Adam Posen attacks world's central bank over UK interest rate criticism

The Bank for International Settlements (BIS) warned in its annual report that the era of "near-zero" interest rates needs to end, and singled out the British central bank for comment.

Highlighting the fact that inflation in the UK has been above the 2pc target since December 2009, it said: "One wonders how long [the MPC's] current policy can be sustained."

Mr Posen, who has voted not only for rates to be left on hold but for the Bank to inject another £50bn of quantitative easing into the economy since October, said stagflation – low growth and high inflation – is unlikely in the UK and argued that BIS had made the wrong historical comparison by drawing parallels with the 1970s, when central banks left rates low for too long, unleashing dangerously high inflation.

In a speech at Aberdeen University titled Why Stagflation Is Unlikely, he said: "The underlying dynamic today is parallel to the 1930s."

Mr Posen has previously warned the global economy faces the same headwinds as in the Great Depression, when he claimed misplaced policy was so severe it led to social unrest that resulted in the Second World War.

He used the stage to unpick the BIS analysis. The 1970s saw "unanchored inflation expectations", "wage price spirals", an energy shock and "an unrecognised decline in trend productivity growth", he noted. "Only oil seems to possibly be at work [this time]," he said. "All of them have to interact to reproduce the 1970s.
"BIS said all central banks should raise rates, and pointed to the UK's above-target past inflation – nonsense," Mr Posen said. "In the UK and the West more broadly, there is little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations, and oil prices are not yet a one-way bet."
Taking a non-consensus view, BIS made the strongest case yet for early and rapid rate rises. "Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks," it said. "Central banks may have to be prepared to raise rates at a faster pace than in previous tightening episodes."
It warned that high inflation is not a one-off, as the Bank has argued for the past two years, as "second-round effects" of soaring food and commodity prices have yet to feed into the system. Wages will have to rise in emerging markets as the prices of staples has soared, which will then feed back into higher goods prices for consumers in the developed world.
Mr Posen said: "Workers have limited bargaining power over wages." He also dismissed suggestions that the UK has less slack in the economy to absorb rising demand than thought, which would put upward pressure on prices.

"[There is] little risk of inflation let alone stagflation," he said. "But we still risk echoing that 30's show writ small."

SOURCE: telegraph.co.uk

U.S. Money Funds Risk Losses If Europe Crisis Sparks ‘Wildfire’

June 28 (Bloomberg) -- The European debt crisis would pose a threat to U.S. money-market mutual funds if a rash of sovereign defaults caused big banks to fail to meet obligations within the next three months.

“It would take a very rapid decline and not just in the smaller European countries” for the debt crisis to threaten U.S. money funds, George “Gus” Sauter, chief investment officer at Vanguard Group Inc. in Valley Forge, Pennsylvania, said in an interview. “You’d probably have to see Spain and Italy get into difficult shape.”

Greek lawmakers are scheduled to vote this week on a five- year austerity plan for the cash-strapped nation to secure more international aid and avoid the euro-area’s first sovereign default. Money funds could be hurt by a default because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries.

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated.

“It’s not about whether Greece defaults, it’s what happens after that, and there’s uncertainty behind that,” Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. in New York, said in a telephone interview.

Austerity Package

European Union leaders vowed June 24 to prevent a Greek default as long as Prime Minister George Papandreou pushes a $78 billion euro ($111 billion) package of budget cuts and asset sales through Parliament this week. Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August.

“Money-market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have “sizable exposures” to European banks through short-term debt, he said.

The $2.68 trillion money-fund industry is the biggest collective buyer in the commercial paper market.

The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money-market fund in 14 years to expose investors to losses.

Scaling Back

Customers were denied access to most of their cash for months as the fund liquidated. Investors, fearing that other funds might fail, withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short- term debt.

Money market funds are limited to securities that can be converted into cash within 13 months.

