Originally appeared at the Fung Global Institute By Liu Mingkang When the U.S. investment bank Lehman Brothers collapsed five years ago, emerging-market economies did not hold many of the toxic financial assets – mainly American subprime mortgages – that fueled the subsequent global financial crisis. But they were deeply affected by the drop in world trade, which recorded a peak-to-trough decline of at least 15 per cent, with trade finance also contracting sharply, owing to a shortage of dollar liquidity. Have policymakers responded appropriately since then? Soon after the crisis erupted, the G-20 countries embraced massive stimulus packages, unconventional monetary policies in the advanced economies, and major institutional efforts, such as the Dodd-Frank financial-reform legislation in the United States and the Basel III initiative to strengthen banking standards. China’s RMB4 trillion stimulus package, unveiled in November 2008, restored confidence in global commodity markets. Led by strong Chinese growth, emerging markets stabilized. Since 2009, quantitative easing (QE) by the U.S. Federal Reserve has resulted in record-low interest rates around the world. But, while the resulting surge in capital flows to emerging markets stimulated economic growth, it also inflated asset bubbles. Now, with the Fed publicly considering an end to its massive, open-ended purchases of long-term securities and foreign capital fleeing home from emerging markets, many fear that Asia’s economies could come crashing down, as they did in the late 1990’s. Leverage in some emerging markets’ household and corporate sectors has reached record levels. China’s annual economic growth has slowed to around 7.5 per cent, while Indonesia and India – and, outside Asia, Brazil and South Africa – are experiencing sharp downward pressure on their exchange rates. Moreover, there has been no major reform of the global financial architecture. China’s renminbi is internationalizing, but its share of global payments remains relatively small, with the dollar retaining its role as the world’s main reserve currency. And, while regulatory reform is progressing, its effectiveness in addressing the weaknesses exposed by the global financial crisis will depend not only on the new rules that emerge, but also on the consistency and quality of their implementation. There has been commendable progress on the Basel III capital requirements for banks, with 25 of 27 Basel Committee members having issued final rules. Likewise, the impact of regulatory changes resulting from major legislation and policy directives in the United States, Europe, and the United Kingdom on banking, insurance, financial-transaction taxes, anti-money laundering, and cyber-space is likely to be substantial. Although rules on shadow banking have yet to be formulated, another problem exposed by the crisis has abated: America’s external deficit has shrunk to a much more manageable 2-3 per cent of GDP, accompanied by drops in the surpluses run by Japan and China. Global trade rebalancing has arrived. Still, fiscal conditions in the advanced economies remain unsustainable, with many OECD members’ debt levels hovering around 100 per cent of GDP. Japan, which has one of the world’s highest debt/GDP ratios, currently well over 200 per cent, is engaging in a risky experiment with further monetary stimulus to try to target 2 per cent annual inflation. In many advanced economies, both monetary and fiscal policies have reached the limits of their effectiveness. The key questions now are whether global economic growth is self-sustaining without QE, whether emerging markets’ output will continue to rise strongly, albeit at a slower pace, and whether current global financial-reform efforts will be sufficient to prevent another crisis in emerging markets. Given the high degree of trade and financial globalization that now characterizes the world economy, there is no doubt that the slowdown in the advanced economies, which account for two-thirds of global GDP, will undermine emerging-country growth. Indeed, the threat to withdraw QE is already having an enormous impact on emerging economies’ asset markets. As real interest rates and risk premia begin to rise, the level of global trade and investment will decline. In the coming years, emerging markets will most likely struggle with implementation of global financial regulatory standards, which apply mostly to more sophisticated financial markets. They will also confront a rapidly changing external environment and a growing need to manage capital flows more effectively, which will require much closer coordination between central banks and financial regulators. Indeed, perhaps the most important lesson learned in the aftermath of the collapse of Lehman Brothers is that we can no longer afford to examine problems in terms of individual institutions and from regulatory “silos.” The global economy’s high degree of interconnectivity, interdependence, and complex feedback mechanisms imply that one weak hub can bring down the entire system. In other words, the world needs a systemic approach to deal with systemic risks and system failures. Unfortunately, there may be little hope of strengthening global financial governance as long as implementation and enforcement of rules remain at the national level. Like other emerging markets, China is committed to financial stability and playing its role in reforming the global financial system. China was one of the first countries to sign up to the Basel III standards, and further renminbi internationalization will be implemented in a prudent and pragmatic manner. Domestic financial reforms will focus on strengthening policy coordination and moving toward market determined interest rates and exchange-rate flexibility. All of these steps will contribute to sustainable domestic growth and a more stable global financial system. Other major emerging economies’ policymakers would be wise to act with the same purpose in mind.
Fresh from Jan Hatzius' printing press: BOTTOM LINE: The FOMC unexpectedly decided not to taper the rate of its asset purchases at today's meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin. MAIN POINTS: 1. The FOMC unexpectedly decided to leave its monthly rate of asset purchases unchanged for both Treasuries ($45bn) and MBS ($40bn) at today's meeting. The statement noted that "the Committee decided to await more evidence that progress [on improvement in economic activity and labor market conditions] will be sustained before adjusting the pace of its purchases." However, the Committee signaled that reductions in asset purchases are likely in the near term, noting that "in judging when to moderate the pace of asset purchases, the Committee will at its coming meetings assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective." Previously, this language noted that the Committee was prepared to "increase or reduce the pace of asset purchases" and did not refer to "coming meetings." 2. The FOMC did not change its forward guidance on the federal funds rate, retaining the language that the Committee expects to keep rates on hold at least as long as unemployment remains above 6.5% and projected inflation one to two years ahead is not greater than 2.5%. 3. The characterization of economic activity in the statement was slightly more tepid than in the July statement. The statement noted that "some indicators of labor market conditions" have shown further improvement in recent months, slightly more cautious language than used in the last statement. In addition mortgage rates "have risen further," although the Committee retained the language that "the housing sector has been strengthening," despite more mixed recent housing data. The statement explicitly noted that "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market." 4. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered a touch to 7.2% in 2013Q4 and 6.6% in 2014Q4, while real GDP growth was lowered by 0.3pp to 2.15% at end-2013 and 0.25pp to 3.0% at end-2014. In 2016—included for the first time—participants expected 2.85% real GDP growth, 1.95% core inflation, and 5.65% unemployment, only 0.15pp above the longer-run unemployment rate, which was lowered to 5.5%. Projections for real GDP growth in the longer term edged down slightly to 2.35% from 2.4% previously. 5. Participants’ forecasts for the funds rate (the “dots”) remained at 0.13% (average excluding the four highest projections) at end-2013 and end-2014 and fell 15bp to 0.81% at end-2015. Participants expected the funds rate to rise to 1.81% by end-2016, well below participants’ 3.25-4.25% range for the longer-run rate.
Official watchdog says there has been a 50% rise in the use of force and restraint of prisoners at the Victorian prisonWormwood Scrubs, the west London prison, is on a "knife-edge", an official watchdog has warned, with an alarming 50% growth in the use of force or restraining measures to control prisoners in an increasingly violent, gang-dominated jail.An independent monitoring board says that staff at the prison, once condemned as a "penal dustbin" by its then governor, have never felt so fearful. The board says that force or restraint measures were used 406 times to control prisoners in the first half of this year in a jail that holds 1,279 inmates, more than 450 of them foreign nationals.The board reports that cuts in staff and low morale are affecting every aspect of life inside, with the absence of just one or two officers because of illness or holidays having a huge impact."Prisoners spend too long in their cells and their frustration regularly spills into aggressive behaviour," according to the board's annual report to the justice secretary, Chris Grayling. "This is before sweeping cuts by the justice secretary take effect in October, when the budget will be cut by a further 21% and 128 members of staff have to be laid off."The official watchdog says the governor and his staff have done their best in increasingly difficult circumstances, but their ability to deliver a safe and secure regime is being seriously compromised by staff who are stretched to breaking point and stringent financial restrictions.The board says its belief that the prison "is on a knife-edge" has been fuelled by experienced staff with more than 20 years' service telling it confidentially that this is the first time they have felt fearful for the safety of both prisoners and staff. They say that there is increasing gang activity on the wings, with many prisoners reluctant or too scared to complain about intimidation or co-operate with staff. While this gang culture has been kept under control, the impending staff cuts will make it more difficult. The monitoring board, which is made up of volunteer visitors, says staff shortages are getting in the way of attempts at rehabilitation. A state-of-the-art laundry, installed at considerable cost and intended to raise much needed funds for the prison, is unable to sign any outside commercial contracts because of uncertainty over the number of supervisory staff available. The kitchen has also become a serious health hazard, with mice nesting in equipment.The staff reductions at Wormwood Scrubs reflect a 20% cut in staff numbers across the prison service in England and Wales. Total numbers have fallen from 51,060 in March 2009 to 39,510 this year. A further round of staff reductions is due next month.Michael Spurr, of the National Offender Management Service, said the prison provided a safe and decent regime: "I am very conscious of the pressures staff face and we remain absolutely committed to tackling and reducing violence at Wormwood Scrubs and across the prison estate."Our more efficient national model for running safe and secure prisons is being introduced at Wormwood Scrubs next month. This will help maximise opportunities for rehabilitation, with more prisoners engaging in full-time work, while staff will be deployed efficiently so a positive regime is routinely and consistently delivered."Prisons and probationUK criminal justiceAlan Travis theguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
If there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings. And while the tide for the New Abnormal credit bubble has yet to expose its megalevered monoliths swimming fully naked, as for now corporations have opted for graduated semi-MBOs in the form of ever larger stock buybacks (although as rates rise this too day of reckoning is coming), the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away. From the WSJ: "Energy Future Holdings Corp. has begun sounding out banks for financing to help it operate during expected bankruptcy proceedings, which could come as soon as November for the Texas power producer." The losers (in addition to the thousands of company employees who were and are about to be laid off): all those who invested equity in hopes nat gas prices would rise, and even looser credit would mean a quick and profitable flip in the next 3-5 years, namely KKR, TPG, as well as Lehman (RIP), Citigroup, and Morgan Stanley. These banks were also instrumental in underwriting (and holding on to) the loans and bonds that would fund this monster deal, which ultimately led to unprecedented writedowns for all those involved. The irony: the same companies that provided the LBO financing, will also now serve as the source of the company's $2+ billion DIP loan, so all is well with the world. The Dallas-based company—formerly called TXU Corp. and once at the center of the largest-ever private-equity buyout—within the last week or so started discussions with Citigroup Inc., J.P. Morgan Chase & Co. and other banks in pursuit of more than $2 billion in so-called debtor-in-possession financing, said people close to the deliberations. The discussions are in early stages, and the size and the structure of the loan could change, these people said. Such loans give companies under bankruptcy protection additional money to fund operations and other obligations and are usually negotiated about four to six weeks before a Chapter 11 filing. The company, whose org chart was a 5 by 7 foot nightmare for many a analyst, will first see its TCEH subsidiary which sells power in the wholesale market file its $32 billion in debt first. As for Energy Future, which carries more than $40 billion in debt, the WSJ says it is "racing to negotiate a prepackaged bankruptcy plan with creditors at that subsidiary and another one in an effort to avoid a prolonged stay under Chapter 11 protection. If successful, the creditors would agree to a reorganization plan ahead of a bankruptcy filing, setting Energy Future up for a speedier trip through bankruptcy court. Without a prepackaged deal, the company would have to negotiate a restructuring plan after seeking bankruptcy protection, a process that could lengthen its stay in court." The successful resolution of a prepack depends on the various stakeholder entities, most of which will be equitized, ultimately agreeing on just where they see the industry, and the price of nat gas going. After all, it was the plunge in natural gas prices after the LBO to record lows that led to $18 billion in losses in the five years following the LBO, and coupled with unprecedented leverage, resulted in what now appears to be the inevitable largest bankruptcy filing since 1980. Luckily, the investing community has learned from its past mistakes and is no longer loading up quality companies with epic amounts of debt. Actually... ... Nevermind. But who cares: after all it is all other people's money.
