THE G-30 GROUP OF CENTRAL BANKERS WARN THEY CAN “NO LONGER SAVE THE WORLD”

“Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on"

by ZERO HEDGE

In a detailed report by the Group of Thirty, central bankers warned that ZIRP and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. As Reuters reports, the flow of easy money has inflated asset prices like stocks and housing in many countries but have failed to stimulate economic growth; and with growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies. “Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on,” sending a message of “you’re on your own” to governments around the world.

The G30 begins their report rather pointedly…

Central banks worked alongside governments to address the unfolding crises during 2007–09, and their actions were a necessary and appropriate crisis management response. But central bank policies alone should not be expected to deliver sustainable economic growth. Such policies must be complemented by other policy measures implemented by governments.
At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weaknesses that originate outside the control or influence of central banks. In order to contribute to sustainable economic growth, the report presumes that all other actors fulfill their responsibilities.

Roughly translated… central bankers are saying “you are now on your own.”

Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future.

And the “need to exit” appears to be front and center for The G30 bankers…

There seems to be an almost unanimous view that monetary policy in the major AMEs will have to be normalized at some point. However, even if views differ about what precisely normal might mean, presumed dates for exit also differ due to different countries being at different points in the business cycle. There is also agreement that a danger exists of exiting too soon, thus aborting a nascent recovery, and also of exiting too late, thus encouraging some combination of higher inflation and other imbalances that could also weigh on recovery.

However, where serious disagreement arises is when it comes to discussing which danger is the greater. Those worried about too early an exit point to the example of the Federal Reserve in 1937. In contrast, those worried about too late an exit point to the inflation that followed the Fed-Treasury Accord in the late 1940s and to the inflationary surge in the early part of the 1970s.

In recent years, distortions in financial markets and the effects on EMEs have also moved much higher up the list of concerns of this latter group.

While reasonable people can disagree on such objective issues, a number of political economy factors seem to make exiting too late the more likely outcome.

First, there is great uncertainty concerning the consequences of tightening.

Second, in some cases it will in fact be clear that tightening will reveal some debts as being unserviceable, and some financial institutions as undercapitalized. Central banks will then be asked to wait until these other sectors have become more robust, which could well take a long time. The danger is that debt levels will rise with the passage of time, strengthening the arguments for still more forbearance—the debt trap discussed above.

Third, debtors will obviously resist the tightening of policy.Since governments are struggling to manage record-high sovereign debt levels, they too will be tempted to put pressure on their central banks to push back tightening as far as possible.

But delaying an ‘exit’ has costs…

Wicksell, Hayek, Koo, Minsky, and others have, over many decades, identified a variety of theoretical concerns arising from the excessive expansion of money and credit during booms. Rising inflation, investment misallocations, balance sheet overhangs, banking sector instability, and volatile international capital flows were all highlighted as threats to future economic stability. Moreover, by 2007 it was evident that these were matters of practical concern as well.

The policies followed by the major central banks since 2008, while contributing to stability in the short run and conceivably avoiding a second great depression, might also have aggravated threats to future stability. These policies have had undesirable macroeconomic side effects both in the AMEs themselves and in EMEs. Admittedly, in the latter case, the policy responses of the EMEs themselves to inflows of foreign capital have also played a contributing role.

“Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop,” the G30 report said.

With the consequences of an exit from easy money so unpredictable, the G30 said the risk was of exiting too late for fear of sparking another crisis.

And so, while ‘exit’ is seen as urgent, it is unlikely…

“Faced with uncertainty, the natural default position is the status quo,” the G30 said.
In other words more of the same… and while  The G30 are careful to note the glass-half-full persepctive of the future, their “endgame” scenario of continuing weak (or even weaker) growth  is troubling…

Should the global economy stay weak, or indeed should it weaken again as financial markets overshoot, we could face the possibility of debt deflation. The almost 40 percent decline in commodity prices since mid-2014 could be a precursor of such a slowdown. In this environment, risk-free rates would stay very low and there would be no exit for monetary policy.
Nevertheless, the current prices of many other financial assets would be revealed as excessive. Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop. In this scenario, for all the political economy arguments presented above, attempts might nevertheless be made to rely on monetary policy to restore demand. However, just as past efforts have failed to gain traction, renewed efforts would likely have a similar outcome. This would be particularly likely if the overhang of debt had worsened in the interval as has indeed happened over the last few years.