JPMorgan’s Roever and Peter Rizzo, senior director of fund services at credit rater Standard & Poor’s in New York, said U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining. That would allow them to withdraw more quickly without having to sell securities into a potentially illiquid market.

S&P estimated that 80 percent of European bank holdings is limited to three months or less, and 95 percent to six months or less among the 500 U.S. and European money funds it rates.

Multiple Defaults

“The risk is if something takes the crisis from Greece to Portugal, Ireland and beyond and it spreads like wildfire,” Deborah Cunningham, head of taxable money-market funds at Pittsburgh’s Federated Investors Inc., said in a telephone interview. Federated is the third-biggest money-fund provider after Fidelity Investments and JPMorgan.

Multiple sovereign defaults could be managed if the banks don’t have to write down the bonds’ full value, said Anthony Carfang, a partner at Chicago-based Treasury Strategies Inc., which advises corporate treasurers.

“A whole lot of very bad things would have to happen very quickly for this to even approach a problem for money funds,” Carfang said in an interview.

Rules adopted by the U.S. Securities and Exchange Commission after the Reserve Primary debacle would also protect funds if investors spooked by the European crisis suddenly began withdrawing money, Carfang said. Funds now must keep 30 percent of holdings in securities that can be converted to cash within seven days.

The risk from securities issued by European banks has been “mischaracterized,” said Mercer Bullard, founder of Fund Democracy, a consumer group that advocates on behalf of U.S. mutual-fund investors.

“There is no empirical basis for the assertion that these holdings pose a threat to money-market mutual funds’ net asset values,” Bullard, a law professor at the University of Mississippi, said in testimony June 24 before a subcommittee of the House Financial Services Committee in Washington.

--With assistance from James G. Neuger and Jonathan Stearns in Brussels. Editors: Josh Friedman, Steven Crabill