Submitted by Simon Black of Sovereign Man blog, In mathematics, the term ‘linearity’ describes a relationship in which the rate of change for a variable is constant. If you’re driving from Paris to Frankfurt at 100 kilometers per hour, then this is a linear system– your rate of change (speed) is constant. Exponential growth, on the other hand, describes a relationship in which the rate of change for a variable is proportional to its current value. Think of a single bacterium that multiplies into two. Two become four. Four become eight. Eight become sixteen. Etc. The more bacteria, the faster the population grows. This is exponential. Many of the issues we face today are exponential problems masquerading as linear ones. And this is a huge distinction. Think about the debt. I was in Japan for the last several days, a country so deeply in debt that the government has to finance 46.3% of its annual budget with DEBT. Imagine, for example, that your total household budget is $100,000 annually. It would be as if you had a $54,000 salary, and had to borrow the rest on your credit cards. There’s a huge problem with this approach– the more debt you take on, the harder it becomes to pay back, and the more debt you’ll have to take on. It’s a vicious cycle. The Japanese government has to borrow money just to pay interest on the money they’ve already borrowed. Same in the US and most of Europe. This means that each year, they have to take on more and more debt just to pay for the debt they already have. Just like the erosion of civil liberties, the destruction of financial privacy, the growth in world population, the expansion of the money supply, and the demand/depletion of natural resources, debt is an exponential challenge. The danger with exponential problems is that they can really sneak up on you. Here’s an example– Let’s say you’re at a party in a small apartment that’s about 500 square feet in size. Then suddenly, at 11pm, a pipe bursts, starting a trickle into the living room. Aside from the petty annoyance, would you feel like you were in danger? Probably not. This is a linear problem– the rate at which the water is leaking is more or less constant, so the guests can keep partying through the night without worry. But let’s assume that it’s an exponential leak. At first, there’s just one drop of water. But each minute, the rate doubles. So by 11:01pm, there’s 2 drops. By 11:02, 4 drops. And so forth. By 11:27pm, there’s only six inches of standing water. Yet by 11:31pm, just four minutes later, the entire room is under nearly 8 feet of water. And the party’s over. For nearly half an hour, it all seemed safe and manageable. People had all the time in the world to leave, right up until the bitter end. 11:27, 11:28, 11:29. Then it all went from benign to deadly in a matter of minutes. (I highly recommend William Ophuls’ great book on this topic, Immoderate Greatness.) Politicians are telling us that the leak is linear. They’re giving people a false sense of security that everything is under control, and ridiculing those who express valid concerns for their safety. But the numbers do not lie. Debt grows exponentially. Tax revenue grows linearly. So the only question is– what time would you leave? Rational, thinking people ought to have a plan for leaving the room. This doesn’t necessarily mean ‘leaving the country’, but rather, having a plan to safeguard your family and everything you’ve worked to achieve. Or if you’re young, to safeguard your future before it’s robbed from you. In many cases this involves diversifying abroad. Moving some funds overseas. Moving some retirement savings overseas. Holding precious metals abroad. Having a second residency. Or even another citizenship. These are sensible, time-tested steps which ensure that no single government has total control over you and your assets. And it’s exactly the sort of detailed information we cover in every edition of Sovereign Man: Confidential, our premium intelligence service.
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter Japanese banks, which should know a thing or two about banking crises, have once again clawed their way to the top of the heap of overseas lenders. And with their knack for impeccable timing, they’ve once again become the largest force in emerging market economies – just as financial turmoil there is coming to a boil. The Bank of Japan, under the new religion of Abenomics, has embarked on a dizzying money-printing and bond buying program to devalue the yen (partially accomplished) and to get banks to sell their hoards of JGBs to the BOJ and then lend the proceeds to Japanese businesses so that they’d invest in productive assets so that the economy could start producing more and pick up momentum. However, with businesses in no mood to invest at home, there is little demand for loans in Japan. There is demand overseas, however. Japanese banks are falling all over each other to lend to these businesses, including Japanese companies that are offshoring production. Focal point: emerging markets, where cross-border lending in the first quarter reached its highest level on record, according to the Bank for International Settlements’ Quarterly Review, released on Sunday. Largest recipient countries: China, Brazil, and Russia. So Japanese banks had a 13% share of all cross-border loans in the first quarter, ahead of US banks with a 12% share, German banks (11%), British banks (10%), and French banks (10%). Yen lending jumped 4.3%, or $55 billion, for the January-March quarter, the first Abenomics quarter. Nearly half of the $114 billion booked for the entire 12-month period! The pace of overseas lending has turned outright frenetic. It shows up in a myriad ways. For example, an August survey by the state-owned Development Bank of Japan showed that Japanese companies were planning to boost their investments overseas by 26% this fiscal year. At the same time, overall cross-border lending by banks reporting to the BIS dropped during the first quarter. Dollar loans declined by $28 billion (-0.1%), euro loans by $145 billion (-1.4%), and sterling loans by $57 billion (-4.0%). In total, cross-border loans to advanced economies fell by $341 billion, or 1.5%. But the first quarter belonged to the halcyon days in the emerging markets, before the current turmoil tore up much of the rosy scenery. And banks in general stepped up their activities there, and total cross-border loans to these countries soared by $267 billion, or 8.4%. A tsunami of money (which is now receding). It’s not like Japanese banks haven’t been there before. During the bubble in the late 1980s, Japanese banks dethroned US banks as the number one overseas lender – including to the emerging markets. In 1989, their share of cross-border lending peaked at 39%. They had their reasons – including, as the BIS explains, a desire “to avoid regulatory restrictions at home.” But then came the inevitable banking crisis that turned these unconquerable powerhouses, for which no loan was too large and no asset too overpriced, into the infamous “zombie banks” of the 1990s. With a mountain of loans decomposing in their basements, they focused on survival and dealing with the onset of deregulation. Waves of consolidations followed that turned 20 big “city banks” into three megabanks – Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group – that are now, thank God, too big to fail. The BIS graph shows the implosion of their cross-border lending bubble by Japanese banks. It bottomed out in 2007, at the cusp of the financial crisis, at an 8% share. Then Japanese banks began once again to expand their overseas lending activities. Now they’re number one again, though at a much lower share. There is a darker side By the first quarter of 2013, cross-border loans by Japanese banks (by the three megabanks, that is) had increased to $4 trillion. But their cross-border funding amounted to only $2 trillion, mostly raised from non-banks, according to the BIS. The remaining $2 trillion were funded within Japan. Thus, Japanese banks were deploying overseas their huge deposit base that had been painstakingly squirreled away by Japanese savers to live off during their long retirement years. Investing these $2 trillion overseas over the years to fund corporate expansion projects, acquisitions, and other operations, such as offshoring production to emerging market economies or even the US, was a boon for the economies of those countries. But it didn’t help the Japanese economy. Not one bit. Though $2 trillion would have been a lot of money in Japan’s $4.6 trillion economy. Now, these Japanese megabanks have redoubled their efforts to lend overseas, funded by a new source, also at home. Upon urging from the Bank of Japan, as part of Abenomics, they are selling their vast holdings of JGBs to the Bank of Japan – $242 billion in the last quarter alone. And these funds too are largely flowing to destinations overseas. It has been good for these megabanks, the prime beneficiaries of Abenomics. Lending rebounded. They wrote up stock holdings and extracted fees from frenzied trading. Profits surged. But smaller banks stuck in the real economy of Japan are not so lucky [my take on their plight.... “We Don’t Feel Any Impact Of Abenomics Here”]. In the US, corporate revenues have been crummy all year, and earnings estimates for Q3 have come crashing down. A year ago, they were still expected to grow 15.9%, a sign of blind optimism. By now, that has plunged to 4.7%. During that time, the S&P 500 soared 16.8% and the NASDAQ 19.6%. The Fed’s greatest accomplishment. But there is a corollary. Read.... The Mother Of All Delusions: US Stocks Blind To Crashing Earnings Estimates (For Now)
From the NY Times: Push for Yellen To Lead at Fed Gathers Steam Janet L. Yellen told friends in recent weeks that she did not expect to be nominated as the next chairman of the Federal Reserve. Although she had been the Fed’s vice chairman since 2010 and would make history as the first woman to hold the job, President Obama’s aides made clear throughout the summer that he wanted Lawrence H. Summers, his former chief economic adviser. ... the president’s advisers insisted throughout the summer that Mr. Obama was not averse to Ms. Yellen but simply more comfortable with Mr. Summers, a former Treasury secretary to President Bill Clinton who was Mr. Obama’s chief White House economic adviser through the height of the financial crisis and recession in 2009 and 2010. ... I expect Yellen to be nominated for Fed Chair, probably next week. Tuesday: • 8:30 AM ET, the Consumer Price Index for August will be released. The consensus is for a 0.1% increase in CPI in August and for core CPI to increase 0.2%. • At 10:00 AM, The September NAHB homebuilder survey. The consensus is for a reading of 59, the same as in August. Any number above 50 indicates that more builders view sales conditions as good than poor.
