Spain Sets Massive Precedent – Charges Its Central Bankers in Court


TheMillenniumReport

Claire Bernish

First, Iceland, and now Spain has taken on the Big Bankers responsible for financial calamity, as the country’s highest national court charged the former head of Spain’s central bank, a market regulator, and five other banking officials over a failed bank leading to the loss of millions of euros for smaller investors.

This, of course, markedly departs from the mammoth taxpayer giveaway — commonly referred to as the bailout — approved by the U.S. government ostensively to “save” the Big Banks and, albeit unstated, allow the enormous institutions to continue bilking customers without the slightest fear of penalty.

Errant bankers and financiers, it would seem, typically manage to either evade actually being charged, or escape hefty fines and time behind bars.

Spain’s Supreme Court last year ruled “serious inaccuracies” in information about the listing led investors to back Bankia in error, thus the bank has since paid out millions of euros in compensation.

But Spanish authorities could not abide the telling findings of a yearslong investigation into the failed listing, as Wolf Street explains,

“As part of the epic, multi-year criminal investigation into the doomed IPO of Spain’s frankenbank Bankia – which had been assembled from the festering corpses of seven already defunct saving banks – Spain’s national court called to testify six current and former directors of the Bank of Spain, including its former governor, Miguel Ángel Fernández Ordóñez, and its former deputy governor (and current head of the Bank of International Settlements’ Financial Stability Institute), Fernando Restoy. It also summoned for questioning Julio Segura, the former president of Spain’s financial markets regulator, the CNMV [National Securities Market Commission] (the Spanish equivalent of the SEC in the US).

“The six central bankers and one financial regulator stand accused of authorizing the public launch of Bankia in 2011 despite repeated warnings from the Bank of Spain’s own team of inspectors that the banking group was ‘unviable.’”

As AFP reports, “The National Court validated conclusions made by prosecutors who concluded that when ‘an unviable entity has been listed on the stock market, its administrators or auditor should not shoulder all the responsibility.’”

Specifics of the charges have not yet been made apparent, but as The Economist reports:

“The court is questioning why they allowed Bankia to sell shares in an initial public offering in 2011, less than a year before Bankia’s portfolio of bad mortgage loans forced the government to seize control of it. It said there was evidence the regulators had ‘full and thorough knowledge’ of Bankia’s plight. After its nationalisation, it went on to report a €19.2bn ($24.7bn) loss for 2012, the largest in Spanish corporate history.”

Internal emails and documents played a crucial role in ultimately bringing the central banking officials to task for the failure of Bankia — inspectors bringing issues to the attention of superiors were allegedly ignored. One email cited by the Economist came from an inspector who warned Bankia was “a money-losing machine,” for which an IPO would not solve.

Another report, deemed “devastating by the court,” saw an inspector advise Bankia to seek a private buyer rather than proceed with the listing.

An inquiry into “the participation of other players, such as officials in the central bank,” was also urged by the National Court.

As the Economist points out, Spanish judges are generally reluctant to sentence first-time financial criminals to prison; though five Novacaixagalicia executives had five-year suspended sentences — levied for embezzlement in 2015 — abruptly enforced in January.

Meanwhile, taxpayers in the United States have yet to see Big Bankers criminally responsible for the financial ruin of so many Americans brought to any semblance of justice for their wrongdoing.

 

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What Would Actually Happen If All Debt Was Erased?


TheEventChronicle

 

The Invention of Debt

What you may not know is that debt arose recently on the human stage. Throughout more than 99% of our history we have not even had a concept for debt. (The interested reader can pick up David Graeber’s excellent book Debt: The First 5000 Years for full story.)

Anthropological studies of hunter-gatherer societies reveal that there were no barter systems, no currencies to use for money, and — in the absence of these cultural artifacts — there was no debt. With all the great variation cross cultures one might expect from ethnographic research, the anthropologists found that some tribal communities engaged in “gift economies” where status arises from how generous a person is who has acquired wealth, while others have remained egalitarian and non-hierarchical for thousands of years by sharing their food and materials based on the principles of “from each as they are able, to each as they need.”

This belies the great misunderstanding about communism that treats it as a state-centric governing system, when in truth it is the foundational sentiment of any community that builds upon the trust and good will of social relations between people who know and depend upon one another — a condition that has held for all hunter-gatherer societies throughout our long 200,000 year history as a species.

Pick up an economics textbook at random and you will find a classic (and false) “just so” story about the need for barter systems to have money. They all go something like this: Steve has potatoes and needs some shoes. Bob has shoes but does not need any potatoes. They are unable to directly exchange goods due to this mismatch of need, and so must introduce a money system to preserve the value of currency across multiple exchanges that enable Steve to sell his potatoes to Sue and acquire money that he can then use to pay Bob for a pair of shoes. What this simple narrative conceals is the broad evidence from ancient cultures studied by anthropologists that no such problem arises in this way.

What really happens is that a warring society has arisen somewhere (to get a sense of how this happens, read my article about psychopaths and agrarian city states) and is in a mode of conquest. When this burgeoning empire conquers new land, the ruler imposes a system of taxation on the local populace to pay for the costs of war. This imposition of scarcity, by extracting resources from the local population to be hoarded by the warrior chieftain, is what leads to the emergence of barter systems and — in some instances — the introduction of a money system by the ruler.