In such circumstances, governments would also be faced with chronic revenue shortfalls. This could lead to a worst-case situation where deflation would actually sow the seeds for an uncontrolled inflationary outcome. Governments with both large deficits and large debts must borrow to survive, but worries about debt accumulation might imply an increasing reluctance on the part of the private sector to lend to them at sustainable rates. In that case, recourse to the central bank is inevitable, and hyperinflation often the final result.

And the side effects of central bank policies during the crisis is still more worrying…

Central banks see their actions as buying time for governments to address problems that are essentially real, not monetary. However, governments have thus far not reacted as necessary. Recognizing the political difficulties of addressing these underlying problems, they prefer to believe that central bank actions will be sufficient to restore strong, stable, and balanced growth. Thus, they are strongly tempted to forebear in the pursuit of policies that might be more effective. The longer this standoff persists, the more dangerous it becomes as the undesirable side effects of current central bank policies continue to cumulate.

Which is exactly what Macquarie hinted at… the academics will be the first to note that policy escalation may be required (helicopter money).. and then policy-makers have the ivory tower to lean on when they unleash it.

Finally, The G30 admits – it’s all an illusion…

Central bank policies since the outbreak of the crisis have made a crucial contribution to restoring the appearance of financial stability.

Nevertheless, for this appearance to become a reality, underlying problems rooted in very high debt levels must be resolved if global growth is to be more sustainably restored.

So, the bottom line, reading between the lines of this 80-page report, is that

Central Bankers know their policies have done (and will do) nothing to promote real economic improvements, are putting pressure on governments to do something (anything), admit that is unlikely (because the central bankers have always saved them before), expect extreme policy measures to become the status quo (despite admitting their failure) for fear of any asset weakness, and suggest more measures might be needed (which have led to hyperinflation in the past).

But apart from that – everything is awesome!!

It Is Absolutely Shocking How Much Gold China is Acquiring

Today Stephen Leeb told King World News, “... there is a controlled desperation in China when it comes to acquiring gold.”  Leeb, who is Chairman of Leeb Capital Management, also said, “They are acquiring as much as they possibly can without tilting the markets dramatically to the upside.”

The acclaimed money manager also stated, “China mined a total of 355 tons, which was by far the largest amount of gold mined for any country.  And yet they are still buying every single available ounce they can get in the open market.”  Leeb was also quick to point out the strength gold is displaying, “Today we have global stock markets under significant pressure, the US dollar breaking out on the upside, and yet gold is holding firm.”

Here is what Leeb had to say about what is happening with Europe, the Chinese and gold:  “Europe is a mess and sooner or later the Europeans are going to have to come to grips with the dire situation they face.  Yesterday, Moody’s put the three AAA countries on credit watch, Germany, Luxembourg, and the Netherlands.”

“Unless the European bank is willing to print money in order to start buying the debt of the failing countries, you are going to have a catastrophe.  The patchwork schemes they have been using are not going to get the job done.  Right now, Eric, as we look at the European crisis, it’s worse now than it has ever been. 

5-Year Spanish bond yields are now trading at 7.6%.  That’s an extraordinary number, and it really says Spain cannot finance anything....

“For practical purposes, Spain has come to a halt unless they get help.  This means lots of money printing going forward and tremendous inflation down the road.  All of this favors the price of gold going dramatically higher.

In the past, when you have seen these kinds of situations, people sell things to get liquid.  The item that is most liquid is gold.  But you are not seeing intense selling of gold today.  I just don’t think gold will go down very much.  If gold does eventually test the lows or break lower, I don’t believe it will go much lower than the previous low. 

In the past, people felt gold could go much lower in a full-fledged crisis, but that is not the case this time.  The Chinese will continue to step in and buy and this is the primary reason gold has remained so strong during this European upheaval.  You have to remember that the stock market is down in China and it is likely to remain down until you see a shift in leadership.

So gold has become increasingly important and China has encouraged its citizenry to buy gold.  With the stock market already frustrating people in China, the Chinese, interestingly, will not want gold to be added to that list of frustrations for their investing public.

In the past, if the Chinese could step out of the way and let gold tumble in price so they could purchase it cheaper they would.  Right now I think they just don’t want to add to their citizen’s frustrations with key markets, gold being one of them.  If I’m right, then the Chinese will continue to support the price of this metal.

