A major Wall Street bank has released a piece of research which [inter alia] warns that the advent of a Corbyn-led Labour government in the UK would potentially have a more calamitous impact on London share prices that would 'Hard Brexit'. The markets have balanced out the 'risk' arising to future profits from firms if the government totally cocks-up the Brexit negotiations with the actual fall in the pound among world currencies and the day-to-day performance of the listed companies. The level of the stock market index would fall in the event of failure; but the possibility is factored in to buyers' calculations. On the other hand, the imponderable impact on the market of Corbyn actually becoming prime minister is inestimable. How far he would cling to his lifelong Marxist dogma [and how far his party would follow him there] cannot be predicated on any known basis of probability. Thus, the bank argues, there might be no 'floor' below which British stock prices would fall. Consequently, the Wall Street Crash of 1929 might be replicated, or even exceeded, once panic sets in among dealers who have no precedent for such a change in government to be assessed against.
The very worst case is a catastrophic Brexit followed by a collapse of the present government and the anointing of Mr Corbyn to preside over the chaos, while John McDonnell would try to enact some of his socialist plans. This is no longer an impossibility, with Dr Fox, Mr Davis and Boris Johnson working so hard to achieve the disaster that they cannot understand.
Meanwhile, the vicious charade of bitcoin continues. The 'price' of this nonentity is continuing to rise, giving strength to some of the unknown number of hundreds of other cryptocurrencies that are now on offer. An ever-wider range of investors, fearful of the very high level to which the world's leading stock indeces have climbed, have 'diversified' some of their holdings into these fanciful 'assets'. Some expect that [whatever they may say now] the central banks might have to buy cryptocurrencies to prop up the market: as they have propped up derivatives and other bets that existed before the crash in 2008. If the central banks do shore up the whole rotten fantasy, the real-world economy will be hammered even harder than it has been since 2008.
The prospect for Britain, host to the London market, is especially hazardous. Warren Buffer called derivatives 'weapons of mass destruction' but they have have been protected and the market in them has continued to grow. The traders in, and owners of, those assets remain complacent: that is what gives confidence to the cryptocurrency speculators. Real people have good cause to be worried; and Corbyn's communist-inspired views give no reassurance at all.
Showing posts with label Central Banks. Show all posts
Showing posts with label Central Banks. Show all posts
Tuesday, 28 November 2017
Tuesday, 10 July 2012
Concern at the IMF: About What?
The Managing Director of the IMF has expressed concern about the probability that their forecasts for economic growth throughout the world must be downgraded. Her foreboding is justified by the regular downward revision of estimates for growth that are being published in various countries, especially in the light of the ongoing crisis in the eurozone and its potential negative impact on its trading partners in other parts of the world. In the face of such a negative mood among Economists, politicians, journalists, bankers and some business managers it is unsurprising that there is a growing feeling of unease among the general public.
During the so-called credit crunch of 2007-8 many governments tried to secure the future of banks in their territories by guaranteeing the deposits that people and businesses had placed in those banks. When banks could not meet depositors' demands for cash from their own resources the government supplied the money. Governments that had control of their own currencies, such as the US dollar and the British pound, could authorise their central banks to create 'new' money and make it available to the banks: some went further and actually create the money with which to buy control of threatened banks. In the USA this process was extended to the one insurance company, AIG, that had ruined itself by creating contracts by which it guaranteed to fund banks in certain circumstances which had been thought highly improbable until they happened to several big banks all at once.