In the absence of war and conquest, hunter-gatherer societies do not spontaneously create barter systems. Instead they share more or less equally within their tribe and only trade with other tribes through highly ritualized and often conflict-ridden exchanges that take place when two tribes come together for a brief interaction. The pathway that does lead to the emergence of barter systems takes place in agrarian societies where some kind of accounting system has been created to track debts. And from these accounting systems we do find that debt is present.

So where does debt come from if it isn’t naturally a part of human societies? Again it is the imposition of scarcity by the ruling class — designed to extract and hoard wealth in the hands of a powerful elite — that creates the notion of debt. Does this sound familiar in today’s context? Many countries were “modernized” throughout the 20th Century by introducing market systems that structure debt into the economies of newly founded nations. These nations now must pay tributes — in the form of interest payments — to external banks that extract wealth from the poor countries and hoard it in the coffers of wealthy countries.

Stated plainly, debt is created when a powerful group of people impose scarcity upon another group of people who have been conquered. This is the root cause of poverty. It is the destabilizing force of unequal societies that breeds civil unrest and revolution. Thus the need for Hebrew kings to introduce Jubilee. They knew that a revolution might cause the people to rise up and clear their own debts, while also uprooting the monarchy from power. In order to preserve their power base, they would routinely erase the debt and start again.

A Note About Debt and Moral Accounting

The astute reader may already be asking, “What does this story about the creation of debt say about the religious use of moral accounting?” You may have noticed that all the world religions have at their core a transactional relationship between God and humans — where each person owes a debt to their creator and must pay it either by relinquishing sin from their lives or by returning to their maker upon death.

This economic transaction frame for moral accounting is not present in all human societies. Those hunter-gatherer tribes practicing the ethic of distribution based on need have no concept for trading an eye-for-an-eye. Nor do they see a gift as something to be repaid, expressing disgust at the insult of treating their generosity in such a transactional manner.

Instead what anthropologists have found is that debt-based morality is only present in societies that already have accounting systems and also engage routinely in barter and monetary exchange. In other words, this moral accounting system is a product of war and conquest and not a natural part of human society. So the next time you feel a debt to one of your friends, society, or your maker it may help to keep this in mind.

What Would It Mean to Erase All Debt?

We are living in a time when too many of our financial resources are allocated to non-productive activities — principally the accumulation of wealth by “making money with money” and a myopic focus on economic activities that service our massive debts. This is why people work at jobs they hate. It is why investments are not being made in renewable energy, public education, the arts, health care, or the eradication of poverty. We have built a massive financial house of cards on debt — with money itself coming into being when loans are taken out, a pool that grows exponentially due to the interest that accompanies it — and so we are not able to bring consumer culture to an end or focus our creative talents on planetary sustainability.

By the way, this is exactly what my friends at /The Rules are trying to address in their global mobilization effort.

So if we were to erase all debt, the 7 billion people alive today could focus on their passions. We could all come together to address global threats — be they resource-based like the scarcity of fresh water or peaking of global oil production; or cultural like the loss of spiritual meaning in the secularization of society or the soullessness of employment drudgery that comes from working long hours at a mind-numbing job.

What comes to my mind is the way cities try to implement broad solutions to address economic development, transportation, resource management, social justice, and environmental concerns. They must operate within constrained budgets that keep draining further without a clear end in sight. I imagine what would be possible if everyone was able to set out on their own intellectual and experiential journeys without the fear of a debt-collector coming to their door. How then would the peoples of this world choose to live out their lives?

Perhaps you have your own dreams of a better world for you and your loved ones. What comes to mind for you? This is not merely an academic question, by the way, because we each participate in the social realities that are lent our beliefs, our actions, and our obligations. If we were to collectively decide that our debts are no more, they would cease to exist.

This is because what we take to be real in many respects becomes so as a self-fulfilling prophesy. We each have the power to be accountants — defining “the real” by choosing what to measure and imbuing it with significance. In this way, the Gross Domestic Product was claimed as an economic alter for measuring the progress of civilization in the 20th Century. Perhaps in the 21st we will replace it with Gross National Happiness or some other novel metric for capturing the essence of our values and purpose as a civilization on this Earth.

Watch the video below:


Joe Brewer is co-founder and research director of Culture2 Inc., a culture design lab for social good. He is a former fellow of the Rockridge Institute, a think tank founded by George Lakoff to analyze political discourse for the progressive movement.

Source: Common Dreams
Via: Conscious Life News

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The Fake News About Central Banking


TheDailyBell

Trump Shouldn’t Bully the Fed … U.S. President-elect Donald Trump repeatedly criticized Federal Reserve Chair Janet Yellen during his campaign. British Prime Minister Theresa May has questioned the Bank of England’s recent actions, for a while putting Governor Mark Carney’s tenure in doubt. The long-cherished principle of central-bank independence seems to be under attack.  – Bloomberg

The mainstream media is up in arms over “fake news” but the reality is that almost everything the mainstream reports is in a sense fake. Global warming is fake. Vaccines do not work as advertised. Central banking is fake too.

On and on. Truth has been overtaken by propaganda. We call these fake notions “dominant social themes.” They are inevitably intended to reinforce the idea that a very few must have control over the many.