South Court 12:31 P.M. EDT THE PRESIDENT: Good afternoon, everybody. Please have a seat. Before I begin, let me say a few words about the tragedy that's unfolding not far away from here at the Washington Navy Yard. That's part of why our event today was delayed. I’ve been briefed by my team on the situation. We still don’t know all the facts, but we do know that several people have been shot, and some have been killed. So we are confronting yet another mass shooting -- and today, it happened on a military installation in our nation’s capital. It’s a shooting that targeted our military and civilian personnel. These are men and women who were going to work, doing their job, protecting all of us. They’re patriots, and they know the dangers of serving abroad -- but today, they faced unimaginable violence that they wouldn't have expected here at home. So we offer our gratitude to the Navy and local law enforcement, federal authorities, and the doctors who’ve responded with skill and bravery. I’ve made it clear to my team that I want the investigation to be seamless, so that federal and local authorities are working together. And as this investigation moves forward, we will do everything in our power to make sure whoever carried out this cowardly act is held responsible. In the meantime, we send our thoughts and prayers to all at the Navy Yard who’ve been touched by this tragedy. We thank them for their service. We stand with the families of those who’ve been harmed. They’re going to need our love and support. And as we learn more about the courageous Americans who died today -- their lives, their families, their patriotism -- we will honor their service to the nation they helped to make great. And obviously, we're going to be investigating thoroughly what happened, as we do so many of these shootings, sadly, that have happened, and do everything that we can to try to prevent them. Now, in recent weeks, much of our attention has been focused on the events in Syria -- the horrible use of chemical weapons on innocent people, including children, the need for a firm response from the international community. And over the weekend, we took an important step in that direction towards moving Syria’s chemical weapons under international control so that they can be destroyed. And we're not there yet, but if properly implemented, this agreement could end the threat these weapons pose not only to the Syrian people but to the world. I want to be clear, though, that even as we’ve dealt with the situation in Syria, we’ve continued to focus on my number-one priority since the day I took office -- making sure we recover from the worst economic crisis of our lifetimes and rebuilding our economy so it works for everybody who is willing to work hard; so that everybody who is willing to take responsibility for their lives has a chance to get ahead. It was five years ago this week that the financial crisis rocked Wall Street and sent an economy already into recession into a tailspin. And it’s hard sometimes to remember everything that happened during those months, but in a matter of a frightening few days and weeks, some of the largest investment banks in the world failed; stock markets plunged; banks stopped lending to families and small businesses. Our auto industry -- the heartbeat of American manufacturing -- was flat-lining. By the time I took the oath of office, the economy was shrinking by an annual rate of more than 8 percent. Our businesses were shedding 800,000 jobs each month. It was a perfect storm that would rob millions of Americans of jobs and homes and savings that they had worked a lifetime to build. And it also laid bare the long erosion of a middle class that, for more than a decade, has had to work harder and harder just to keep up. In fact, most Americans who’ve known economic hardship these past several years, they don’t think about the collapse of Lehman Brothers when they think about the recession. Instead, they recall the day they got the gut punch of a pink slip. Or the day a bank took away their home. The day they got sick but didn’t have health insurance. Or the day they had to sit their daughter or son down and tell him or her that they couldn’t afford to send their child back to college the next semester. And so those are the stories that guided everything we've done. It’s what in those earliest days of the crisis caused us to act so quickly through the Recovery Act to arrest the downward spiral and put a floor under the fall. We put people to work repairing roads and bridges, to keep teachers in our classrooms, our first responders on the streets. We helped responsible homeowners modify their mortgages so that more of them could keep their homes. We helped jumpstart the flow of credit to help more small businesses keep their doors open. We saved the American auto industry. And as we worked to stabilize the economy and get it growing and creating jobs again, we also started pushing back against the trends that have been battering the middle class for decades. So we took on a broken health care system. We invested in new American technologies to end our addiction to foreign oil. We put in place tough new rules on big banks -- rules that we need to finalize before the end of the year, by the way, to make sure that the job is done -- and we put in new protections that cracked down on the worst practices of mortgage lenders and credit card companies. We also changed a tax code that was too skewed in favor of the wealthiest Americans. We locked in tax cuts for 98 percent of Americans. We asked those at the top to pay a little bit more. So if you add it all up, over the last three and a half years, our businesses have added 7.5 million new jobs. The unemployment rate has come down. Our housing market is healing. Our financial system is safer. We sell more goods made in America to the rest of the world than ever before. We generate more renewable energy than ever before. We produce more natural gas than anybody. Health care costs are growing at the slowest rate in 50 years -- and just two weeks from now, millions of Americans who’ve been locked out of buying health insurance just because they had a preexisting condition, just because they had been sick or they couldn't afford it, they're finally going to have a chance to buy quality, affordable health care on the private marketplace. And what all this means is we've cleared away the rubble from the financial crisis and we've begun to lay a new foundation for economic growth and prosperity. And in our personal lives, I think a lot of us understand that people have tightened their belts, shed debt, refocused on the things that really matter. All of this happened because ultimately of the resilience and the grit of the American people. And we should be proud of that. And on this five-year anniversary we should take note of how far we've come from where we were five years ago. But that's not the end of the story. As any middle-class family will tell you, or anybody who’s striving to get into the middle class, we are not yet where we need to be. And that’s what we’ve got to focus on -- all the remaining work that needs to be done to strengthen this economy. We need to grow faster. We need more good-paying jobs. We need more broad-based prosperity. We need more ladders of opportunity for people who are currently poor but want to get into the middle class. Because even though our businesses are creating new jobs and have broken record profits, the top 1 percent of Americans took home 20 percent of the nation’s income last year, while the average worker isn’t seeing a raise at all. In fact, that understates the problem. Most of the gains have gone to the top one-tenth of 1 percent. So, in many ways, the trends that have taken hold over the past few decades -- of a winner-take-all economy where a few do better and better and better while everybody else just treads water or loses ground -- those trends have been made worse by the recession. That’s what we should be focused on. That’s what I’m focused on. That’s what I know the Americans standing beside me as well as all of you out there are focused on. And as Congress begins another budget debate, that’s what Congress should be focused on. How do we grow the economy faster; how do we create better jobs; how do we increase wages and incomes; how do we increase opportunity for those who have been locked out of opportunity; how do we create better retirement security -- that’s what we should be focused on, because the stakes for our middle class and everybody who’s fighting to get into the middle class could not be higher. In today’s hypercompetitive world, we have to make the investments necessary to attract good jobs that pay good wages and offer high standards of living. And although ultimately our success will depend on all the innovation and hard work of our private sector, all that grit and resilience of the American people, government is going to have a critical role in making sure we have an education system that prepares our children and our workers for a global economy. The budget Congress passes will determine whether we can hire more workers to upgrade our transportation and communications networks, or fund the kinds of research and development that have always kept America on the cutting edge. So what happens here in Washington makes a difference. What happens up on Capitol Hill is going to help determine not only the pace of our growth, but also the quality of jobs, the quality of opportunity for this generation and future generations. The problem is at the moment, Republicans in Congress don’t seem to be focused on how to grow the economy and build the middle class. I say “at the moment” because I’m still hoping that a light bulb goes off here. (Laughter.) So far, their budget ideas revolve primarily around even deeper cuts to education, even deeper cuts that would gut America's scientific research and development, even deeper cuts to America’s infrastructure investment -- our roads, our bridges, our schools, our energy grid. These aren’t the policies that would grow the economy faster. They're not the policies that would help grow the middle class. In fact, they’d do the opposite. Up until now, Republicans have argued that these cuts are necessary in the name of fiscal responsibility. But our deficits are now falling at the fastest rate since the end of World War II. I want to repeat that. Our deficits are going down faster than any time since before I was born. (Applause.) By the end of this year, we will have cut our deficits by more than half since I took office. That doesn't mean that we don't still have some long-term fiscal challenges -- primarily because the population is getting older and they're using more health care services. And so we've still got some changes that we've got to make and there's not a government agency or program out there that still can't be streamlined, become more customer-friendly, more efficient. So I do believe we should cut out programs that we don’t need. We need to fix ones that aren't working the way they're supposed to or have outlived their initial mission. We've got to make government faster and more efficient. But that's not what is being proposed by the Republican budgets. Instead of making necessary changes with a scalpel, so far at least, Republicans have chosen to leave in place the so-called sequester cuts that have cost jobs, harmed growth, are hurting our military readiness. And top independent economists say this has been a big drag on our recovery this year. Our economy is not growing as fast as it should and we're not creating as many jobs as we should, because the sequester is in place. That's not my opinion. That's the opinion of independent economists. The