In countries that did not have control of their money supply, notably those in the eurozone, the means available to governments to stabilise the economic situation were seriously constrained. For seven years before the credit crunch occurred the member countries of the eurozone issued bonds and bills [certificates of government debt] denominated in euros; and bonds that had been issued before the creation of the euro had become redeemable in euros. Those governments could not follow the lead of the Americans and the British in creating the money that they had to pay out to buy the bonds that fell due to be cashed: they had to borrow the necessary euros from the European Central Bank or the International Monetary Fund, or tap new funds created by other eurozone governments. In considering any of those options a government was faced with strict conditions attaching to any loan, that usually included the imposition of restrictive economic policies. At an early stage in the banking crisis the Irish government decided to guarantee all banks' obligations, raised a large loan and imposed dramatically restrictive conditions on the economy. Southern European members of the eurozone faced up to the crisis more slowly and then took the very different stance of demanding bail-out loans and prevaricated about imposing the conditions that they had accepted, threatening the northern eurozone countries with progressive economic collapse and political chaos. The northern eurozone countries regard this as simple cheating and are resisting any further concessions to the south unless they are accompanied by enforceable sanctions. Meanwhile the population of the whole Union is getting used to commentators covering the arguments about the possible withdrawal of some countries from the euro or the collapse of the entire venture. The fact that the eurozone is not coterminous with the European Union is widely understood: the Union could survive either the defection of some members or the total collapse of the single currency.
The possibility of chaos in much of the EU - the world's largest economic bloc - is the cause of worry throughout the world economy. The shabby history of the Union - the political fudges, the pervasive unaccountability of the Brussels bureaucracy and the notorious 'democratic deficit' by which the eurorats have evaded public concerns in aggregating power in their own hands - has created the circumstances in which there is little mass empathy with any proposal to give more power to the Union. Spaniards and Italians would like the Union to be able to grab Germany's wealth and hand it to them in return for promises to which nobody gives the slightest credibility: Germany would never assent to such a scheme. The extension of another loan to Spain, agreed overnight, is an allocation of the existing funds which the Finns and the Dutch and the Slovaks and the Germans have already written off. This time round the northern eurozone members seem to be so little concerned about this further handout that they have agreed to give the Spanish government longer to impose austerity.
And so the sorry saga drags on. Greece will leave the euro. With that example in their sights it is just possible that the Spanish, the Portuguese and the Italians will accept enough 'discipline' to keep the euro staggering along for a year or two. There is no hope of Europe leading the world economy to a new era of prosperity; and not much sign of the emergent economies or the US providing a 'motor' to drag the global economy into an era of growth. New thinking is needed, urgently.
During the so-called credit crunch of 2007-8 many governments tried to secure the future of banks in their territories by guaranteeing the deposits that people and businesses had placed in those banks. When banks could not meet depositors' demands for cash from their own resources the government supplied the money. Governments that had control of their own currencies, such as the US dollar and the British pound, could authorise their central banks to create 'new' money and make it available to the banks: some went further and actually create the money with which to buy control of threatened banks. In the USA this process was extended to the one insurance company, AIG, that had ruined itself by creating contracts by which it guaranteed to fund banks in certain circumstances which had been thought highly improbable until they happened to several big banks all at once.
In countries that did not have control of their money supply, notably those in the eurozone, the means available to governments to stabilise the economic situation were seriously constrained. For seven years before the credit crunch occurred the member countries of the eurozone issued bonds and bills [certificates of government debt] denominated in euros; and bonds that had been issued before the creation of the euro had become redeemable in euros. Those governments could not follow the lead of the Americans and the British in creating the money that they had to pay out to buy the bonds that fell due to be cashed: they had to borrow the necessary euros from the European Central Bank or the International Monetary Fund, or tap new funds created by other eurozone governments. In considering any of those options a government was faced with strict conditions attaching to any loan, that usually included the imposition of restrictive economic policies. At an early stage in the banking crisis the Irish government decided to guarantee all banks' obligations, raised a large loan and imposed dramatically restrictive conditions on the economy. Southern European members of the eurozone faced up to the crisis more slowly and then took the very different stance of demanding bail-out loans and prevaricated about imposing the conditions that they had accepted, threatening the northern eurozone countries with progressive economic collapse and political chaos. The northern eurozone countries regard this as simple cheating and are resisting any further concessions to the south unless they are accompanied by enforceable sanctions. Meanwhile the population of the whole Union is getting used to commentators covering the arguments about the possible withdrawal of some countries from the euro or the collapse of the entire venture. The fact that the eurozone is not coterminous with the European Union is widely understood: the Union could survive either the defection of some members or the total collapse of the single currency.