Central banks fix the volume and value of “money” – and price fixing inevitably creates disasters. But you will never find this simple fact stated in almost any mainstream media article about central banking.

This Bloomberg article is no exception. Seldom do we see all the fallacious reasons for a central bank gathered together in one short editorial, but Bloomberg has done us this favor.

In this case, Bloomberg is trying to justify why central banks should be “independent.”

More:

 The standard case for leaving central banks alone to conduct monetary policy rests on three points.

First, a government that controls the central bank might be tempted to finance unaffordable budget deficits by printing money. (See Zimbabwe.) Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. (Would anybody want to put Congress in charge of interest rates?) Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.

All three of these points are fallacious. First, central banks, independent or not, over-print money on a regular basis. Western central banks have a goal of creating price inflation, which institutionalizes this overprinting, usually via too-low interest rates.

Second, the idea that an independent central bank can provide “a steady hand on monetary controls” is laughable. Central banks the world over are cartelized via the Bank for International Settlements in Switzerland. Central bank policy is created via a secret monopoly and anyone looking over the past 20 years of central bank existence can easily see that the current “steady hand” has yielded up a series of global monetary disasters.

Even Bloomberg has trouble with the third reason being cited, that central banking is “apolitical.”

The editorial admits that “Changes in interest rates hurt some and help others,” and thus central bank policy-making is innately political. But because it is political, the predictable argument is made by Bloomberg that central banking ought to be “independent.”

Bloomberg states, “Disagreement is OK. Intimidation is not.”

The argument here is that statements by Donald Trump regarding the endless and ruinous low-rate regime of the Federal Reserve are “worrying” because Trump is bullying the Fed rather than criticizing it.

The larger argument, and it’s one that Trump is surely familiar with, is that central banking cannot be justified at any level. As soon as individuals or groups attempt to manipulate the money supply, prosperity is inevitably affected and wealth is endlessly consolidated.

This is just what’s happened around the world and especially in the West. Wealth has been gathered into fewer hands and the financial industry itself has grown without stopping until it has virtually taken over the larger economy.

Conclusion: Money needs to be regulated by markets, not by a handful of individuals. There is plenty of free-market economic theory that illustrates logically why this should be so. Bloomberg’s argument is wrong, but at a more fundamental level, Bloomberg is addressing the wrong issue. The problem with central banking is not whether it should be independent, but whether it should exist at all.

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Former CEO Of UBS And Credit Suisse: “Central Banks Are Past The Point Of No Return, It Will All End In A Crash”


ZeroHedge

Remember when bashing central banks and predicting financial collapse as a result of monetary manipulation and intervention was considered “fake news” within the “serious” financial community, disseminated by fringe blogs?

Good times.

In an interview with Swiss Sonntags Blick titled appropriately enough “A Recession Is Sometimes Necessary“, the former CEO of UBS and Credit Suisse, Oswald Grübel, lashed out by criticizing the growing strength of central banks and their ‘supremacy over the markets and other banks’. The former chief executive officer claimed that the use of negative interest rates and huge positive balance sheets represent ‘weapons of mass destruction’. He calls for an end to the use of negative interest rates.

Oswald Grübel, 72, led both UBS and Credit Suisse.

Sounding more like a “tinfoil” blog than the former CEO of the two largest Swiss banks, Grübel warned that central banks have “crossed the point of no return” which will ultimately “end in a crash.”

Joining Deutsche Bank in slamming NIRP, Grubel said that banks are losing hundreds of millions of francs each year to negative interest rates paid to central banks.

Worse, he warned that central banks will eventually lose their credibility in the markets but that this could take 10 years or more, at which point it will “all end in a crash.” What happens then? The former CEO believes that the final outcome will be wholesale financial nationalization: “after that all banks could belong to the state”

Grubel also the doubted the wisdom of the Swiss National Bank’s balance sheet: “the Swiss National Bank’s balance sheet now accounts for 100 percent of GDP. Japan is also 100%, but mainly invested in its own state paper. The ECB and the Fed are 30%. Switzerland is far, far, far ahead. Is that wise?”

The former CEO also touched on a point we have made ever since 2010 when we said that in a world of unprecedented political polarity, politicians now control the world almost exclusively through monetary policy, to wit: “After the financial crisis, politics has taken power in the banking sector: It has bound the banks into a regulatory corset and now they can no longer move. Politicians have told central banks: now you determine what is going on with the economy.”

What are the implications of this power shift? “Previously, the risk was distributed to thousands of banks. They had to pay for their mistakes. The risk lay with the shareholders. Today, more and more the state carries the risk.” Which, of course, is another word for taxpayers. In other words, the next crash will be one where central – not commercial – banks are failing, and the one left with the bill will once again be the ordinary person in the street.

In a tangent, Grübel gave his thoughts on what makes a man rich: “rich is a man when he goes to bed in a carefree manner and wakes up without care.” He is then asked if, by that definition, a billionaire is rich to which he replied: “No. Money has little to do with wealth. The real rich are carefree. Those who are healthy, are not dependent. The greatest wealth is independence.