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

JPMorgan's Contrarian Bet on Bank Branches

Charlsey Smedley, a retired schoolteacher in Orlando, started moving her checking account last month to JPMorgan Chase (JPM) from Bank of America (BAC), where she has been a customer for more than 35 years. "The service at Bank of America was O.K., but they just kept adding more and more fees," Smedley, 74, says outside the sleek, gray JPMorgan branch that opened last July on Town Center Boulevard. It's one of 18 JPMorgan outlets in Orlando and a five-minute walk from where Smedley used to bank. The $150 JPMorgan offered to put in her account as a promotional enticement helped seal the deal, she says.
Jamie Dimon, JPMorgan's chief executive officer, had people like Smedley in mind when he announced plans in February to open as many as 2,000 branches, more than half of them in Florida and California, expanding the New York-based bank's network by almost 40 percent. He's targeting states dominated by Bank of America, the biggest U.S. bank by deposits, and Wells Fargo (WFC).
The strategy runs counter to Bank of America's plan to close 10 percent of its offices as analysts question whether the industry needs a bank on every corner. As customers cut back on borrowing and mobile and online banking take hold, doubts about the expense of branches have arisen. "Two thousand is a mind-bending number, even for a bank the size of JPMorgan Chase," says Bob Meara, a senior analyst with Boston-based consulting firm Celent. "Branch building on a large scale seems tough to justify."
Dimon's plan is based on the theory that having more branches enables the bank to attract deposits, a cheap source of funding and a big edge in the post-crisis, Dodd-Frank era of stricter bank regulations. A larger branch network enables JPMorgan to sell investment products to customers and offer banking services to businesses, analysts say.
It also allows JPMorgan to expand its brand in markets such as Florida and California where it gained a foothold by buying Washington Mutual in 2008, according to Ryan McInerney, CEO of the firm's consumer bank and a member of its executive committee. "We don't have nearly the density or branch presence we think we need to serve our current customers or acquire new customers in those markets," he says. "We view it as a very big opportunity."
JPMorgan's five-year strategy calls for 525 to 700 new outlets in California, 375 to 500 in Florida, and an additional 800 elsewhere, according to an investor presentation. The bank had 5,268 retail branches at the end of 2010, the third-largest network in the U.S. behind those of San Francisco-based Wells Fargo, with 6,314, and Bank of America, with 5,856, according to yearend filings.
Dimon estimated at an investor conference on June 2 that each branch makes on average about $1 million a year in profit. That would mean the new outlets may contribute $2 billion to annual profit once they've been open for several years. Dimon's wager is that JPMorgan can soak up deposits from shuttered community banks or beat-up regional lenders forced to trim their footprint, says Brian Foran, an analyst with Nomura Securities International in New York: "They see blood in the water."
Other analysts point out that banks with large branch networks such as JPMorgan may gain little benefit from deposits since they have few attractive ways to deploy the funds amid a decline in borrowing and historically low yields on fixed-income securities. "I would love to know what advantage they see in their retail-banking model," says Nancy Bush, a contributing editor at SNL Financial, a bank-research firm in Charlottesville, Va. "It's good, but is it wildly superior?" With consumers trying to pay off debt and avoid new loans, "the macro trend would be for the entire financial sector to contract, and that means fewer branches, not more," she says.
Bank of America shut 200 branches in the last five quarters through March, CEO Brian T. Moynihan said in April. Wells Fargo, still digesting its 2008 purchase of Wachovia, has chosen to add resources to existing branches rather than open hundreds of new outlets. The bank, which opened 47 branches last year, placed about 5,000 more bankers into former Wachovia offices, CEO John G. Stumpf said on June 3.
Bank of America already has a fully developed branch network in Florida and California, says Walter Elcock, the executive responsible for branches. The bank has plans to add bankers to about 1,500 branches to sell more investment, mortgage, and small-business products. "Our strategy is much more focused on strengthening relationships with existing customers," he says. "It's not about customer acquisition."
A 2010 survey by the Washington-based American Bankers Assn. found that 36 percent of respondents preferred banking online compared with 25 percent who said they would rather bank in person. Even so, "the banks have figured out they need to be able to deliver their products through multiple channels, and branches are one of those that will be here to stay," says Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Me. "Banking has yet to find the killer app to make branching obsolete."
The bottom line: By adding as many as 2,000 branches in five years, more than half in California and Florida, JPMorgan would have the nation's largest network.

Vietnam's Labor Unrest

In May, Japanese motor maker Minebea broke ground in Phnom Penh for a 5,000-worker plant. The company had at first considered Vietnam but rejected it because strikes had become increasingly common there. "A strike would be trouble," Yasunari Kuwano, a spokesman at Tokyo-based Minebea, says of the $62 million plant, which will make motors for appliances and digital equipment. "Labor is the key focus for us in choosing Cambodia."
As Minebea was starting to build its plant, London-based cable maker Volex Group and Japanese lingerie company Wacoal Holdings (WACLY) were among the foreign investors in Vietnam facing illegal wildcat strikes. Workers are demanding better pay as the highest inflation in Asia hurts their purchasing power. Inflation quickened to a 29-month high of 19.78 percent in May, stoked by fuel and electricity prices. The key index for the Ho Chi Minh City Stock Exchange has declined about 14 percent over the last 12 months, the worst performance for that period in Asia, and the currency has slid 8.6 percent against the dollar.
Vietnam had 336 strikes in the first four months of 2011, according to its General Confederation of Labor: That's on course to beat the 2008 record of 762. Many are wildcat stoppages, which lack legal authorization, according to the Geneva-based International Labor Organization. "Every day, somewhere in the country there is a strike," says Youngmo Yoon, a Vietnam labor specialist for the ILO. Average wages should rise 12 percent this year.
The strikes have dented Vietnam's 25-year-old policy of offering foreign investors a stable workforce whose minimum wage, at $85 a month, is still half that of China. It was an effective policy, until now. Planned foreign direct investment in Vietnam fell 48 percent in the first five months of 2011, to $4.7 billion. "The nation is at a crossroads," says Victoria Kwakwa in Hanoi, the World Bank's country director in the Southeast Asian nation. "Vietnam can't assume that FDI will continue. Money can go elsewhere."
In March the government switched its focus to inflation rather than expansion and has cut its 2011 growth target to 6 percent from up to 7.5 percent. Since the credit-rating agencies lowered Vietnam's sovereign debt rating in December, some foreign investors have become wary of making a long-term bet. In June, Srithai Superware, a Bangkok-based maker of tableware, suspended plans for a $5 million expansion at its plant in southern Vietnam because of "economic instability," says Santi Sakgumjorn, general director of the Vietnamese unit. The company says it will set up a subsidiary next door in Laos. "In the short term, we have no confidence in the economic situation in Vietnam," Sakgumjorn said in an e-mail. Production costs have gone up after two salary increases this year, he says.
Vietnam's workers say they have to strike. At an industrial park in Hanoi, factory hand Le Kien scans job openings on a bulletin board, looking for better pay. He has just finished his shift at a plant that assembles cables used in Honda (HMC) and Yamaha motorcycles. "The price of everything—food, gas, electricity—has gone up by more than my pay raise," says Kien, 24, whose monthly salary is equivalent to $87. "I can't even afford to start a family. I wouldn't have enough to buy milk for my baby."