I would also note that China mined an unbelievable 20% of their proven reserves of gold last year.  That’s an almost impossible achievement.  That number was reported by the USGS, which is a very credible source for this type of information.

China mined a total of 355 tons, which was by far the largest amount of gold mined for any country.  And yet they are still buying every single available ounce they can get in the open market.  Australia was second with 270 tons.  Keep in mind that Australia has 4 times the reserves that China has.  I have never seen any country mine that percentage of any commodity.  What China has done in truly a Herculean feat.

So there is a controlled desperation in China when it comes to acquiring gold.  They are acquiring as much as they possibly can without tilting the markets dramatically to the upside.

Today we have global stock markets under significant pressure and the US dollar breaking out on the upside, and yet gold is holding firm.  The bottom line is the weak hands are out of gold and China is creating a floor in the market.  So if your downside is around $1,520 and your upside is many thousands of dollars, I would buy.”

Nigel Farage - Europe is Collapsing, Buy Gold & Expect QE

On the heels of Fed Chairman Bernanke’s comments, Spain being downgraded and key meetings taking place in Europe, today King World News interviewed MEP (Member European Parliament) Nigel Farage, to get his take on the ongoing crisis.  Farage told KWN that “when I look into the eyes of the leaders of Europe ... what I’m seeing now is madness, absolute, total and utter madness.” 

Farage also discussed the action in the gold market, but first, here is what Farage had to say about the deteriorating situation in Europe:  “Of course, over the last couple of years we’ve had two bailouts of Greece, a bailout of Ireland, Portugal.  We’re now on the verge of needing a bailout in Cyprus, but perhaps more significantly, a bailout in Spain.”
     
“There is all sorts of twisting and turning going on with the Spanish saying, ‘Please save our banks, but don’t put us under the austerity measures that you’ve put the other countries under.’

If one looks globally, we’ve got people like David Cameron, and importantly, President Obama, who are basically saying, ‘The euro project must be saved.  It must be saved at all costs.’ ....

“For that to happen the Eurozone has to turn into a state, and a state that effectively has a Fed.

The Germans are saying, “Hang on guys, we don’t really want to take on the debt for the whole of ‘Club Mediterranean’ countries.”  There’s been a meeting in Berlin today, and Angela Merkel has, for the first time, said that she’s prepared to countenance this becoming a full fiscal and political union, but it has to be constructed on German terms.

So it would appear that despite the fact that the eurozone is a disaster, despite the fact that nobody is prepared to recognize just what a mess our banks are in, despite all of this, our political classes in Europe and America are prepared to continue this project of total failure. 

If we continue with this route, we are heading for money printing on a scale that has never been seen before in the history of mankind.  Clearly, as history teaches us, that will lead to massive inflation, and huge asset depreciation.”

Farage also added:  “All I can tell you is when I look into the eyes of the leaders of Europe, and as a leader of a group in the European Parliament I do get eyeball to eyeball with them, when I look into the eyes of these people, frankly what I’m seeing now is madness, absolute, total and utter madness.

The project, the idea is what must be protected and to hell with the consequences.  I really believe that when we look back in decades or centuries to come, we will see what is happening now in the eurozone as something of huge historical significance.

People will say to themselves in classrooms, in a couple of hundred years time, ‘How could they have been so stupid?’”

Farage also had this to say regarding gold:  “I think we are at that level where people who have waited to add to their gold portfolios should be adding now.  You may well get a situation where if they do pull off some grand deal that gold falls ... but we are now back in the buying zone for gold.

I always felt, and I’ve said for some months on your show, that I thought gold would come back (down), and indeed it has.  I think investors that are scared of what may happen to paper money, you’d have to be very complacent not to be, we are in a buying territory for gold now in my view.”

This is an incredibly important and timely interview with Farage. The KWN interview with Nigel Farage will be available shortly and you can listen to it by CLICKING HERE.

Christine Lagarde attack on Greece backfires as she pays no tax

Christine Lagarde, the International Monetary Fund managing director who provoked an angry reaction from the Greek people after telling them to pay their taxes, does not pay tax on her own salary, it has emerged.

By Philip Aldrick, Economics Editor

Ms Lagarde was forced to publish an embarrassing climbdown on her Facebook page over the weekend after being bombarded by hundreds of Greek people who felt insulted by her suggestion that the country’s crisis was partly due to “all these people in Greece who are trying to escape tax”.