Grubel takes issue with the unprovable claim that only trillions in central bank liquidity injections prevented the entire world from sliding into a 1929-type depression: “It is said that without this money we would fall into the worst recession since 1929. This is a typical utopian-socialist interpretation of the economy, which knows no limit of government debt.

His damning summary: “a recession is sometimes necessary to abolish old structures and to bring renewal.” Alas, this critical point remains lost on virtually everyone in a position of control, and as a result the delay assures that the day of reckoning will be far worse.

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Cash Is Not the Enemy; Central Banks Are


FEE

Cash Is Not the Enemy; Central Banks Are

Ostensibly to foil terrorists, the European Central Bank intends to stop producing €500 banknotes. Getting rid of the bill, referred to by the sinister name ‘Bin Laden’, “will make life harder for criminals, raising their costs and increasing their detection risks,” Peter Sands, a former chief executive of the British bank Standard Chartered and enemy of big bills, told the New York Times.

Nonfarm Payrolls
Photo by 401(K) 2013

Rogoff views the world as a giant chess game, and we are mere pawns in the all-knowing monetary mandarins’ game.However, all of the public safety blather is mere eyewash. Kenneth Rogoff writes in The Curse of Cash that central bankers know getting rid of cash “would make it easier for central banks to invoke negative interest rates either when inflation is stuck at very low levels or, far more significantly, when the economy is in deep recession and requires substantially negative real interest rates to help stimulate demand.”

Rogoff quit high school to play chess and achieved Grandmaster status, but decided to pursue economics and now teaches at Harvard after working at the IMF and the Fed. Readers of “Curse” will get the feeling Rogoff views the world as a giant chessboard, and we humans are mere pawns in the all-knowing monetary mandarins’ chess game.

Money in Rogoff’s world is the government’s tool. There is no sense in Bitcoin or anything else competing with government money, for “it can use laws, regulations, and outright coercion to come out on top: a determined government is always going to win the battle of currency supremacy, at least in the long run.”

Ironically, it is the government’s cash that the professor sees as the enemy. The majority of currency (80 percent to 90 percent) is made up of large denomination bills, and he believes there is no use for $100s, $50s, or $20s other than criminal activity and tax evasion.

Cash Is King

I would urge the ex-Fed economist to come down from his Ivory Tower and visit Las Vegas where C-notes are the coin of the realm, or go to a trailer park and collect rent, where most occupants pay in the bills he wants to abolish.

Rogoff’s plan to handle such pedestrian concerns is to hand out debit cards to the poor and let one, five, and 10 dollar bills circulate until converted to coins.

Rogoff and other cash haters wish to turn time-preference on its head. Savers should pay borrowers for delaying consumption, instead of the other way around. However, as Murray Rothbard explained,

What we need, in short, is savings: this is the factor limiting investment. And saving, in turn, is limited by time-preference: the preference for present over future consumption. Investment always takes place by a lengthening of the processes of production, since the shorter productive processes are first to be developed. The longer processes remaining untapped are more productive, but they are not exploited because of the limitations of time-preference. There is, for example, no investment in better and new machines because not enough saving is available.

While the author explains that cash is the enemy of central bank policy, he does not admit it is the enemy of fractionalized banking. A hundred dollars on deposit can be lent out and multiplied by the banking system. A hundred dollars in cash can not. “The ‘bank run,’ which shivers the timbers of every banker,” wrote Murray Rothbard in The Case Against the Fed, “is essentially a ‘populist’ uprising by which the duped public, the depositors, demand the right to their own money. This process can and will break any bank subject to its power.”

In Europe and Japan, where Rogoff’s negative interest rate policy panacea is ineffectively underway, the run is on safes. Savers seeking the high yield of zero are hoarding money at home. “To be sure, the Germans are merely catching up to where the Japanese were over half a year ago,” reports Zero Hedge.

Super Negative Rates

Rogoff writes that incentives to hoard cash must be taken away so negative rates can work their magic. He claims Europe and Japan have just tiptoed into negative rates and if they haven’t worked, and they haven’t, it “cannot be viewed as a decisive test of how they might work after necessary preparations have been made, because many issues have yet to be dealt with, especially finding a way to deal with a run into cash.”

Pushing rates to say -5% if necessary “will be transformative” claims the Harvard economist. He asserts that it’s no big deal, comparing it to dropping the gold standard, moving away from fixed exchange rates, and central banks becoming independent.

Are interest rates not prices? And if so, should they not be discovered instead of imposed?The idea is that instead of letting their money do nothing, negative rates would push people to spend the economy into prosperity. Keynesians view savings (or hoarding) as bad. The hoarder is depriving the economy of consumption that creates employment. In no time, Keynesians fret, everyone becomes a hoarder and the economy spirals down the recessionary rabbit hole never to return.

However, Keynesians forget about production and the capital needed to fund it. On this Ludwig von Mises explained, “Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material condition of man; they are the foundation of human civilization.”

Rogoff believes the government must have monetary policy, to stabilize the economy,  respond to financial crises, create price inflation and ”engage in partial default on government debt.”  Government money is a “natural monopoly” he claims, writing, “the modern-day system of having independent central banks run by technocratic central bankers has worked far better than any other system so far, certainly better than a gold standard would.”