sequester makes it harder to do what’s required to boost wages for American workers, because the economy is still slack. So if Republicans want the economy to grow faster, create more jobs faster, they should want to get rid of it. It’s irresponsible to keep it in place. And if Congress is serious about wanting to grow the economy faster and creating jobs faster, the first order of business must be to pass a sensible budget that replaces the sequester with a balanced plan that is both fiscally sound and funds the investments like education and basic research and infrastructure that we need to grow. This is not asking too much. Congress’s most fundamental job is passing a budget. And Congress needs to get it done without triggering another crisis, without shutting down our government, or worse -- threatening not to pay this country’s bills. After all the progress that we’ve made over these last four and a half years, the idea of reversing that progress because of an unwillingness to compromise or because of some ideological agenda is the height of irresponsibility. It’s not what the American people need right now. These folks standing behind me, these are people who are small business owners, people who almost lost their home, young people trying to get a college education, and all of them went through some real tough times during the recession. And in part because of the steps we took, and primarily because of their courage and determination and hard work, they’re in a better place now. But the last thing they’re looking for is for us to go back to the same kind of crisis situations that we’ve had in the past. And the single most important thing we can do to prevent that is for Congress to pass a budget, without drama, that puts us on a sound path for growth, jobs, better wages, better incomes. Now, look, it’s never been easy to get 535 people here in Washington to agree on anything. And budget battles and debates, those are as old as the Republic. It’s even harder when you have divided government. And right now you’ve got Republicans controlling the House of Representatives, Democrats controlling the Senate, Democrat in the White House. So this is always going to be tough. Having said that, I cannot remember a time when one faction of one party promises economic chaos if it can’t get 100 percent of what it wants. That’s never happened before. But that’s what’s happening right now. You have some Republicans in the House of Representatives who are promising to shut down the government at the end of this month if they can’t shut down the Affordable Care Act. And if that scheme doesn’t work, some have suggested they won’t pay the very bills that Congress has already run up, which would cause America to default on its debt for the first time in our history and would create massive economic turmoil. Interest rates on ordinary people would shoot up. Those kinds of actions are the kinds of actions that we don’t need. The last time the same crew threatened this course of action back in 2011 even the mere suggestion of default slowed our economic growth. Everybody here remembers that. It wasn’t that long ago. Now, keep in mind, initially, the whole argument was we’re going to do this because we want to reduce our debt. That doesn’t seem to be the focus now. Now the focus is on Obamacare. So let’s put this in perspective. The Affordable Care Act has been the law for three and a half years now. It passed both houses of Congress. The Supreme Court ruled it constitutional. It was an issue in last year’s election and the candidate who called for repeal lost. (Applause.) Republicans in the House have tried to repeal or sabotage it about 40 times. They’ve failed every time. Meanwhile, the law has already helped millions of Americans -- young people who were able to stay on their parents’ plan up until the age of 26; seniors who are getting additional discounts on their prescription drugs; ordinary families and small businesses that are getting rebates from insurance companies because now insurance companies have to actually spend money on people's care instead of on administrative costs and CEO bonuses. A lot of the horror stories that were predicted about how this was going to shoot rates way up and there were going to be death panels and all that stuff -- none of that stuff has happened. And in two weeks, the Affordable Care Act is going to help millions more people. And there's no serious evidence that the law -- which has helped to keep down the rise in health care costs to their lowest level in 50 years -- is holding back economic growth. So repealing the Affordable Care Act, making sure that 30 million people don’t get health insurance, and people with preexisting conditions continue to be locked out of the health insurance market -- that’s not an agenda for economic growth. You're not going to meet an economist who says that that’s the number-one priority in terms of boosting growth and jobs in this country -- at least not a serious economist. And I understand I will never convince some Republicans about the merits of Obamacare. I understand that. And I'm more than willing to work with them where they've got specific suggestions that they can show will make our health care system work better. Remember, initially this was like repeal-and-replace, and the replace thing has kind of gone off to the wayside. Now it's just repeal. But the larger point is, after all that we've been through these past five years, after all the work Americans like those standing behind me have done to come back from the depths of a crisis, are some of these folks really so beholden to one extreme wing of their party that they're willing to tank the entire economy just because they can't get their way on this issue? Are they really willing to hurt people just to score political points? I hope not. But in case there's any confusion, I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States. This country has worked too hard for too long to dig out of a crisis just to see their elected representatives here in Washington purposely cause another crisis. Let's stop the threats. Let's stop the political posturing. Let's keep our government open. Let's pay our bills on time. Let's pass a budget. Let's work together to do what the American people sent us here to do: create jobs, grow our economy, expand opportunity. That’s what we need to do. (Applause.) And as far as the budget goes, it's time for responsible Republicans who share these goals -- and there are a number of folks out there who I think are decent folks, I've got some disagreements with them on some issues, but I think genuinely want to see the economy grow and want what's best for the American people -- it's time for those Republicans to step up and they've got to decide what they want to prioritize. Originally, they said they wanted deficit reduction. As I said before, our deficits are falling fast. The only way to make further long-term progress on deficit reduction that doesn’t slow growth is with a balanced plan that includes closing tax loopholes that benefit corporations and the wealthiest Americans at the expense of the middle class. (Applause.) That’s the only way to do it. They said that they wanted entitlement reform -- but their leaders haven’t put forward serious ideas that wouldn’t devastate Medicare or Social Security. And I've put forward ideas for sensible reforms to Medicare and Social Security and haven’t gotten a lot of feedback yet. They said that they wanted tax reform. Remember? This was just a few months ago -- they said, well, this is going to be one of our top priorities, tax reform. Six weeks ago, I put forward a plan that serious people in both parties should be able to support -- a deal that lowers the corporate tax rate for businesses and manufacturers, simplifies it for small business owners, as long as we use some of the money that we save to invest in the infrastructure our businesses need, and to create more good jobs and with good wages for the middle-class folks who work at those businesses. My position is, if folks in this town want a “grand bargain,” how about a grand bargain for middle-class jobs? So I put forward ideas for tax reform -- haven’t heard back from them yet. Congress has a couple of weeks to get this done. If they’re focused on what the American people care about -- faster growth, more jobs, better future for our kids -- then I’m confident it will happen. And once we’re done with the budget, let’s focus on the other things that we know can make a difference for middle-class families -- lowering the cost of college; finishing the job of immigration reform; taking up the work of tax reform to make the system fairer and promoting more investment in the United States. If we follow the strategy I’m laying out for our entire economy -- and if Washington will just act with the same urgency and common purpose that we felt five years ago -- our economy will be stronger a year from now, five years from now, a decade from now. That's my priority. All these folks standing behind me, and everybody out there who’s listening -- that's my priority. I've run my last election. My only interest at this point is making sure that the economy is moving the way it needs to so that we've got the kind of broad-based growth that has always been the hallmark of this country. And as long as I’ve got the privilege of serving as your President, I will spend every moment of every day I have left fighting to restore security and opportunity for the middle class, and to give everyone who works hard a chance to get ahead. Thank you, everybody. God bless you. God bless America. (Applause.) END 12:59 P.M. EDT
Announcement after closure of stock exchange marks significant step in returning bailed out bank to private sectorThe government on Monday began to sell off its stake in Lloyds Banking Group in a move that marks a significant step in returning the bailed out bank to the private sector five years after the financial crisis began.The announcement was made just after the stock market closed when the banks advising the government started to approach major investors about buying chunks of the 4.2bn shares – currently valued at £3.3bn – being sold.About 6% of shares in the group are being sold, which would reduce the government's stake from 38.7% to 32.7%.The timing, in the midst of the Liberal Democrat party conference, means the Lloyds shares will be sold ahead of the £3bn privatisation of Royal Mail, although the size of the stake being sold is smaller than some City analysts had expected.After conducting a daily analysis of the Lloyds' share price throughout the summer, UK Financial Investments (UKFI), the body set up to look after the stakes in the bailed out banks, advised George Osborne earlier on Monday afternoon that it is now time to kickstart the privatisation.Osborne said on Monday night: "Five years ago the previous government used taxpayers' money to bail out the banks and I've been absolutely determined to get that money back for taxpayers so we can pay down debt. Today we have started to do that and it is another step in the long journey to repair what went so badly wrong in the British economy."The exact price at which the shares are sold was expected to be announced on Tuesday, as the fifth anniversary approaches of the rescue of HBOS by Lloyds TSB to create the enlarged Lloyds Banking Group. The bank was eventually bailed out with £20bn of taxpayer money.The government is expected to be able to claim it has made a profit – albeit a small one – on the sale which has been the subject of much speculation since the chancellor's Mansion House speech in June when he signalled preparations for the privatisation of Lloyds but played down the prospect of a