 

China must change for the world to prosper

Good news for poultry farmers; the ban on exports to China is being lifted. Good news all round; some £1.4bn of trade agreements with China were announced yesterday to coincide with premier Wen Jiabao's visit to Britain.

But that's where the positive stuff ends. Unfortunately, these deals will barely make a dent in Britain's yawning trade deficit with China. Nor do they address the underlying structural issues which act to keep British exports out.

In 2009, the last year for which detailed figures are available, China sold £17bn more to us in goods and services than we sold to them, making China far and away our biggest deficit country. Things plainly need to change.

Yet lamentable though the UK's export performance has been these past 30 years, the fault is more theirs than ours. They need to change a lot more than us if the UK is ever to exploit the glittering opportunities David Cameron is constantly banging on about.

What's needed, the Chinese ambassador to London said in a recent interview with The Daily Telegraph, is a big flagship contract to transform the Anglo-Chinese trading relationship. Why not, he suggests, exploit China's growing expertise in high-speed rail by giving the contract for the £17bn London to Birmingham link to China?

Clever man that he is, I'm not sure Liu Xiaoming fully understands the nature of the problem. We need to be exporting more to them, not the other way around.

Now if China were to finance the line as well as build it, making Chinese taxpayers liable for the risk rather than our own, that might be a different matter. The link would at least then count as a big capital investment in the UK, and thereby help offset the costs of China's ever-growing trade surplus.
But in any case, it's not going to happen. The high-speed rail link is to be a substantially UK taxpayer-funded project. Anything the Chinese manage to win from the tender will only add to the deficit rather than subtract from it. The ambassador's "solution" would make the problem worse, not better.
In recent days, Mr Wen has come surprisingly close to admitting publicly something that he has long implicitly acknowledged, that the capital imbalances caused by the extraordinary size of China's trade surplus with the rest of the world have been a contributory factor to the recent financial turmoil.
More than any other Chinese leader, he seems to recognise the need for change. The Chinese economy, he has said, has become "unstable, unbalanced, unco-ordinated and ultimately unsustainable".
Just as the UK economy needs to rebalance away from domestic consumption to net trade and investment, the Chinese economy must rebalance the other way from net trade and investment to consumption. But can Mr Wen deliver? So far, the practice has failed to match the rhetoric.
It's easy to see why. China's economic miracle was built on exports and investment, dynamos of growth which are now hardwired into the country's economic DNA. Change is not just difficult; both politically and economically, it's also exceptionally high risk.
Social stability – and what China's political leadership still self-interestedly imagines is the only guarantee of that stability, the continuity of Communist Party rule – is still prioritised over the sort of economic liberalisation that would allow for a more balanced world economy.
In recent years, consumption has grown strongly, creating the illusion that things are indeed changing. But it hasn't grown nearly as strongly as savings and investment, which still form a bizarrely high proportion of Chinese GDP.