That is an amazing assertion coming from a guy who co-authored, with Carmen Reinhart, This Time Is Different: Eight Centuries of Financial Folly. The world has gyrated between boom and bust since the last thread to the gold standard was cut in 1971, and Rogoff himself lists the numerous inflations and hyperinflations that have occurred in recent decades.

James Grant, in an acceptance speech before the Money Marketeers, wondered aloud what he would have done should Ron Paul have won the presidency in 2012 and appointed him Fed Chair. “Are interest rates not prices?” He would have asked members of the Federal Reserve Board. “And if so, should they not be discovered instead of imposed?”

The Pretense of Knowledge

As for the 700 economics PhDs employed by the Fed that Rogoff is so impressed with, Grant channelled Nobelist F.A. Hayek, saying he would ship “these aspirational physicists” to NASA or the National Science Foundation, and hire a few financial historians in their place.

Hayek,in his Nobel Prize

 

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The Central Bank Power Shift from West to East, Game of Thrones Style


Nomi Prins

 

(This piece is a version of my article appearing in Jim Rickard’s Strategic Intelligence newsletter this month. It gives you an idea of what’s to come in Artisans of Money (abent the Game of Thrones comp.)) Enjoy.

“When you play the Game of Thrones, you win or you die.” – Cersei Lannister

I was late to Season 6 of Game of Thrones (while buried in writing my next book Artisans of Money.)  If you have never watched Game of Thrones, a) do so immediately and b) here’s the nutshell. The show, based on the book series, depicts a land in which several kingdoms are duking it out for the Iron Throne, the symbol of absolute power.  Think the board game “Risk” except with dragons, magic, an army of the dead, and lots of blood.

While I was watching, I couldn’t help noticing that its backdrop is a dead ringer for central banks’ strategy.  The Fed clings to status quo. Other central banks are vying to knock it down, or at least loosen its grip on them. But the Fed behaves as if it has no idea there are other powerful central banks that want to grab and harness its power. It carries on refusing to acknowledge that there may come a time, sooner rather than later, where its power is attacked.

The ramifications of such an attack will impact the standing of the U.S. in the world.  The Fed can carry on being oblivious, but Game of Thrones illustrates the struggles playing out right now.

In the Game of Thrones world, emerging queen, Daenerys Targaryen is biding her time and building her army. She is creating alliances in Meereen, an ancient country in the East (her awesome fire-breathing dragons in tow).  She’s playing the long game, strategically planning when to elevate the fight against the ruling queen in the West, Cersei Lannister.

The most important part of Daenerys’ story is not that she is determined to rule the seven kingdoms and take possession of the Iron Throne. It’s that she knows she can’t do it alone. So she aligns reinforcements, smaller power bases.

These smaller partners may or may not have allegiance to her based on the legitimacy of her claim to power — but they have all been wronged by the Lannister’s. This family, currently led by Cersei Lannister, is extremely wealthy and powerful, but hasn’t managed to lead the western kingdom, Westeros, to wealth and power. In fact, the people in Westeros are becoming increasingly frustrated and scared of their rulers.  (You see the similarities?)

Not only has Cersei managed to create enemies out of the smaller families that surround her, she recently massacred a large portion of the city she rules to protect her own interests. She is losing her power domestically and globally, but continues to think and act as if she will rule forever. We’ll see what happens next season.

The Fed’s State

In this situation, the Lannisters are representing the U.S. and the Fed specifically. The Fed remains in denial about the true state of the domestic and global economies. In its realm of hubris, it has no idea of the steps other central banks are taking, or want to take, to reduce their exposure and reliance on not just the U.S. dollar, but on U.S. political, monetary, financial and regulatory policy in general.

Case in point. After the Dow dropped 250 points on September 9th, on September 12th, Asian markets nose-dived on the possibility that the Fed might raise rates (though it said nothing of the sort — the “rate tease” is a manifestation of deliberate Fed obfuscation and media boredom).  This is a pattern that plays out every month, with varying degrees of intensity, or volatility.

Enter three of the Fed’s giants, led by Lael Brainnard. During her speech at the Chicago Council on Global Affairs, she backtracked on any tightening talk saying, “the case to tighten policy preemptively is less compelling.”

That calmed markets. That day. It reminded them nothing is changing any time soon. U.S. stock markets rejoiced. Bubble-baiters bought. The Dow soared 1.3%. Elsewhere in the world though, no one wants their market whipsawed by Fed speak.  Certainly not the People’s Bank of China.

The PBoC’s approach has been to send out anti-Fed policy sound-bites through elite officials. These clips are picked up by national and international media and then spread to the general public.
On September 13th, for instance, Yi Gang, a deputy governor from the PBoC, told a central banking conference in Vienna, “We’re still very cautious on this (zero-interest rate) monetary policy.” He warned, “We have to be very careful and look at the limitations and uncertainty of a zero-interest rate policy, because in China we still have a decent growth rate.” What he basically said was “the Fed’s policy is a joke and we’re not laughing.” (I’ll have more quotes like this in Artisans of Money.)

In the Game of Monetary Policy, the Fed whacked the idea of “free markets” in the face. (For the record, I don’t believe they ever existed, because the theoretical implication is full information transparency and equal access, and that’s just not been the reality – ever.) The ECB chucked an arrow in its heart. The BOJ sliced off its head. Markets are sustained artificially. The Fed has become, as you’ll read more about in my book, the chief Artisan of Money. Central banks are bankrupt of new ideas to keep the system afloat.