The possibility of chaos in much of the EU - the world's largest economic bloc - is the cause of worry throughout the world economy. The shabby history of the Union - the political fudges, the pervasive unaccountability of the Brussels bureaucracy and the notorious 'democratic deficit' by which the eurorats have evaded public concerns in aggregating power in their own hands - has created the circumstances in which there is little mass empathy with any proposal to give more power to the Union. Spaniards and Italians would like the Union to be able to grab Germany's wealth and hand it to them in return for promises to which nobody gives the slightest credibility: Germany would never assent to such a scheme. The extension of another loan to Spain, agreed overnight, is an allocation of the existing funds which the Finns and the Dutch and the Slovaks and the Germans have already written off. This time round the northern eurozone members seem to be so little concerned about this further handout that they have agreed to give the Spanish government longer to impose austerity.
And so the sorry saga drags on. Greece will leave the euro. With that example in their sights it is just possible that the Spanish, the Portuguese and the Italians will accept enough 'discipline' to keep the euro staggering along for a year or two. There is no hope of Europe leading the world economy to a new era of prosperity; and not much sign of the emergent economies or the US providing a 'motor' to drag the global economy into an era of growth. New thinking is needed, urgently.
Thursday, 1 December 2011
Central Banks to the Rescue: Again!
In a significant concerted move a consortium of central banks [the currency-issuing banks of major countries] have jointly offered funds to the International Monetary Fund [IMF] which it will lend to central banks that decide they need it to lend to banks within their jurisdiction. This seems arcane to ordinary people who are only conscious that the purchasing power of their wages and/or benefits is going down while credit is getting harder to get and more expensive.Having urged people to borrow on their credit cards and in enlarged mortgages over many years of apparent prosperity, the banks are now notably unaccommodating to families and to small businesses. So if the banks are 'helping' people less, how can it be that they need to borrow more? And why should their central banks - which habitually lend to banks in their countries - want to borrow money from the IMF? If most of the major central banks have money to lend to the IMF, why are they not just lending it to banks in their own territory?
The US Federal Reserve [supported by other central banks] will indirectly give limited but significant support to the euro. International banks have begun to show their lack of confidence in the durability of the euro by selling bonds denominated in euros and buying US dollars and assets denominated in dollars. Despite the deficit on US finances, the size and strength of the US economy can still be trusted; while nobody can say how great would be the chaos that would follow if the euro collapsed. What would French government bonds be worth, in yen or pounds sterling, after a collapse of the euro? Anybody's guess is as good as anybody else's; but most commentators would reckon that French bonds would be worth more than Greek bonds, when most euro-denominated bonds were catastrophically devalued. German bonds might increase in value after a euro collapse; but the whole scenario is beyond anyone's capability accurately to forecast. So governments and central banks have adopted the view that everything must be done to prevent it happening. This is understood to mean that the European Central Bank must have enough dollars to be able to buy enough bonds to keep the market going. If the dollars are made available by the IMF, there will be strings attached: IMF loans are always conditional on the assisted country [or economic union] maintaining agreed economic policies. So the European Central Bank will be required to enforce discipline on member states' governments, or refuse to buy bonds that they have issued and let them be bankrupted. This suits the Germans very well, and worries the French who do not want the European project to be fractured by some of the reckless Club Med states dropping out of the eurozone [and maybe out of the EU as well].
So the new funding via the IMF is another step in the pathetic saga of governments and central banks making up new policy and risking inflationary pressure on the whole economy in order to 'calm the markets'. This determination to propitiate the financial trading corporations - generically known as 'banks' - shows that the governments are still scared by bankers' behaviour.