It's not only Greeks who've lost their marbles

The essence of ancient Greek tragedy is that the audience knows it will end in disaster, but feels compelled to watch the horror unfold. And so it is with the modern version, a sovereign debt crisis of Sophoclean dimensions. Themes of the great dramatist's finer works are all there: how arrogance, pride and deception result in unbearable pain; the inevitability of retribution and (not yet witnessed in Athens or Brussels) the arrival of wisdom through suffering.

Tomorrow, Greek MPs are scheduled to vote on a fresh austerity package. If it's passed, the country will receive the next 12 billion euros of a 110 billion euro bail-out. Sadly, this is little more than a financial hors d'oeuvre. Still required is an additional 100 billion euro deal if Greece is to remain solvent until 2013. In effect, the country is borrowing enormous sums to service existing debts, which it cannot afford to repay. As Sophocles reminds us, when divine and human purposes conflict, the gods will always prevail. In this case, Athena, the deity of endeavour and reason, is deeply offended by Olympian self-indulgence. The upshot will not be a miraculous economic recovery, but a spectacular flame-out. As far as Greece is concerned, there is no deus ex machina. The tragic denouement will involve its default or withdrawal from the single currency, perhaps both.

Greece is bust; it already owes 160 per cent of its GDP. Its economy is staggeringly inefficient. Many in the public sector enjoy retirement at 50 and pensions close to full final salary. The private sector is blighted by corruption. The tax-collecting system operates on the basis of a tips box, with only 5,000 Greeks admitting to an income of more than 100,000 euros. When in January 2001 the country flagged its intention to ditch the drachma for the euro, the then prime minister, Costas Simitis, promised: "Our inclusion [in the eurozone] ensures for us greater stability and opens up new horizons". That was the comedy.

Now for the tragedy. Greece's entry was based on a false prospectus, as the European Commission admitted in 2004: "It is clear Greece would not have joined the euro with the figures we have now." Greece hid massive budget deficits between 1997 and 2003 by understating military spending, exaggerating VAT receipts and overestimating social security surpluses. Thereafter, while the Brussels elite was suspending disbelief, the Greeks were borrowing cheaply, paying themselves lavishly and spending uncontrollably. The state became a vehicle for pillage and patronage. Dionysos, god of parties and pleasure, had his day.

Those who lecture us on the European Union's "political will" to fix a looming Hellenic bankruptcy have, like the Greeks, lost their marbles. As Bank of England governor Sir Mervyn King warned: "Simply the belief that we just lend a bit more will never be [an] answer [to a problem] which is one of solvency." He added that Greece has only two options: one, to receive gifts or transfers from friendly countries; the other, to improve productivity, enabling it to turn a current account deficit into a surplus. It's inconceivable that German voters (the EU's main paymasters) will permit the former and there's no evidence that Greeks can achieve the latter.

The political party of Prime Minister George Papandreou is in hock to the unions, whose leaders, even as the country teeters on the brink of ruin, launch rolling 48-hour strikes. Organising a Pasok in a brewery appears beyond them.
Were Greece not locked in a synthetic currency that is run for the benefit of its most powerful members, Germany and France, it would have the option of devaluation to restore competitiveness. With that route blocked, however, and with no possibility of the Greek electorate accepting necessary reforms to welfare, work practices and taxation, the most sensible outcome in the short run is an orderly debt restructuring. This is a form of default, except that it is engineered and agreed to by creditors. In the long run, Greece may have to quit the euro.