Or are they? While the Fed cut rates to zero, bloated its book to $4.5 trillion, and pressed the rest of the developed world to follow, global skepticism bubbled over. First the Chinese, then Latin America. Then the IMF. Then the Chinese again. Central bank elite took turns bashing Fed policy, mostly under media radar,  and calling for an alternative to the U.S. dollar associated with it. This is the equivalent of financial warfare. The U.S. and Fed struck first.  It will take time, but the blowback is in motion.

The U.S. dollar was attached to a financial crisis fueled by big bank recklessness and Fed apathy, followed by a Fed policy that devalued money itself.  Many other countries had no choice but to follow the Fed’s lead and directives, but that doesn’t mean they were happy about it. As in Game of Thrones, the smart choice is to forge strategic alliances with other houses or be slaughtered.

The IMF is one of the houses that will be a crucial player in the new power constructs.

The IMF Power Play

The IMF, created by the U.S. and Europe, has been seeking a broader role in the monetary politics wars. For all the media dissection of every word Janet Yellen utters about rates, the IMF knows the Fed is lost. Its policy hasn’t worked. The Fed ignored this and raised rates last December, despite warnings from managing director, Christine Lagarde. Market punishment was swift and the damage was global. The move caused renewed fear and anger from nations that had already suffered at the hands of the Fed and the big U.S. banks it sustains.

The U.S. has the largest voting block within the IMF, which is located blocks away from the White House, but IMF leadership understands how the winds of change are blowing. If the BRICS and a few more developed states were to act as a voting block (or increase their voting power, as they’re attempting), they could potentially dislodge the strong influence that the U.S. has within the IMF.

It was the U.S. voting block that gave Lagarde her job in 2011, and allowed Europe to maintain its 70-year stronghold on the IMF. As a result, Lagarde’s opposition, Augustin Carstens, head of the Central Bank of Mexico, lost that country’s first bid for the role.

In Game of Thrones, this is the story of Tyrion Lannister. He’s Cersei’s brother, but has been loudly critical of her leadership. Originally, he tried to guide his sister towards better practices. She didn’t listen to him. Now, he has joined forces with Daenerys and is helping her rise to power. His loyal alliance with Daenerys has led him to ascend the ranks again, from another angle. He is well-connected throughout the seven kingdoms. He is strategic. He knows the strengths and weaknesses of all the players. He is formidable despite his size (or in central bank terms, the volume of reserves).

This is the Fed and the IMF.  That entity was spawned to augment U.S. central bank and government power in the wake of WWII. Powerful, but not as powerful. Since the financial crisis, the IMF has been strategically chipping away at the Fed’s power base. Like the PBoC, the IMF has been both criticizing and warning about the impact of Fed policy on other nations. By disparaging the Fed, it is amassing its own power. Its international influence has never been higher.

Under Lagarde, the IMF is doing more than funding development projects and supplying overall currency directives to the world, as was its original mandate.  It is reconstructing new alliances amongst countries not involved in its creation. In doing so, it is building its own power by elevating their allies.

On October 1, for the first time in 43 years, the IMF will add China’s currency, the Renminbi (denominated in yuan), into its Special Drawing Rights basket (SDR).  In doing so, the IMF, at the zenith of its own power, has tipped the scales away from the U.S. and the Bretton Woods crew that created the SDR in 1969.  The expanding SDR basket is as much a political power play as it is about increasing the number of reserve currencies for central banks for financial purposes.

The SDR Factor

China’s power ambitions go well beyond the SDR. They include international diplomacy, sustainable energy dominance, and becoming a focal point for alliances through Europe,  Russia and the ASEAN states.  The ASEAN–China Free Trade Area (ACFTA) is a prime example of why the SDR for China and the region is important as China expands its influence. So are new trade and financial pacts with Russia where the yuan and ruble exchange in deals without involving U.S. dollars. In addition, Russia and China are both starting to amass gold which could return as the 6th component of the SDR someday.

When the SDR was created as a global reserve asset, it was to supplement the international supply of gold and the U.S. dollar. Once the gold standard was demolished and countries began accumulating international reserves, there was less of a need for this global reserve asset.  It lay dormant, along with the power of the IMF. But in the wake of the financial crisis, it sprang back to life as another liquidity source for member countries.  The IMF sprang back to power as well.

The SDR was initially defined relative to gold (0.888671 grams of fine gold — the equivalent of one U.S. dollar.) After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a weighted basket of four currencies — the U.S. dollar, euro, Japanese yen, and pound sterling.

In 2015, when the yuan was approved, a new weighting formula was adopted. It assigns equal shares to the currency issuer’s exports plus a composite financial indicator. That means the more prevalent the currency in the world, the bigger its weight. If more Yuan are used in the world, its position in the SDR grows. In another crisis, it could take on the U.S. dollar and Euro, and by extension the Fed.

The SDR weight of the yuan is just 10.92 percent compared to 41.73 percent for the U.S. dollar and 10.92 percent for the Euro.1  That’s not a bad opening gambit. The next official weights review is in September 30, 2021. But in a crisis, there is latitude for this to happen much sooner.