Yet the banks are created under the company law of individual countries, and are granted licenses to trade in other countries under each nation's laws. Their units of account are currencies issued by the central banks of sovereign states. Sovereign states can give instructions to central banks and central banks could enforce much greater discipline on banks than they have done in the past couple of decades: if that control was applied, and looked like failing, new rules could be imposed by governments. There is a fear that some countries would adopt new rules and others would not [or would apply them in a non-standard way], to their short-term advantage and to the disadvantage of other countries' economists. So there is to be a new round of buying the banks' quiescence while the political negotiations about the future management of the eurozone drag on. The stock markets globally rose on the news: and a superficial, brittle sort of 'confidence' returned; notwithstanding the increased risk of worldwide inflation.
The Chinese central bank took separate synergistic action to increase lending to the faltering manufacturing and property sectors. So the real confidence that has very slightly been increased by the central banks' actions on November 30, 2011 is that the political masters of all the major economies are capable of working together. There is no indication that the beggar-your-neighbour policies that intensified the global depression in the early nineteen thirties will be allowed to emerge. There is a good chance that governments will eventually become scared enough to act on Franklin D Roosevelt's most famous dictum, that "the only thing to fear is fear itself": it is especially true of the fear of bankers, but it seems that things will have to get much worse before the politicians grasp the nettle.
The US Federal Reserve [supported by other central banks] will indirectly give limited but significant support to the euro. International banks have begun to show their lack of confidence in the durability of the euro by selling bonds denominated in euros and buying US dollars and assets denominated in dollars. Despite the deficit on US finances, the size and strength of the US economy can still be trusted; while nobody can say how great would be the chaos that would follow if the euro collapsed. What would French government bonds be worth, in yen or pounds sterling, after a collapse of the euro? Anybody's guess is as good as anybody else's; but most commentators would reckon that French bonds would be worth more than Greek bonds, when most euro-denominated bonds were catastrophically devalued. German bonds might increase in value after a euro collapse; but the whole scenario is beyond anyone's capability accurately to forecast. So governments and central banks have adopted the view that everything must be done to prevent it happening. This is understood to mean that the European Central Bank must have enough dollars to be able to buy enough bonds to keep the market going. If the dollars are made available by the IMF, there will be strings attached: IMF loans are always conditional on the assisted country [or economic union] maintaining agreed economic policies. So the European Central Bank will be required to enforce discipline on member states' governments, or refuse to buy bonds that they have issued and let them be bankrupted. This suits the Germans very well, and worries the French who do not want the European project to be fractured by some of the reckless Club Med states dropping out of the eurozone [and maybe out of the EU as well].
So the new funding via the IMF is another step in the pathetic saga of governments and central banks making up new policy and risking inflationary pressure on the whole economy in order to 'calm the markets'. This determination to propitiate the financial trading corporations - generically known as 'banks' - shows that the governments are still scared by bankers' behaviour.
Yet the banks are created under the company law of individual countries, and are granted licenses to trade in other countries under each nation's laws. Their units of account are currencies issued by the central banks of sovereign states. Sovereign states can give instructions to central banks and central banks could enforce much greater discipline on banks than they have done in the past couple of decades: if that control was applied, and looked like failing, new rules could be imposed by governments. There is a fear that some countries would adopt new rules and others would not [or would apply them in a non-standard way], to their short-term advantage and to the disadvantage of other countries' economists. So there is to be a new round of buying the banks' quiescence while the political negotiations about the future management of the eurozone drag on. The stock markets globally rose on the news: and a superficial, brittle sort of 'confidence' returned; notwithstanding the increased risk of worldwide inflation.
The Chinese central bank took separate synergistic action to increase lending to the faltering manufacturing and property sectors. So the real confidence that has very slightly been increased by the central banks' actions on November 30, 2011 is that the political masters of all the major economies are capable of working together. There is no indication that the beggar-your-neighbour policies that intensified the global depression in the early nineteen thirties will be allowed to emerge. There is a good chance that governments will eventually become scared enough to act on Franklin D Roosevelt's most famous dictum, that "the only thing to fear is fear itself": it is especially true of the fear of bankers, but it seems that things will have to get much worse before the politicians grasp the nettle.