How 'fairer pensions for women' will make millions of men worse off

You might think that Government plans to raise Britain’s meagre basic state pension from £102.15 a week to a new flat rate of £140 would be a thoroughly good thing but new calculations by the Pensions Policy Institute (PPI) show that millions of men will be worse off when pensions are made fairer for women.
According to the PPI, about 5.2m people will be an average of £18 a week worse off because they will have paid more than 30 years’ National Insurance Contributions (NICs) but will not receive any State Second Pension (S2P) – formerly known as the State Earnings Relate Pensions Scheme (SERPS) – if this is replaced by the new flat rate scheme for those retiring after 2016.
That is one option being considered by the Government, which would also have the effect of increasing 6.8m pensioners’ income by an average of £23 a week. According to the PPI’s analysis – commissioned by the National Association of Pension Funds (NAPF) – the winners will mostly be women and people who have interrupted work histories; perhaps to care for others or simply through unemployment.
However, the other option being considered – to switch S2P to a flat rate as part of two tier State pensions by 2020 – would mean no older people would be better off than they are now and 5m would be worse off. Niki Cleal, a director of the PPI said: “Those individuals who would have qualified for large amounts of state pension in the current system could lose out the most under a single-tier pension – often moderate to higher earners with an expected full career and NICs record.
“A single-tier pension could also significantly reduce the percentage of pensioner households eligible for Pension Credit from 35pc under the current system, to around 5pc of pensioner households by 2055.
“The single-tier pension could also place additional burdens on employers and employees in defined benefit schemes in both the public and private sectors as NICs would increase.”
For example, employers’ and employees’ NICs increased by one percentage point last April – to 12pc and 13.8pc respectively – and NIC rebates or refunds for final salary or defined benefit schemes that opt out of S2P will be cut from from 5.3pc to 4.8pc next April.  This will help the Government fund higher flat rate basic state pensions but make it more expensive for the minority of private sector employers who still offer final salary schemes to do so.
Zoe Lynch, a partner in pensions lawyers Sackers, said: “The headlines on the Government’s Green Paper on the changes to the state pension have been stolen by the good news story that everyone may receive a flat rate basic state pension of £140 per week.
“But the knock-on effects of this piece of good news have been tempered by the possibility of the closure of yet more defined benefit schemes following the potential withdrawal of the ability to contract-out of S2P.”
However, Joanne Segars, chief executive at the NAPF, said: “The UK has one of the meanest, most convoluted state pensions in Europe, and a radical overhaul is long overdue.
“A simpler, more generous state pension is a win-win that could lift millions out of poverty without hitting the taxpayer’s pocket. Those who are disadvantaged by the current system, like women and the self-employed, will be better off.”
Similarly, Dr Ros Altmann, director general of Saga, said: “All the evidence suggests that creating a flat rate, single tier state pension – above the Pension Credit level – is the only realistic choice.
“It will mean that our state pension system in future would finally be understandable and ensure that for younger generations, the threat of means-testing penalties to their private pensions on retirement will be almost completely lifted.”
It’s hard to argue against that. Unless, of course, you are one of the hard-working men who paid NICs for 30 years and now look set to get less pension.


SOURCE: telegraph.co.uk

There are still some people with faith in the euro

All eyes are firmly on Greece again this week as the country's beleaguered politicians debate (and hopefully back) the fiercely contested package of spending cuts proposed by prime minister George Papandreou.

Both the EU and IMF are demanding that Greece's parliament approve the measures before handing over the latest instalment of cash needed to bail out Greece.

Listen to some commentators and it's not just Greece's bailout which is hanging in the balance this week. The future of the entire Euro project is now apparently at stake.

New York University's Nouriel Roubini is among those to have warned in recent weeks that the Eurozone is heading for break up, while hedge fund manager George Soros claimed at the weekend that at least one country would leave the Eurozone.

The commentators may be predicting the end of the euro – but not, it appears, the world's speculators.

Data released by the US Commodity Futures Trading Commission (based on the activity on the Chicago Mercantile Exchange) late Friday night revealed that hedge funds are actually long (not short) of the euro. With 29,771 more bets on the euro rising against the dollar, than falling.

SOURCE: telegraph.co.uk