quick sale of bailed out Royal Bank of Scotland.In that speech, Osborne signalled that after a sale of Lloyds shares to major institutions, retail investors would be given the chance to buy shares. This option has not been ruled out, and the Policy Exchange thinktank is recommending a sale of the remaining stake through a mass distribution to taxpayers.Since the speech, major investors have been sounded out by UKFI and its advisers about buying the shares and have already signalled their willingness to buy the stock, which has rallied sharply – in part helped by the government's housing schemes, which have bolstered the mortgage market."We want to get the best value for the taxpayer, maximise support for the economy and restore them to private ownership. The government will only conclude a sale if these objectives are met," a Treasury spokesman said.But Chris Leslie, shadow financial secretary to the Treasury, said Osborne was continuing to duck "serious reform of our banking sector"."It's vital that taxpayers get their money back and this must be the prime consideration in the sale of the government's stakes in the banks. And as Labour has consistently said any profits from the sale should be used to repay the national debt," Leslie said.The shares closed on Monday night at 77.3p – above the 73.6p average price at which the government spent £20bn buying the stake. The shares are likely to be sold at a slight discount to that price but still higher than the average price at which they were bought and well above the 61p stated in the national accounts.The 61p level represents the average price at which the shares were trading on the days the government bought the shares, rather than the actual price paid.The government had already indicated it regards 61p as its benchmark for the sale and this is the price to which it has linked the £1.5m bonus of the chief executive of Lloyds, António Horta-Osório. He can receive his bonus if a third of its stake is sold above 61p.Horta-Osório said the sale "reflects the hard work undertaken over the last two years to make Lloyds a safe and profitable bank that is focused on supporting the UK economy".UKFI – which also announced that James Leigh-Pemberton, son of former Bank of England governor Robin Leigh-Pemberton, is to be its new boss – said it would not place any more shares for 90 days.Paras Anand, head of European equities at Fidelity Worldwide Investment, said the placing was "a clear sign of confidence that the bank is well on the road to recovery". RBS sale must waitThe launch of the Lloyds shares sale puts its prospects in stark contrast to those of Royal Bank of Scotland, the other financial institution rescued with taxpayer money.While Lloyds embarks on its path back into private hands, a sale of RBS – which is 81%-owned by the taxpayer – is clearly further away. Its share price is still well below the level where taxpayers stepped in and George Osborne has commissioned a review by investment bankers at Rothschild into whether it should be broken up into a good bank and a bad bank.The rescued bank's boss Stephen Hester resigned in June in a move intended to speed up a sell-off of the taxpayer stake, bought for £45bn in 2008 and 2009 to stop the Edinburgh-based bank collapsing.RBS managementrs have said it could be ready for sale from the middle of 2014 – or even earlier. But the Rothschild review process delays any potential privatisation and the chancellor has said selling the government's stake is "some way off".The results of the Rothschild review are expected later this month and in the meantime support for a split has been growing.Shares in RBS closed at 366.5p last night, a level that represents a £12bn loss on the money ploughed in by the taxpayer, at an average price of around 500p.Katie AllenLloyds Banking GroupBankingGeorge OsborneJill TreanorKatie Allen theguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
IT overhaul cuts time to less than a week for transferring direct debits and payments to new providers Britain's 46 million current account holders will be bombarded from Monday with offers to switch banks thanks to the formal introduction of "seven-day switching", after a £750m systems overhaul to ensure direct debits and payments can be transferred between providers in the space of a week.Three-quarters of current accounts are still held by the "big four" high-street banks, with the typical customer staying with a bank for 17 years – six years longer than the average length of a marriage. Fears of payments going awry has discouraged most customers from moving, even if they have endured poor service. A recent survey found that one in five people would rather go to the dentist than try to switch their current account.But starting from Monday, 33 bank and building society brands will be involved in the launch of the Current Account Switch Service, backed by a multimillion-pound television advertising campaign introducing customers to a "simpler world" of switching. The Payments Council, the independent body that has spearheaded the initiative, promises that switching will become "reliable and hassle-free" and make tales of month-long delays a thing of the past."The service will remove the need for customers to liaise with their old bank or building society when they have made the decision to switch. The new provider will take full responsibility for delivering the switch and the customer's old current account will close once the switch is complete."The so-called "challenger" banks, including new entrants such as Metro Bank and Virgin but also Santander, First Direct, Halifax and Nationwide, are expected to be the biggest winners from switching.First Direct, which says that nearly all its 1.3 million current account holders have been switchers from other banks, has increased staff numbers at its account opening department in anticipation of a wave of switching, and is offering £125 to lure customers.Tracy Garrad, head of First Direct, said: "We don't expect there will be hundreds of thousands of people switching overnight, but we do expect to be high on the list for anyone switching. It's still amazing that around 44% of people have never switched their bank account."Santander is aggressively marketing its 123 account that pays customers interest of up to 3% on deposits of up to £20,000 held in current accounts, while Halifax is offering £100 to people who switch to its Reward account. Martin Lewis, creator of MoneySavingExpert.com, said: "Far too many people whinge that their bank is a bastard, but then do nothing about it. A whole swath of the country still has the same bank account they set up as a child on the back of being given a piggy bank. Don't whinge, ditch and switch."Last year, about 2m current account switches took place in Britain, against a total of 80m current accounts in operation (many people have more than one account). Research by business analytics company SAS, based on a YouGov survey, suggests that around 5m accounts may switch in the next 12 months.But critics say that the new switching regime will fail to break the stranglehold of the major banks on Britain's current accounts. Conservative MP Andrea Leadsom, a member of the Treasury select committee, said that customers would still have to get new sort codes and account numbers. She is calling for full number portability, in much the same way as customers of mobile phone networks can switch provider but retain their telephone number.The Money Advice Service, an independent organisation funded through the Financial Conduct Authority has launched a current account comparison service, at moneyadviceservice.org.uk.Commentary Reform doesn't go far enough Seven-day switching is well worth doing, but if we really want to take away all the hassle of moving from one provider to another, if we really want the kind of competition that keeps bank managers up at night wondering if they will have any customers in the morning, we need full number portability just like in the mobile phone market.We need to create a separate system that holds everybody's bank details. It means, for instance, that my bank account number and sort code become a unique number, which is then accessed by individual banks.At the moment banks hold the data and share it though the VocaLink system. But if our details sat on Vocalink, independent of the banks, all customers' banks would have equal access. At the moment second-tier banks such as Virgin are charged by the clearing banks for access.There are so many benefits from this change. Existing systems are a tangle of legacy IT systems dating back to countless mergers by banks. Not only do they make payment systems slow and switching difficult, they are also open to fraud. It would also mean that when a bank goes bust, the government can avoid the inevitable queues down the street because the accounts are switched to another provider without the bust bank doing anything.Andrea Leadsom, Conservative MP for South Northamptonshire was speaking to Phillip InmanBanks and building societiesBank chargesVirgin GroupBanco SantanderMetro BankNationwideBankingPatrick Collinson theguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
In my Robert Reich's F Minus In Economics: False Facts, False Theories, I gave Professor Reich an F for his Higher wages can save America’s economy — and its democracy. For those who missed it, the reasons for my grade (as a 40-year teacher of economics) are Reich’s lamentable disregard for facts and his lack of knowledge of basic economics. My specific criticisms included: First, Reich’s assertion that America’s growth and prosperity rest on a “basic bargain” that corporations pay their workers enough so that they can buy their products is wrong. Reich claims the bargain was pioneered by Henry Ford in 1914, who decided to pay his workers enough to buy his Model T’s. Second, historical statistics show Reich’s assertion that the Great Depression was caused by businesses allowing wages to stagnate and profits to soar in the 1920s is false. Third, Official U.S. data from 1964 to present reject Reich’s claim that declining employee compensation and rising corporate profits (measured absolutely or as shares of national income) cause economic downturns. Corporate profits fall (often dramatically) during economic downturns, while compensation of employees better holds its own. The employee compensation share of national income rises immediately preceding and during recessions. Reich makes claims about economic relationships with little or no regard to facts. Fourth, I conclude that Reich does not understand wage formation in labor markets, although he was Secretary of Labor under President Clinton. Apparently such knowledge is not necessary for such a position. Robert Reich’s immediate response to my F, entitled Beware Capitalist Tools, takes me to task for a number of sins in my paper. Let’s run through his complaints: Reich: “If I’m correct, Gregory asks, how could it possibly be that America become the world’s richest and most powerful economy in late nineteenth century, when the typical worker was earning peanuts?” Gregory: No, I said nothing about workers earning peanuts. I asked why America became the world’s richest economy prior to the 1914 bargain upon which Reich claims America’s prosperity rests. A minor point, but he makes a big deal of this. Reich: “Gregory then criticizes me for suggesting that Henry Ford benefited financially by increasing the wages of his workers, who could then afford to purchase Model T’s. Gregory says Ford increased the wages of his workers because, in Gregory’s words, “Ford could afford” to pay his auto workers more, given the enormous productivity increases generated by his assembly lines.” Gregory: Can Reich