Sunday, 23 October 2011
Governments in Terror of the Markets
The media are at one with European Finance Ministers in asserting that 'the markets' threaten mayhem in the world economy unless the eurozone solves the 'Greek crisis' expeditiously. The deadline for a solution that was to be agreed between the German and French governments has slipped from Saturday to Wednesday, raising the sense of urgency.
In the mean time another 800million Euros have been given to the Greek government to meet immediate obligations [largely owing to west European banks and investing institutions], and a further eight billion have been earmarked for the Greek bailout subject to evidence that the blatantly unco-operative Greek population are actually enforcing the necessary austerity and tax-paying measures that are minimally necessary to meet the government's assurances to their partners in the Eurozone. There is no credible evidence that Greece can go far enough to appear plausibly to bring living standards within the earnings of the economy, year on year. If the Greek state and the Greek banks stop paying interest on their debts, and declare themselves unable to pay in full where debts have to be repaid, then it is asserted that 'the markets' will create problems for the banks that are not being paid what they were owed by the Greeks.
Banks in almost every trading country have lent money to Greeks to fund businesses and to grant mortgages to households. If they are not being repaid in full, holes will appear in the balance sheets of those lenders. It is taken for granted that 'the markets' will instantly start selling shares of those threatened banks, and withdrawing deposits that were placed with them, as soon as there is clear evidence of an impending Greek default. The argument goes that there will then be a risk of a 'run' on the threatened banks: and conventional wisdom has it that the governments of the banks' home countries will have to take whatever measures are necessary to reassure investors and depositors in the banks that their money is safe. President Sarkozi wants to be able to draw on Germany's assets to give French banks the assurance of unconditional support: and within the eurozone what is available to one country must be available to all. So Germany came once more under pressure to lead the bail-out of anybody else: otherwise it is asserted that 'the markets' will force a domino-effect collapse of one eurozone economy after another.
It would be much easier - and cheaper - to allow Greece to default on its debts and then to ensure the security of the other Eurozone countries: and that will probably be how the whole issue is ultimately resolved, however much bravado is displayed in the mean time about levying the rest of the zone to continue to prop up Greek corruption and indulgence.
In the received wisdom 'the markets' will require a convincing resolution of the eurozone crisis to be concluded, at the latest by the closure of the forthcoming G20 Meeting, if it cannot be sealed-off by the European leaders on Wednesday. And what can the markets do if they do not consider the solution to be workable or sufficient? On investigation, it immediately becomes apparent that the markets as such never 'do' anything. Actions taken by participants in markets can be supportive or disruptive of government and of EU policies: but it is equally apparent that the full-time market players are ultimately and abjectly dependant on governments. No significant bank or investment house in Europe or the United States of America would be in existence now if they had not been supported by their government and Central Bank in 2008-9. How then could the same firms undermine governments and Central Banks in 2011-12? The conventional responding assumption is that the banks would demand repayment of advances that they had made to banks in the supposedly at-risk countries - Portugal, Spain and Italy are the favoured candidates for this role - and they would sell government bonds from the most-threatened country at ever-declining prices; while they would refuse to buy any new issues of bonds by those governments].
Governments need not roll over in shock at such actions by financial institutions. Governments [or Central Banks acting on their behalf] can freeze or 'demonetise' the cash that institutions get by selling 'distressed' government bonds of named states, and the money they collect from recalling deposits made in their banks, so they cannot make any use of the funds, which would remain inaccessible until governments release them in stabilised circumstances. Governments can react to the threat of sovereign credit being downgraded by the rating agencies by banning any publication of ratings in any context within their territories. They can suspend banks' licences if their actions threaten to be disruptive of state policy. Governments have a massive range of powers - some of them not yet imagined - which they can use to cajole and if necessary compel institutions to conform with urgently-necessary policy requirements. Econmists will screech that such policies would undermine 'the market': so what value do Economists bring to the debate? They have not helped hitherto.
Governments should ignore threats from market operatives, or market forecasters, or market trends, or market analysts. The government can always freeze transactions across a market or in any part of it; or they can freeze any cache of cash or credit within the system. Markets and their participants are the government's creatures. They just need the guts to act decisively. Of course there will be an aftermath: but that is in the future and sufficient unto the time is the evil thereof.