As China continues to play host to global events (Olympics, G20, etc.) it also is in pursuit of greater regional influence. With the largest economy, and now showing its capability as having a globally recognized reserve currency, China is adding another layer of strength to its position.  While the associated confidence measure will not be the death of the dollar, it indicates that the dollar is not the only option to turn to in times of panic, or increased trade or financial growth.  The intrinsic power of that position attacks not only the dollar but the overall power of the U.S.

Competing Central Bank Kingdoms and their Power Bases

Currencies reflect both political and economic clout. Even if SDR’s themselves aren’t that voluminous yet, the shift in the make-up is meaningful. The Fed has already lost ground in the process. The IMF and PBoC have gained it. In the middle, there is an increasingly shaky, EU.

The ECB was established after the creation of the Euro in 1998 to oversee other member European central banks. It has more power than any of them because it sets rates for the EU, which dictates the cost of their money and how it flows.

Former Goldman Sachs executive and former Bank of Italy Governor, Mario Draghi is the current President of the ECB. He has followed the Fed’s policy to a letter — despite grumblings from other EU power brokers (and reality) that negative interest rates have solved nothing and instead aided to the fractiousness of the EU experiment itself.  In 2012, facing an acute European debt crisis, he promised, “the ECB is ready to do whatever it takes to preserve the Euro.” The Euro has fallen precipitously since.

If Draghi’s words are weak, his actions are weaker. The ECB is offering to pay banks that borrow money from it, plus, giving them 85 billion Euro each month through its ongoing QE program to purchase their debt. From a battleground standpoint, that smacks of desperation.

The ECB just announced it would give banks three years to write off bad loans — meaning they have lots of bad loans. Deutsche Bank is just one mega example. The ECB has failed to mitigate any risk. Its alliance with the Fed hasn’t helped Draghi build his power, just retain it, and it certainly hasn’t helped the EU as a whole.

Within the wider European Area, the Bank of England, under governor Mark Carney, retains legacy power. That power has waned though, and increasingly so since the Brexit vote. If Britain leaves the EU for real, then the Bank of England’s actions are less relevant to the EU.  This elevates the power of the ECB and the Euro. But as noted, those are already weak to begin with.

If the Bank of England follows the course that Brexit has laid out, the SDR could see a further reduction of the pound weighting, and Euro weighting, which would push up the weighting of the yuan by sheer math. This shift is symbolic now, but power can start in that realm.

The Bank of Japan, before governor Haruhiko Kuroda took the helm, had run-ins with the Japanese minister of finance over its negative rate policy and bond-buying programs. The Japanese stock market lies in a constant state of tension. Because the BOJ is on the same monetary policy plane as the Fed, Japan’s markets have similarly become used to monetary adrenalin shots. Globally, this has led capital, seeking a fix in times of instability, to Japan and to the yen.

But lately Japan’s markets have also been reacting more viciously whenever the possibility of a Fed tightening hits, or lack of fresh BOJ easing measures, emerge.  The alliance of the BOJ and PBoC has not been fleshed out yet, but I believe that’s only a matter of time. Old fights might be discarded if economic or financial survival is imperiled, which is what these sharper market moves foreshadow. (There have already been new trade and lending deals emerging between the two.)

People’s Bank of China: Dragon Rising

This dragon’s about to take flight. The People’s Bank of China governor is Zhou Xiaochuan, who has held that post longer than any other G20 central bank leader. The PBoC holds more U.S. treasuries than any other central bank and is ready for battle. Zhou understands global paradigm shifts. He’s the only Chinese person on the G30 and on the board of the BIS.  He’s been the leading figure pushing the yuan into the SDR basket by slowly allowing it to float with the market, despite allegations of ongoing currency manipulation. He has a good personal relationship with Lagarde.

As China’s position has grown, so has Zhou’s voice, albeit without giving too much away, (something for which the U.S. has been critical.) Keeping some card close to his chest is a strategy. “The central bank has a clear and strong desire to improve its communication with the public and market,” he told Caixin, a major publication in China. “At the same time, it’s not easy to do a good job in communication.”

China wants to keep internal inflation down. This is why it would prefer a strong, not a weak currency. This negates the charge that China is trying to devalue or manipulate the yuan for better trade profits perpetuated by Donald Trump and Hillary Clinton. This is true to a minor extent due to economic pressures, but barely.  (It was, after all, the Ming Dynasty back in 1455 that ended the printing of paper money in order to control inflation.)

The stronger the yuan, and the more prevalent it is globally, the more the PBoC challenges the Fed and the more control the China bloc gains over the U.S. In Chinese culture and the Game of Thrones, the Dragon symbolizes life and expansion. (Side note: I confess to having a Dragon obsession.) It’s a fitting symbol for the rising power of China and the yuan.

The Current Central Bank Hierarchy

The Fed is the world’s most powerful central bank. The ECB is a close second. Third, is the Bank of Japan. Fourth, for now, is the People’s Bank of China.  That will change.

The PBoC has crafted its own techniques to support China’s economy through monetary policy. Although, at the recent G20 meeting, Xi Jianping told reporters that the age of monetary and fiscal stimulation is over and new strategies must arise, he did so by claiming the global growth mantel. As he said, “In light of the pronounced issue of lackluster global economic growth, we need to innovate our macroeconomic policies and effectively combine fiscal and monetary policies with structural reform policies.”