However, on Tuesday she had to admit that her $467,940 (£300,000) annual salary and $83,760 of additional allowances are entirely tax-free as the IMF is an international organisation.

An IMF spokesman said: “Salaries, like those in most international organizations, are paid on a lower, net of tax basis to ensure equal pay for equal work regardless of nationality.”

He added that Ms Lagarde, 56, does pay all other “taxes levied on her, including local and property taxes in the US and France”.

Ms Lagarde earns more than President Barack Obama and David Cameron, both of whom pay taxes.

Radioactive waste at Fukushima threatens second nuclear catastrophe

By Hiroko Tabuchi, Matthew Wald.

TOKYO: What passes for normal at the Fukushima Daiichi nuclear plant today would have caused shudders among even the most sanguine of experts before an earthquake and tsunami set off the world's second most serious nuclear crisis after Chernobyl.

Fourteen months after the accident, a pool brimming with used fuel rods and filled with vast quantities of radioactive caesium still sits on the top floor of a heavily damaged building, covered only with plastic.

The public's fears about the pool have grown in recent months as some scientists have warned that it has the most potential for setting off a new catastrophe. The three nuclear reactors that suffered meltdowns are in a more stable state, but frequent quakes continue to rattle the region.

The worries gained new traction in recent days after the operator of the plant, Tokyo Electric Power Co., or TEPCO, said it had found a slight bulge in one of the walls of the reactor building, stoking fears over the building's safety.

To try to quell such worries, the government sent the Environment and Nuclear Minister to the plant on Saturday, where he climbed a makeshift staircase in protective garb to look at the structure supporting the pool, which he said appeared sound. The minister, Goshi Hosono, added that although the government accepted TEPCO's assurances that reinforcement work had shored up the building, it had ordered further studies because of the bulge.

Some outside experts have also worked to allay fears, saying that the fuel in the pool is now so old that it cannot generate enough heat to start the kind of accident that would allow radioactive material to escape.

But many Japanese have scoffed at those assurances and point out that even if the building is able to withstand further quakes, a claim that they question, the jury-rigged cooling system for the pool has already malfunctioned several times, including a 24-hour failure in April. Had the failures continued, they would have left the rods at risk of dangerous overheating.

Government critics are especially concerned, since TEPCO has said the soonest it could begin emptying the pool is late next year, dashing hopes for earlier action. ''The No. 4 reactor is visibly damaged and in a fragile state, down to the floor that holds the spent fuel pool,'' said Hiroaki Koide, an assistant professor at Kyoto University's research reactor institute and one of the experts raising concerns. ''Any radioactive release could be huge and go directly into the environment.''

The fears over the pool at reactor No. 4, amplified over the web, are helping to undermine assurances by TEPCO and the Japanese government that the Fukushima plant has been brought to a stable condition and are highlighting how complicated the clean-up of the site, expected to take decades, will be. The concerns are also raising questions about whether Japan's all-out effort to convince its citizens that nuclear power is safe kept the authorities from exploring other - and some say safer - options for storing used fuel rods.

''It was taboo to raise questions about the spent fuel that was piling up,'' said Hideo Kimura, who worked as a nuclear fuel engineer at the Fukushima Daiichi plant in the 1990s. ''But it was clear that there was nowhere for the spent fuel to go.''

The worst-case situations for reactor No. 4 would be for the pool to run dry if there is another problem with the cooling system and the rods catch fire, releasing enormous amounts of radioactive material, or that fission restarts if the metal panels that separate the rods are knocked over in a quake. That would be especially bad because the pools, unlike reactors, lack containment vessels to hold in radioactive material.

Attention has focused on No. 4's spent fuel pool because of the large number of assemblies filled with rods that are stored at the reactor building.

According to TEPCO, the pool at the No. 4 reactor, which was not operating at the time of the accident, holds 1331 spent fuel assemblies, which each contain dozens of rods.

Professor Koide and others warn that TEPCO must move more quickly to transfer the fuel rods to a safer location. But such transfers have been greatly complicated by the accident. Ordinarily the rods are lifted by cranes, but at Fukushima those cranes collapsed during the series of disasters that started with the earthquake and included explosions that destroyed portions of several reactor buildings.

TEPCO has said it will build a separate structure next to reactor No. 4 to support a new crane. But under the plan, released last month, the fuel removal will begin late next year.