seriously think that I believe that Henry Ford was not motivated by self interest? That’s not the issue. Rather I questioned Reich’s urban legend that Henry Ford’s wanting to make his employees customers as making no sense. What business model relies on your own employees buying what you produce? I use the Ford Company’s own statistics to give the real explanation of Ford’s $5 wage: Assembly line productivity soared by a factor of 720, shrinking labor costs per car, and allowing Ford to more than halve the Model T’s price. Ford’s real pioneering move was to invest large amounts in training his work force. Ford paid his workers above their productivity to prevent them from leaving with the skills he paid for. Modern economists call Ford’s innovation an efficiency wage. Reich: “Gregory goes on to say that total wages rose sharply from 1915 to the Great Depression, but he completely misses (or ignores) my point. Income inequality widened dramatically in the 1920s. It reached a peak in 1928, when the top 1 percent took home over 23 percent of total income.” Gregory: Sorry, Mr. Reich. You cannot change your metric after it has been proven false. Your article states specifically that “the wages of most American workers stagnated even as the economy surged. Gains went mainly into corporate profits and into the pockets of the very rich.” When I showed these facts to be false, you tried to switch your argument to the distribution of income. Too late, but I show below that substituting income distribution does not help Reich’s cause. Reich: “Does he (Gregory) not know that the median wage has barely increased for three decades, and that it is now 5 percent lower than it was in 2000, adjusted for inflation?” Gregory: Reich’s statistics again do not square with the facts. Working men and women measure their compensation by hourly earnings plus fringes, adjusted for inflation. If we go back Reich’s three decades, real hourly earnings today are up thirty percent (not Reich’s “barely increased”) and are up ten percent since 2000 (versus Reich’s down 5 percent). (See Economic Report of the President 2013, table B-49). Reich misleadingly lets the reader think that real earnings stagnated for thirty years, while in fact they increased up to the Obama recession and then stagnated ever since. Reich: “Does he (Gregory) not have access to the fact that wages are now a lower percent of the total economy and corporate profits a higher percent than at any time in the last thirty-five years?” Gregory: Reich should again check his facts with the Economic Report of the President 2013, Table B-28. The 2012 national income share of compensation of employees (62 percent) was matched within fractions of a percent in 2010, 2006, and 1997, and is not “the lowest in the last 35 years.” There has been little variation in the compensation share with a high of 67 percent and a low of 62 percent with no apparent trend in sight. Reich: “Total wages isn’t the issue; it’s the distribution of those wages. Income inequality widened dramatically in the 1920s. It reached a peak in 1928, when the top 1 percent took home over 23 percent of total income — just as inequality rose in the years leading up to the Great Recession….” Gregory: Reasonable people, including economists, can argue we need a more equal distribution of income for fairness and equity. But economists believe that the distortions of transferring income from one person to another cause some loss of output. Reich argues, to the contrary, that unequal distributions of income cost us growth and prosperity: “Unless the vast middle class, and everyone seeking to join it, have enough money in their pockets — and share sufficiently in the gains from growth — businesses cannot possibly do well.” As a believer in letting data talk, I obtain a slightly positive correlation between Gini coefficient measures of inequality (after taxes and transfers) and 1996-2010 growth rates for the thirty one countries for which the OECD provides data. The data again disagree with Reich: the greater the inequality, the higher the long-term growth rate. If too much inequality destroys growth as Reich believes, we would get a negative correlation, even with such a simple test. I could cite more of Reich’s errors, but they might seem too technical to the reader. Reich seems unaware of the consensus among economists – shared, by the way, by Keynes himself – that shifts in consumption, investment, net exports, and investment can cause business cycles, but they do not explain the long run, as Reich claims they do. As Keynes, famously quipped: “In the long run we are all dead.” Reich has yet to catch on. Even the reliably Keynesian CBO projects long term growth rates using real factors, such as demography, projected technological progress, capital formation, labor force participation rates, quality of education, and immigration. Modern growth economics has contributed to our understanding of growth and development by adding institutional factors to the mix. Innumerable studies have shown that the quality of institutions -- rule of law, corruption, legal restrictions on domestic and foreign trade -- determine long-run economic performance. Bad institutions mean bad economic performance. If Reich is truly interested in understanding the determinants of prosperity, wages, and growth, he should use his lawyer’s training to study our regulatory environment, tax system, incentives to stimulate capital formation, saving, and innovation. He should focus on the most important factor of all – our collapsing K-12 education system. (I recommend Endangering Prosperity: A Global View of the American School). Although I am holding fast on not changing Reich’s F grade, I have tried to keep my arguments reasoned and factual. Reich is less restrained. He characterizes me as a “polemicist,” who engages in “diatribes” and “ad hominem attacks.” I’ll let readers decide whose discourse they prefer and whose evidence they find more compelling.
Interview with Mark Bray, OWS organizer and author of the new book Translating Anarchy: The Anarchism of Occupy Wall Street What role did you play in OWS? During the first year of the movement I was most active in the Press Working Group, which facilitated communication between the media and the movement. Therefore I focus on the role of the media and its influence on Occupy a great deal in the book because, ultimately, I think the rise and fall of the first wave of Occupy had a great deal to do with how it was portrayed in the media and how everyday people interpreted it through the corporate media lens. I also regularly attended meetings of the Direct Action Working Group and helped plan some actions in the winter of 2011-2012. Regarding the book, this range of participation gave me an even greater insight into the inner workings of OWS in NYC. What inspired you to write the book? As a historian, I was interested in documenting a historic moment as it was unfolding around me. I realized that I had an opportunity to capture an element of what was going on that would be lost in time if it wasn’t documented and for me the most interesting part of the movement was the political composition of its organizers. As I got more and more involved I started to realize that more and more of the core organizers of the movement had really radical politics. There was definitely a huge gap between the political outlook of the average person who marched in an OWS event and wanted to ‘get money out of politics’ and the average organizer who was working toward an anti-capitalist revolution. To me that was especially fascinating given how the media ignored the distinction between organizers and participants and included everyone under homogenizing rubric of ‘the protester.’ In the eyes of the media all we ever did was show up to the park and hold signs so the political cleavages that influenced the direction of the movement were obscured. Also not only the media but most liberal supporters of the movement had this ingrained antagonism toward seeing OWS in terms of ideology or distinct political orientations. Instead most liked to see us all as this uniform sea of ‘democracy’ that had transcended ‘sectarian’ political labels but in fact this muddled outlook ran the risk of entrenching the default liberal orientation. So as I came to realize that anarchist politics played a powerful role in the movement I decided to try to gauge that influence by interviewing as many organizers (as opposed to participants) as I could to see how they identified politically, what they thought about capitalism and democracy, who they did or did not vote for and other questions. Over the course of a little over a year I interviewed 192 organizers and found that 39% self-identified as anarchists and 78% were anti-capitalist. I also found that about 33% of organizers had what I call ‘anarchistic’ politics, meaning that they were anti-capitalist anti-authoritarians with direct-action oriented politics who didn’t actively identify as anarchists. To me the label is not what’s important, it’s the content behind it so I was very excited to be able to document the fact that about 72% of the OWS organizers of NYC had anarchist politics whether explicitly or implicitly. In a context where many would have us believe that anarchists ‘ruined’ occupy by resisting hierarchical leadership and infusing a sense of militancy, I think it’s really important to be able to definitively demonstrate that not only was OWS started primarily by anarchists, but that even throughout the first year most of those keeping it afloat were anarchists. I think mainstream liberals have tended to try to isolate those aspects of OWS that they liked and try to denigrate the rest without realizing that the dynamism of the movement stemmed from it’s anti-authoritarian nature. What’s the significance of the title Translating Anarchy? The book’s called Translating Anarchy because in my opinion OWS became so popular because it managed to present essentially anarchist politics (autonomy, self-management, direct democracy, even anti-capitalism) in an accessible format without generally using the word ‘anarchist.’ For example, I found that 65% of self-identified anarchists wouldn’t use the ‘a-word’ if they were speaking about their politics to a person they had just met who was unfamiliar with radical politics. Instead they would convey their perspectives through more familiar language. Also many of the organizers of the Press Working Group were anarchists but didn’t present themselves as such with MSNBC or The Wall Street Journal. So my point is that in many ways Occupy Wall Street was fundamentally about ‘translating anarchy’ (promoting horizontalism, anti-capitalism, mutual aid) in an intelligible idiom. I’m not arguing against using the term ‘anarchist’ explicitly. After all I did write a book called Translating Anarchy. Rather I’m pointing out that the language we use should be calibrated to the context and that in some contexts the ideas of anarchism do better without the misunderstood label. What influence do you think OWS has had on the development of anarchism in the United States? Well to a large extent the answer to that question will only be known in the future, but I think it’s safe to say that an entire generation of radical youth came of political age in a broad-based, horizontal, anti-capitalist context and that this early exposure to direct democracy and direct action will carry over into the politics of the social movements to come. Given how the financial system has been going and the tendency of capitalism to produce crisis we have to be ready for the next opportunity and so hopefully the anarchist seeds that were planted with OWS will blossom in the not so distant future.
