of Shell’s Arctic drilling rigs, the 47-year-old Noble Discoverer, in Dutch Harbor and the failure of its blowout containment dome, the Arctic Challenger, in lake-like conditions. SEEC Members believe these serious incidents warrant thorough investigation.”
Ben Ayliffe, head of Greenpeace’s Arctic campaign, said: “This latest incident has destroyed any lingering notion of Shell’s credibility.”
Shell declined to respond to the criticisms.
Telegraph
UBS fires eighteen over Libor-rigging scandal
Just eighteen UBS staff were sacked over the Libor-rigging scandal that saw the bank hand over $1.5bn (£940m) to regulators, the second-largest fine ever paid by a bank.
The scale of dismissals was revealed by the chief executive of the bank's investment arm, Andrea Orcel, as he insisted to a sceptical Banking Standards Commission he was "recovering the honour" of the shamed institution.
Mr Orcel, who was grilled by the commission alongside chief risk officer Philip Lofts and global head of compliance Andrew Williams on the practice of Libor-rigging at the bank, maintained the scandal stemmed from a small subset of traders, and top management was unaware.
"I believe a limited number of people are responsible for what happened at UBS," he said.
"People were appalled, upset and angry that their reputation was dragged down by the actions of others."
The trio of top executives said the 18 sackings were of traders found guilty of "reprehensible behaviour" who were still employees of the bank when the scandal broke, but did not put a figure at how many of the 40 culpable staff identified by the FSA remained at the bank.
However Mr Orcel contended the bank's reaction to the scandal had been thorough, saying: "We believe all the people that were involved in Libor and were still at UBS have been appropriately reprimanded, dismissed or penalised. I am absolutely determined and convinced the whole organisation is behind me and we will root it out."
Mr Lofts added the bank is considering buying "more sophisticated surveillance technology" to monitor staff, in addition to efforts to impress ethical standards more strongly on employees.
At times contrite, Mr Orcel, commonly branded as a "deal junkie" for his role in many of Europe's biggest banking deals during his 20-year tenure at Bank of America Merrill Lynch, admitted "we all got too arrogant that things were correct the way they were", saying the industry "needed to change."
Banking commission members voiced scepticism senior management was oblivious to the practice, a claim described as "baffling" by Lord Nigel Lawson.
Mr Williams admitted management had been "ineffective", blaming the complexity of UBS - which underwent a decade of rapid expansion before deciding announcing a major restructure this year - for blinding senior figures to Libor-rigging activities.
UBS has been mired in controversy in recent months after facing a bill three times that of Barclays for its involvement in Libor-rigging, including the FSA's largest every fine of £160m.
Weeks earlier, former UBS trader Kweku Adoboli was jailed for seven years after being found guilty of the biggest fraud in British history, in actions that lost the bank £1.4bn.
Libor is a benchmark interest rate used in transactions worth $500 trillion (£310 trillion) globally. One UBS manager in October 2008 admitted a single basis point move in Libor – or 0.01pc – would be worth $4m to the bank.
UBS began manipulating Libor in early 2005 – with traders making false submissions to the organisations that compiled banks’ offers to set the daily rate.
By 2007, though, UBS’s rigging was industrial in scale – with “illicit fees” paid to brokers that ran into hundreds of thousands of pounds and deals struck with rivals so that everyone would have the chance to cash in. The scale of the abuse was on a radically different level from that at Barclays, which is why UBS’s £940m fine was more than three times bigger.
Mr Tyrie said at the time of UBS's fine that Libor rigging was "the clearest illustration yet that a great deal more needs to be done to restore standards in banking".