The Fed’s power is resting on the dollar’s dominance. That dominance, in turn, was established by political design based on military prowess following two world wars — which were financed by elite U.S. banks.

The U.S. Treasury market is the world’s largest and most liquid. Central banks holding U.S. dollars are really holding U.S. Treasuries.  They are lending the U.S. money, and we pay them for it with interest. But when rates are zero, we are paying them nothing to lend us more money. This is why growing debt is so easy under current Fed policy.

Just like Cersei Lannister, the Fed thinks it will retain its power simply because it currently has power, even though everyone is wary of her and the house she represents. In contrast, Daenerys is not so disliked. Like China, she is clever and building alliances. They are playing the long game patiently and strategically.

Bad Bad Contagion

The Fed re-assembled in Washington on September 20-21, after a mini-break. Prior to that, they were in “black out” mode. During that time, I discovered a new report while sleuthing around the Fed’s website.  It’s about 45 pages of mathematical equations, beyond which lies some scary thoughts.

In this September 2016 report, to which main stream reporters paid none to minimal attention, Fed economist, Juan M. Londono addresses the notion of “contagion.” The Fed’s own research team is ahead of its management. Bad contagion, Londono notes, is the “confluence of unexpectedly low stock returns across several international stock markets simultaneously.” His findings revealed that, “episodes of bad contagion are followed by significant and meaningful deteriorations to financial stability indicators.”

If stock markets crumble, so do economies. The elites running central banks in those economies don’t want that happening on their watch. The only way to avoid the collapse is to distance themselves from the Fed and the dollar. Even David Reifschneider, deputy director of research for the Fed, noted, “there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained.” (Translation: The Fed is running out of bullets,. Or losing its power over other central banks.)

This doesn’t mean the dollar will tank like a stone immediately as some people predict — the power base that supports it won’t go down without a fight. (Nor will the Lannister’s—Season 7 will be bloody.)  But once the fight starts in earnest, it will accelerate off its own momentum.

Stock markets have reached historic highs on a steady diet of fabricated money. Contagion is real, because the associated polices are interdependent. Having gone down with the U.S. economic ship in 2008, why would any country want to endure that again?

During the past eight years, the Fed has led a global race to the bottom of responsible monetary policy while exuding bi-polar verbiage as to its effectiveness. This blind continuity of Fed policy is the clearest indication of its lack of success. The inability to articulate an exit strategy is another.

The third, is the denial that other central banks and countries want to distance themselves from the Fed. For the moment, the leader in that regard is the PBoC. The Dragon is re-entering the fight now that the stakes are highest. The swords are drawn. The battles of the East and West are on.


Nomi Prins is a best-selling author and speaker

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Say What You Like About The Fed Or The Central Banks, The Bank$terS Are Above Governments


FT

Fed on ropes as Yellen seeks to fend off Trump blows

Populist attacks from all sides make central bank vulnerable to calls to rein it in, say analysts

After a fusillade of excoriating and in many ways unprecedented attacks on the Federal Reserve by the Republican presidential candidate, Janet Yellen, the US central bank’s chair, finally hit back.

Ms Yellen last Wednesday dismissed as emphatically wrong Donald Trump’s claims that she and her institution were keeping short-term interest rates low at the behest of the Obama administration. “Partisan politics play no role in our decisions,” she declared.

Mr Trump is throwing punches at a time when the US central bank is under assault from both sides of the partisan divide, and at a time when polling suggests public confidence in its leadership has declined during a subpar economic recovery.

Some experts say the Fed is vulnerable and that the populist attacks could fuel demands by politicians for tighter constraints on its policy freedoms. Mr Trump “is tossing a lot of fuel on the fire”, says Sarah Binder, a professor of political science at George Washington University. “It intensifies the partisan criticism of the Fed and keeps the Fed in the politicians’ crosshairs.”

Mr Trump’s interventions by no means mark the first time the Fed has been turned into a political punching bag. Previous Fed chairs have been the subject of barbs during presidential campaigns — including in 2011 when Republican candidate Rick Perry accused former Fed chair Ben Bernanke of “treasonous” behaviour by conducting quantitative easing. Past administrations have seen outbreaks of tension with Fed chiefs, including under presidents George HW Bush and Richard Nixon.

Ms Yellen herself has become accustomed to fielding hostile questions from lawmakers during often fractious Capitol Hill appearances.

Mr Trump has, however, set a new standard for anti-Fed invective — at least when it comes to presidential nominees. He has said in recent weeks that Ms Yellen should be “ashamed” of what she is doing to the country, accusing her of creating a false stock market with low rates and setting policy to bolster President Barack Obama’s fortunes…

Read further


Central banks: Peak independence

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After a post-crisis surge in central bankers’ power, some politicians want to rein in their role


Yellen To Trump: The Fed Is Above The President

CorbettReport.com


Trump goes after Fed Reserve’s Yellen, claims she’s ‘more political’ than Clinton – Fox

“We are in a very big, ugly bubble,” Trump said Monday. “The Fed is not doing its job. The Fed is being is more political than Hillary Clinton.”


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