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New governor tells MPs his pledge to keep interest rates at record lows for up to three years has reinforced recoveryBank of England governor Mark Carney on Thursday defended his plan to keep interest rates low for up to three years as MPs voiced concerns that it may be confusing the public and had failed to convince investors.Carney said the central bank's policy of forward guidance was supporting the recovery and encouraging consumers and businesses to spend.Under tough questioning from MPs on the Treasury select committee the new governor said the pace of growth was picking up, but remained in its early stages and could be knocked off course.The fragile nature of the recovery, he said, meant there was no reason to bring forward interest rate rises, which have remained at 0.5% for the last four years. He insisted: "Overall, my view is that the announcement has reinforced recovery. It's made policy more effective, and more effective policy is stimulative at the margin."Last month the BoE's monetary policy committee said that so long as inflation stayed under control it would only consider pushing interest rates to more normal levels once unemployment fell to 7%. The MPC forecast that unemployment would remain above the new target until the second half of 2016.In a speech in Nottingham last month Carney said the target was a trigger point to discuss a rise in rates rather than a threshold that would immediately force a rate rise. He also outlined how three "knockouts", including a jump in inflation beyond 2.5%, would force the MPC to reconsider its low interest rate policy.Several MPs said it remained unclear how the MPC will react to improvements in the economy. Some City analysts predict the unemployment rate will fall to 7% at least a year earlier than forecast by the MPC.Andrew Tyrie, the committee's Tory chairman, complained that Carney's account of the Bank's new approach would be difficult to explain "down the Dog and Duck".After the meeting he said: "Credibility in monetary policy is hard won and easily lost. The new framework – with its target, threshold and 3 'knockouts' – is more complex to explain than its predecessor. Rightly, the Bank is now engaged in bolstering credibility in its new framework with detailed explanations."He added: "Confidence in monetary policy will be enhanced where those detailed explanations provide greater certainty about the likely responses of the Bank as circumstances change."Andrea Leadsom MP said she was concerned that the MPC had "watered down" its inflation target."I am still slightly bemused how the inflation target ranks alongside the new unemployment target," she said.Asked about the plight of savers, whose savings are being eroded by inflation with interest rates at rock bottom, the governor said he had "great sympathy", but the best thing the Bank could do to help was to generate a sustainable economic recovery."Our job is to make sure that that's not another false dawn, and ensure that this economy reaches, as soon as possible, a speed of escape velocity, so that it can sustain higher interest rates."Carney stressed that despite the MPC's expectation that rates will remain on hold for up to three years, he would be ready to push up borrowing costs if necessary."I'm not afraid to raise interest rates," he said, pointing out that he is the only serving central bank governor among the G7 countries to have increased rates – in his previous post, in Canada.City investors have pushed up long-term borrowing costs in financial markets sharply since the MPC announced its three-year pledge to leave borrowing costs unchanged at 0.5%.But Carney, who was handpicked by George Osborne to kickstart recovery and took over in Threadneedle Street at the start of July, said the recent increase in rates, which sent 10-year government bond yields through 3% last week for the first time in more than two years, was a result of the recovery and "benign".He also repeatedly refused to be drawn on whether the new approach represented a loosening of policy – equivalent to a reduction in interest rates – in itself. He said forward guidance made the current stimulus of low rates and £375bn of quantiative easing more effective.Bank of EnglandMark CarneyInterest ratesEconomicsEconomic policyInflationUnemployment and employment statisticsHeather StewartPhillip Inman theguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
Below is a comment on the anniversary of 9/11 by my friend David Kotok, Chairman of Cumberland Advisors. We all lost many friends that day. Kotok himself was in the WTC and was lucky to survive. -- Chris A dozen years have passed. Memory doesn't fade. In some ways, the events remain as vivid today as they were that September morning. For newer readers who do not know this history, I was sitting in the ballroom at a breakfast meeting of the National Association for Business Economics. The speaker, who had come down from the 37th floor, was in the middle of his remarks. The noise of impact was shocking. The chandelier shook in the middle of the ballroom. Lights flickered intermittently. The meeting stopped, and so began an orderly and rapid exit from the conference center. We exited from the main floor. I had come from an upper floor and had checked out of the World Trade Center hotel early. When we reached the foyer, we could see the street littered with debris. It was an orderly exit through the emergency exit doors, onto Liberty Street. Old timers will remember it as the exit from the "Tall Ships Bar." We crossed West Street in the middle of chaos, pandemonium, and smoke. There were people injured; some were fleeing in every direction. Crossing West Street we moved to the knoll in front of the old Wall Street Journal office in the World Financial Center. I turned to look at the smoldering building, wondering, "How could this be? What kind of a plane is that? What is a light plane like a Cessna doing hitting this building? But it couldn't be a small plane – the explosion is too big!" The fact is that something else was going on, something far more sinister. In those confused moments we did not understand what that first explosion meant and how it would impact our lives. Several of us watched from that knoll, right under the connecting second floor corridor that is protected from the weather. That manmade bridge runs between two buildings in the financial center. As we looked at the first building, the second explosion occurred. The "flash-to-bang" time counted automatically in my brain. Army training took over so I could triangulate and measure the distance. The sound was huge. The explosion's fireball on the exterior of the building measured 10 stories. I counted them. It was as wide as it was high. Imagine such a fireball, 10 stories high and 10 stories wide. That was the outside of the building on the other side after the plane impacted and exploded. 9/11 never leaves. Images are embedded in the mind as clearly as if they had been etched in the back of the retina. Even as the retina ages. Two jumpers holding hands leapt from the 100th floor. Smoke was suffocating. Noise was deafening. Let's fast forward to today. The news flow is disconcerting. In this world there are still many who would like to reprise 9/11 and deliver another devastating attack. Why? To what purpose? How is it that the divisions among billions of people on this planet include so many who revere the cause of raining death on others? Why? At the same time, there are billions more who would like to revere and respect the quality, existence, and perpetuation of life. How do we, as human beings, ever bridge the massive divides among us? Where can we find a way to connect, to bridge human chasms of differing perspectives, painful histories, and sometimes hatred? Years after 9/11, after a catastrophe on American soil, contemplation affords us no ready answers, but only politically and logistically challenging, soul-searching questions. Maybe in a generation or two we will find answers. Maybe. But the march of age and the trajectory of events suggest that is unlikely in our lifetimes. Still, 9/11 poses a question that echoes forward through the years: Do we have the strength and the will to continue the search for solutions to such a profound dilemma? Do we have the wherewithal to find, amid the smoke and noise, a path forward rather than a path into escalating destruction? That is the question in front of America. That is the question for our Congress, about our policy, and it supremely challenges our leaders. That is the question in front of the modern, mature, Western world, and the rest of the developing world. 9/11 provides a pause to reflect on it. www.cumber.com
US billionaire Ron Burkle's Yucaipa investment vehicle agrees to take on 150 stores and 4,000 staffTesco has finally negotiated an exit from its failed expansion into the US by lending US billionaire Ron Burkle £80m to take away its loss-making Fresh & Easy chain.After more than nine months searching for a buyer, Burkle's Yucaipa investment vehicle has agreed to take on 150 Fresh & Easy stores as well as 4,000 staff and a vast distribution centre and production facility east of Los Angeles.The deal will cost Tesco £150m in total, including the loan, payoffs for about 400 permanent staff and the closure of about 50 stores not included in the deal – taking the total cost of the humiliating episode to nearly £2bn. The future for a further 600 staff is unclear, with some expats likely to return to Tesco in the UK while others are part-time staff and will be let go.Philip Clarke, the UK supermarket's chief executive, said: "The decision we are announcing today represents the best outcome for Tesco shareholders and Fresh & Easy's stakeholders. It offers us an orderly and efficient exit from the US market, while protecting the jobs of more than 4,000 colleagues."Tesco said that the deal would mean there was no ongoing financial exposure in the US. However, under the agreement, which is expected to be finalised by the end of the year, Tesco will hold warrants that entitle it to a 32.5% stake in the holding company that will run Fresh & Easy, should certain performance criteria be met. They could be exchanged for a cash sum in the future.Ron Burkle, managing partner of Yucaipa, who founded the Ralphs and Food4Less supermarket chains in the US, indicated that he planned to continue to run Fresh & Easy as a standalone chain.He said: "Fresh & Easy is a tremendous foundation. Tesco should be applauded for giving their customers an affordable, healthy, convenient shopping experience. Its dedicated employees and great base of customers give us a solid starting point to complete Tesco's vision with some changes that we think will make it even more relevant to today's consumer."He said Yucaipa planned to build the chain into a "next-generation convenience retail experience". However, there has been speculation that Burkle wants to use the Fresh & Easy stores to relaunch his Wild Oats brand, which he sold to rival Whole Foods Market in 2007.The deal is good news for Tesco after weeks of speculation that it would be unable to find a buyer for its US business. The trip over the Atlantic, begun in 2007 with ambitious plans for thousands of stores, has proved very costly for Tesco with trading losses and investment reaching some £1.8bn.The failure has not only meant problems for Tesco but tarnished the reputation of former chief executive Sir Terry Leahy, who was previously held up as a shining example of British retail success.It also reflected badly on Tim Mason, the Tesco marketing supremo who was relocated to the US to run Fresh & Easy and build it into a chain the same size as Tesco UK. He was made redundant earlier this year with more than £2m.It was not clear on Tuesday night if Tesco would have to make further write downs after completing the deal.Selling off the US business is good news for Clarke, who has been attempting to get rid of poorly performing overseas assets in order to concentrate on Tesco's problems at home.In April, the supermarket reported its first fall in annual profits for 20 years as its chains both abroad and at home suffered during a global downturn.The ongoing losses in the US were blamed for a squeeze on expenditure in the UK which meant that stores began to look tired and customer service suffered. Tesco has also suffered from a series of PR disasters including revelations that some of its burgers contained horse meat.Tesco recently revealed it was in negotiations to put its Chinese business into a new joint venture with the state-owned Chain Resources Enterprise. The deal, which would cost Tesco an estimated £1.5bn, would merge its 131 stores into CRE's Vanguard chain, which has nearly 3,000 outlets.TescoSupermarketsRetail industryUnited StatesSarah Butler theguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
Spain’s Repsol is moving closer to the sale of its stake in utility Gas Natural Fenosa, with the Financial Times reporting that the oil company sounded out banking advisers about the operation. At the end of July, Repsol voiced its intention to proceed with the sale of its €4.4 bn stake. “We are not in a hurry, but it is true, that is something we have to seriously think about,” said Chief Financial Officer Miguel Martinez in July. Repsol has recently asked Citigroup and Deutsche Bank to study options for its 30% holding in Gas Natural Fenosa, planning to free cash to invest in upstream oil exploration. The Madrid-based firm beat forecasts for the first half of the year, with good performances of downstream and especially upstream units. It surpassed its 2012-2016 divestment goals at the end of February following the agreement to sell LNG assets to Shell for $6.652 billion.