In the mean time another 800million Euros have been given to the Greek government to meet immediate obligations [largely owing to west European banks and investing institutions], and a further eight billion have been earmarked for the Greek bailout subject to evidence that the blatantly unco-operative Greek population are actually enforcing the necessary austerity and tax-paying measures that are minimally necessary to meet the government's assurances to their partners in the Eurozone. There is no credible evidence that Greece can go far enough to appear plausibly to bring living standards within the earnings of the economy, year on year. If the Greek state and the Greek banks stop paying interest on their debts, and declare themselves unable to pay in full where debts have to be repaid, then it is asserted that 'the markets' will create problems for the banks that are not being paid what they were owed by the Greeks.
Banks in almost every trading country have lent money to Greeks to fund businesses and to grant mortgages to households. If they are not being repaid in full, holes will appear in the balance sheets of those lenders. It is taken for granted that 'the markets' will instantly start selling shares of those threatened banks, and withdrawing deposits that were placed with them, as soon as there is clear evidence of an impending Greek default. The argument goes that there will then be a risk of a 'run' on the threatened banks: and conventional wisdom has it that the governments of the banks' home countries will have to take whatever measures are necessary to reassure investors and depositors in the banks that their money is safe. President Sarkozi wants to be able to draw on Germany's assets to give French banks the assurance of unconditional support: and within the eurozone what is available to one country must be available to all. So Germany came once more under pressure to lead the bail-out of anybody else: otherwise it is asserted that 'the markets' will force a domino-effect collapse of one eurozone economy after another.
It would be much easier - and cheaper - to allow Greece to default on its debts and then to ensure the security of the other Eurozone countries: and that will probably be how the whole issue is ultimately resolved, however much bravado is displayed in the mean time about levying the rest of the zone to continue to prop up Greek corruption and indulgence.
In the received wisdom 'the markets' will require a convincing resolution of the eurozone crisis to be concluded, at the latest by the closure of the forthcoming G20 Meeting, if it cannot be sealed-off by the European leaders on Wednesday. And what can the markets do if they do not consider the solution to be workable or sufficient? On investigation, it immediately becomes apparent that the markets as such never 'do' anything. Actions taken by participants in markets can be supportive or disruptive of government and of EU policies: but it is equally apparent that the full-time market players are ultimately and abjectly dependant on governments. No significant bank or investment house in Europe or the United States of America would be in existence now if they had not been supported by their government and Central Bank in 2008-9. How then could the same firms undermine governments and Central Banks in 2011-12? The conventional responding assumption is that the banks would demand repayment of advances that they had made to banks in the supposedly at-risk countries - Portugal, Spain and Italy are the favoured candidates for this role - and they would sell government bonds from the most-threatened country at ever-declining prices; while they would refuse to buy any new issues of bonds by those governments].
Governments need not roll over in shock at such actions by financial institutions. Governments [or Central Banks acting on their behalf] can freeze or 'demonetise' the cash that institutions get by selling 'distressed' government bonds of named states, and the money they collect from recalling deposits made in their banks, so they cannot make any use of the funds, which would remain inaccessible until governments release them in stabilised circumstances. Governments can react to the threat of sovereign credit being downgraded by the rating agencies by banning any publication of ratings in any context within their territories. They can suspend banks' licences if their actions threaten to be disruptive of state policy. Governments have a massive range of powers - some of them not yet imagined - which they can use to cajole and if necessary compel institutions to conform with urgently-necessary policy requirements. Econmists will screech that such policies would undermine 'the market': so what value do Economists bring to the debate? They have not helped hitherto.
Governments should ignore threats from market operatives, or market forecasters, or market trends, or market analysts. The government can always freeze transactions across a market or in any part of it; or they can freeze any cache of cash or credit within the system. Markets and their participants are the government's creatures. They just need the guts to act decisively. Of course there will be an aftermath: but that is in the future and sufficient unto the time is the evil thereof.
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