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The last seven, crisis-ridden, years would already have completely finished off a lesser man. The poor chap must be exhausted.It is perhaps still too early to be passing judgments on his reign, but on one level it certainly doesn’t seem so bad, given the challenges faced. Bernanke has arguably done better than central bankers in Europe, Britain and Japan in terms of his crisis response. US GDP is back above pre-crisis levels, unlike the UK, and is continuing to grow at a reasonable, if quite modest, rate.Having avoided the fiscal cliff, Congress still has to confront the separate debt ceiling. This will involve the same sort of “end of days” media frenzy we saw around the cliff, but ultimately a deal will be done and the US economic juggernaut will move on.The negative impact on confidence of these stand-offs seems to be much exaggerated. In fact, the US economy continued to create jobs at quite a pace right through the supposed uncertainty of the fiscal cliff negotiations.How much of this is down to the genius of “helicopter Ben” is, of course, another matter. One quite powerful contributor to recent growth has been the “fracking” gas revolution, which is delivering cheap energy worth perhaps as much as 1pc of GDP a year to the US economy. There’s no objective way of measuring the extent to which aggressive money printing by the Fed has contributed to the US turnaround.Whatever the truth, one thing is for sure. It is really quite hard to justify further rounds of money printing given the evident recovery that is now taking place. Even so, Mr Bernanke has indicated he’ll keep the printing presses at full throttle at least until unemployment sinks below 6.5pc. This is a mistake, with some possibly quite malign unintended consequences for both the US and world economies.Like others, I was a strong supporter of the initial burst of “quantitative easing”, both in the US and the UK, when it seemed a very necessary tool for combating the collapse in the financial system and the accompanying, violent, contraction in credit.And by targeting the “toxic” loans of failing banks for asset purchases, the Fed seems to have practised a rather more effective form of it than we saw in either Britain or Europe. As Bluford Putnam, chief economist of CME Group, has argued in a paper for the Review of Financial Economics, buying up these assets has helped the US banking system rebuild capital and liquidity much more rapidly than has occurred in either the UK or Europe, enabling a return to balance sheet growth.In Britain, by contrast, QE has almost exclusively targeted government debt, which has been very helpful to the Government in helping to fund a still burgeoning fiscal deficit at very low interest rates — and in keeping the bankers in bonuses — but has failed to restore health to the banking system and seems increasingly ineffective in stimulating demand in the real economy. We’ll reserve judgment on “funding for lending”.Meanwhile, the European Central Bank largely spurned asset purchases altogether and instead focused on long-term liquidity facilities. Solvency issues in the European banking system have therefore remained substantially unaddressed, preventing meaningful economic recovery.Even so, the injection of central bank liquidity seems to have done a relatively good job in preventing catastrophe. Yet whether QE can continue to be justified after the financial system has been stabilised is much more questionable. The trouble is that today the purpose of QE is no longer really that of depressing interest rates or preventing a collapse in the money supply, but that of attempting to support aggregate demand.Growing concern over mountainous public debt has left governments increasingly reliant on the supposed miracle remedies of monetary policy to restore economic growth. Monetary policy has become the only game in town, so much so here in Britain that the Government has elevated faith in the easy money policies of the Bank of England to cult-like status. Britain has blazed the trail, the Prime Minister once boasted, as “fiscal conservatives but monetary activists”. Regrettably, and perhaps predictably, the cult of QE has failed to deliver the goods.Of course, it is possible that things might have been even worse without it, but the longer it goes on, the less likely this seems, and meanwhile some quite counterproductive long-term consequences are starting to emerge.Some of the wider adverse consequences of QE have been brilliantly elucidated in a paper for the Dallas Federal Reserve by William White, former economic adviser at the Bank for International Settlements. Since Mr White was one of the few monetary gurus to have accurately highlighted the dangers of the credit bubble when it was still possible to do something about it, his analysis deserves some attention. His main conclusion is that there are limits to what central banks can do, and that monetary stimulus has essentially already hit the buffers. The consequences of persisting are therefore quite likely to be negative from here on in.These negatives include misallocation of capital likely to prove quite harmful to growth in the long run. For instance, easy money encourages banks to keep existing debtors afloat even though they might be insolvent, thus denying credit to new businesses and younger households. This “evergreening” of long standing debtors creates an army of weak, zombie-like customers.What’s more, QE results in some very undesirable distributional effects. Those able to afford it are charged higher interest rates than otherwise, while debtors are constantly favoured over creditors. The previously profligate are rewarded, and the thrifty are punished, creating moral hazard on a grand scale. Easy money in response to a crisis can also generate serial bubbles, with each action setting the stage for a later crisis.But perhaps worst of all, it encourages governments to do nothing. One possible defence of QE is that it at least buys time for governments to engage in debt reduction and structural reform to redress imbalances and increase potential growth.Unfortunately, this time is not being well used. To the contrary, QE has become an excuse for doing nothing and carrying on as before in the Micawber-like hope that something will turn up. By allowing governments to borrow more cheaply, it also positively encourages irresponsible spending. Oh, what a tangled web we weave…
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