There is a tradable approach to analyzing the fundamentals of supply and demand in the monetary metals markets. This article is a brief summary of the approach we take at Monetary Metals (and we also released a video that presents some of the ideas in a more engaging format). Gold and silver are money because, unlike all other commodities, people accumulate them without limit. Virtually all of the gold ever mined in human history is still in human hands. The “stocks to flows” ratio (inventories divided by annual production) for gold is 80 years. For silver it is also measured in decades. For other commodities, it is measured in months. Think about this. It means that there is no such thing as a “glut” in gold or silver. If the wheat harvest comes in a few percent higher than expected, the price can crash. If oil consumption rises a little, the price can spike. But in the case of gold and silver, the value has nothing to do with either mine production or jewelry or electronics consumption. Stability is exactly what we want and expect from money. The prices of gold and silver, as expressed in dollars, are unstable, not because of gold and silver, but because of the dollar itself. This means that you cannot analyze the fundamentals of gold and silver with conventional techniques. It is not possible to predict changes in the prices by looking at “supply” (i.e. mining and recycling) and “demand” (i.e. jewelry and electronics). All of those huge inventories are potential “supply”, at the right price. Everyone on the planet is potential “demand”, at the right price. Some analysts point to the same fundamental story in every article. Central banks are issuing money and other big problems are occurring in the world’s financial system. It’s true. But it was true before the big price crash on April 15, 2013 and it is true today. While this is a good reason to own gold, this isn’t good information to trade gold. Another approach is to try to assess whether gold is being bought or sold by central banks, sovereign wealth funds, or other high profile market participants. This is often based on the assumption that the buyer represents the “smart money” and the seller is “dumb money”. People often study the open interest in the futures market, ETF inventories, COMEX inventories, etc. Other analysts prefer to look at price charts and perform technical analysis. This is based on using past price movements to predict future price moves. It works sometimes, though it gives a limited picture. The price of something can also move for other reasons. These reasons are sometimes obvious at the time, though it is often not clear until afterwards, if ever. Monetary Metals was founded on a different approach. We do not look at the price per se. We look at the fundamentals of supply and demand. We do this by studying the spread between two prices: the spot market and the futures market, called the basis. It is helpful to use the example of a non-monetary commodity to understand how the basis shows the fundamentals of supply and demand. Imagine driving a grain truck to a town with grain silos right before the harvest. Workers are cleaning off the equipment and washing the interiors of the empty storage bins. You ask how much money to fill up your truck. They will laugh until you take out a stack of money. Someone may quote you a price: $25 per bushel is the price to get wheat today. If you take it, they will have to pay a bakery to sit idle for a week until the harvest, and pull wheat out of the supply chain. But if you can sign a contract for delivery next month, the price is $7. This case, where the price in the spot market is greater than the price in the futures market, indicates scarcity. Of course, this makes sense that wheat would be scarce a few days prior to the harvest. It is perishable, which means every bushel produced is consumed. There are no permanent hoards. This case has a technical term, which is backwardation. Here is the proof that backwardation means scarcity. Suppose someone had wheat in a warehouse. How could he profit from the situation? He could sell you the wheat at $25 and immediately buy a contract to get the same amount of wheat delivered in one month. This is an arbitrage called decarrying the wheat. Decarrying is pulling the commodity out of the warehouse, buying an equivalent amount in the futures market, and keeping the profit (in this case 25 – 7 = $18). Obviously, if anyone had wheat, he would take the free $18 offered by the market. In doing this, he would reduce the backwardation. If others had wheat, they would do it and reduce the backwardation further, and so on. The opposite example occurs a month later. When the harvest comes in, the market is overflowing in wheat. But if a bakery wants to contract to guarantee its wheat supply for delivery in 8 months, the price is higher on the 8-month future than in the spot market. The technical name for this condition is called contango. Contango implies that there is plenty of the good, or at least that there is no scarcity. In contango, one can make a profit by buying the commodity and selling a futures contract against it. This is called carrying it. In the meantime, one pays interest on the money one borrowed to buy the wheat and one has costs to store and insure it in the meantime. In brief, the basis is a measure of availability of a commodity to the market. When the basis is well above zero (i.e. well into contango territory) and rising, then the good is abundant. When the basis falls below zero, then the commodity may be in backwardation. Just as backwardation is the opposite of contango, there is a spread which is opposite of the basis. It is called the cobasis. When the cobasis is above zero, that is the precise definition of backwardation. When you hear backwardation, you should think scarcity or shortage. Gold and silver are different than wheat. As we said earlier, there is no such thing as a “glut” and for the same reason there is never a shortage either. Backwardation in gold means there is a shortage of gold to the market. There is no lack of gold available to decarry, unlike the case of wheat. But for whatever reason, owners of gold are reluctant to entrust it to the market, even to make a profit. Gold backwardation should never happen. It did not happen until December 2008. Since then, it has been occurring intermittently. Backwardation in gold is a sign that the regime of irredeemable paper money based on the dollar is coming to an end. When it becomes permanent, then gold will no longer be offered in exchange for dollars (or yuan, pounds, euro, etc.) There will be no gold “price”. In other words, paper money will be worthless. This is not merely academic. In general, the positive basis (i.e. contango) is disappearing. This is a process of gold withdrawing its bid on the dollar. One cannot understand this if one lives in the dollar bubble, looking at the gold “price” as if it were comparable to the price of Apple shares or crude oil. It would be better and more accurate to think of the dollar price, measured in milligrams of gold or grams of silver. In the meantime, we have temporary backwardation. Each futures contract drops into backwardation as it approaches expiration. In temporary backwardation, when each futures contract approaches expiration, it is pulled into backwardation. The bid drops, which causes the basis to drop significantly. One explanation is that this could be due to the contract roll. Most traders who buy futures use leverage. They do not wish to take delivery of the gold, and cannot take delivery because they don’t have the cash in their account. So they must sell before First Notice Day. This selling presses down the bid on the future. The basis, therefore, drops. But the mechanics of the contract roll does not fully explain the phenomenon of temporary backwardation. While it may not herald the end of the dollar just yet, it is a sign of cancer in the brain of the system. The reason is simple. Increasingly post-2008, when people buy gold they prefer metal that they can hold in their hand to a futures contract. The consequence is that the price on the futures contract has a tendency to sag below the price of the metal itself. Buying of futures has become relatively soft relative to buying of gold metal. This does not mean that the price cannot drop. Recently, the price did in fact drop by hundreds of dollars. The way to think about this is that demand fell, which is why the price fell. But at the same time, what demand that there was concentrated increasingly in the spot metal market. The result was falling price combined with rising cobasis and backwardation at one point had crept into three successive contracts for gold (August, October, and December) simultaneously. The above discussion makes a powerful case for buying gold. This leads to the question: why does the price fall? Why does the dollar rise? One short answer is that most people—even gold bugs—think of the dollar as money and gold as a volatile commodity. They buy when the gold price is going up. They sell to take profits, or to avoid losses when the price is falling. The longer answer is that the dollar is the currency needed by debtors worldwide to service their debts. At times when they are squeezed under pressure, they scramble to get dollars. The dollar strengthens and that is reflected in a lower gold price. There is one other benefit to looking at the basis. It helps understand the various conspiracy theories. What would happen if someone sold a huge amount of gold short in the futures market? It would drive down the price of the futures relative to the price of metal in the spot market. It would instantly cause a very great backwardation. For example, this was alleged on April 15, 2013 so I wrote an article to look at it. Let’s look at the actual basis calculation. Conceptually, we’re interested in carry and decarry. If the price in the futures market is higher, then anyone can carry the good at a profit. On the other hand, a positive cobasis means that it is profitable to decarry it. Let’s start with an oversimplified definition. Carry = Future – Spot Decarry = Spot – Future To carry, one buys spot and sells future, if this spread is positive. To decarry, one sells spot and buys future. To be more precise, we must define these terms that would be experienced by anyone who tries to carry or decarry. When one buys, one must pay the ask (also called the offer). To sell, one must accept the bid. With that in mind, here are the proper definitions: Carry = Future(bid) – Spot(ask) Decarry = Spot(bid) – Future(ask) Basis and cobasis are the annualized returns for carry and decarry. Quoting them as annualized returns helps put them in perspective. You can compare the basis to the rate of interest, or the rate of return of any other investment with the same duration. Note that both can be negative. There are times when there is no profit to be made in carrying or in decarrying. This is typically a sign of poor liquidity and hence wide bid-ask spreads. But at most one of them can be positive. Either the market is offering a profit to carry something, or to decarry it. It makes no sense for it to be possible to carry profitably and decarry profitably, because if so then one could make unlimited money by carrying and decarrying over and over. You can simply look at the graphs of the basis and cobasis and get a clear picture at a glance. Or you can delve as deeply into the theory as you wish, to understand the nuances of the market and the mechanics of how, precisely, it works and why certain things are occurring when they do. We provide the data and analysis for any level of interest.