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2012-01-13T04:13:00.000-08:00

RBS cuts 3,500 investment banking jobsT)

A branch of the Royal Bank of Scotland is pictured in London, on August 5, 2011.

STORY HIGHLIGHTS

Royal Bank of Scotland is to cut an additional 3,500 jobs
It has already announced 2,000 investment banking job cuts as it shrinks its risky operations
The investment bank will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000

(Financial Times) -- Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outlook and wide ranging reforms of the banking sector due to take effect before the end of the decade.

Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS' wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin.

Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan.

The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years.

Since taking over in 2009, Mr Hester has shrunk RBS's balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.

It has already announced 2,000 investment banking job cuts as part of Mr Hester's attempts to shrink the highly profitable but risky operations and focus on lending to corporate and institutional clients.

The investment bank, which will be restructured into a markets division and an international banking unit, will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000.

However, people close to the bank have said that the staff numbers could fall to below below 10,000 in a worse case scenario.

The two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12 per cent, in the medium term.

The unprofitable cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses will be closed or sold.

"Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall," Mr Hester said in a statement.

The investment bank has been RBS's growth engine in the last three years, producing an average return on equity of 19 per cent, but Mr Hester made clear on Thursday the bank had to respond to the challenges thrown up by the current economic crisis.

But pressure mounted on the bank just before Christmas, when George Osborne, chancellor, said the bank, which is 83 per cent-owned by the government, should "scale back [its] risky activities".

The government has also accepted proposals from the Vickers commission, which was set up following the financial crisis and recommended splitting investment banking activities and retail banking operations in the UK's leading banks by 2019.

Shares in RBS were 9 per cent higher at 23.75p in morning London trading.

U.S. acts against Chinese oil trader

2012-01-13T04:04:00.000-08:00

The U.S. is taking action against three firms in Asia over oil deals with Iran.

STORY HIGHLIGHTS

U.S. has slapped sanctions on three firms including a major Chinese oil trader
US State Department said penalties would be imposed on China's Zhuhai Zhenrong

(CNN) -- The US has slapped sanctions on three firms including a major Chinese oil trader for selling refined oil products to Iran, just days after US Treasury secretary Tim Geithner travelled to Beijing to press for Chinese support on Iran sanctions.

The US State Department announced late Thursday night that penalties would be imposed on China's Zhuhai Zhenrong, the Singapore-based oil trader Kuo oil, and the UAE-based independent oil trader FAL.

While the measures are unlikely to have a big immediate impact on these three companies, they send a strong warning signal to energy companies working in Iran at a time when the US has been canvassing Asian countries for more support in isolating Tehran.

The US State Department called the sanctions against the three firms an "important" step in convincing Iran to change its behaviour, and highlighted the "potential connection between Iran's revenues derived from its energy sector and the funding of its proliferation [of] sensitive nuclear activities."

A spokesperson for Zhuhai Zhenrong said the company had not sold gasoline to Iran. "We've never exported a barrel, not even a wee bit of refined fuel to Iran," said Zheng Mei, director of the public affairs department.

According to the statement, the three firms violated US restrictions on supplying Iran with refined oil products that were passed in 2010. "Under the sanctions imposed today, all three companies are barred from receiving US export licenses, US Export Import Bank financing, and loans over $10m from US financial institutions," the US State Department said.

Importing refined oil products like petrol and diesel is crucial for Iran's economy because the country doesn't have sufficient refining infrastructure to process enough of its own crude into products.

China is the biggest buyer of Iran's crude oil and, according to the US State Department, is also a significant source of gasoline for Iran, but Chinese companies have until now avoided sanctions from the US.

China supported the most recent United Nations sanctions resolution on Iran in 2010, and some analysts believe that in exchange for that support the US may have turned a blind eye to Chinese companies which may have violated US laws. Last year the US placed sanctions on seven companies for selling refined oil products to Iran, but none of those were Chinese.

Zhuhai Zhenrong is a state-owned oil trader based in Southern China. The company has a special mandate from the State Council to do crude trades that offset military trade debt with Middle Eastern countries, according to their website.

Ms Zheng, the spokesperson for Zhenrong, said the company would continue buying Iranian crude. "Zhuhai Zhenrong's trade with Iran is carried out under the two governments. The trade accords with international law and Chinese laws and regulations," she said.

"What we've signed with Iran are long-term contracts and we import around 12m tonnes of crude from Iran each year," Ms Zheng said. "We've never exported gasoline to Iran. This is out of thin air! "

The US State Department said Zhuhai Zhenrong is Iran's largest supplier of refined oil products, brokering sales of gasoline worth more than $500m between July 2010 and January 2011.

The sanctions are likely to have little immediate impact on Zhenrong because the company does very little, if any, business in the US.

Additional reporting by Gwen Chen in Beijing

Thinking big in space

2012-01-13T04:01:00.000-08:00

AS A small boy Paul Allen, the co-founder of Microsoft, dreamed of going into space. He even tried to launch the hollow aluminium arm of a chair, stuffed with propellant, into orbit. It didn't work out. But his latest adventure in space travel—a joint venture with Burt Rutan, a famous designer of aircraft—looks more promising. Earlier this month, the two of them said they will build an air-launched orbital delivery system. To do this, Paul Allen’s company Stratolaunch Systems will have to build the world’s largest aeroplane.

The Stratolaunch, as the plane will be called, will be big. Really, really big. It will have six engines, a wingspan of 117 metres (385 feet) and weigh about 544 tonnes. (The wingspan of Boeing's 747 is around half that of the Stratolaunch.) Taking off will require 3.6km of runway, and the aircraft will launch its rocket—a shortened version of the Falcon 9 rocket, built by another private space firm called SpaceX—at around 9,100 metres. The whole contraption will be able to put about 6 tonnes of payload into low-earth orbit.

The idea is to offer a cheaper way of getting medium-sized payloads into orbit, and the system is designed to fill a niche that Boeing's Delta 2 rocket once served. Former NASA administrator, Mike Griffin, who now sits on the board of Stratolaunch, says that besides delivering cargo to the International Space Station, the Stratolaunch will tap a thriving market for launching small to middling communications satellites. There are also other customers in the form of NASA and the Department of Defense. Ultimately, however, Mr Allen wants to see the system launch humans into space.

Of course the obvious question is why not launch the rocket directly from the ground in the first place? It turns out that land-based rocket launches are greatly restricted by irritations such as where one’s rocket pad is, and what the weather is like. Air launch, by contrast, makes orbital access to space much more flexible, a particular bonus for military applications. There will also be a small efficiency gain from launching the rocket from above much of the Earth’s atmosphere. Mr Allen is being cautious about saying how much money he will put into the venture. All he will admit is that an effort of this size requires an "order of magnitude" more money than he invested into a previous collaboration with Mr Rutan, SpaceShipOne. This cost Mr Allen $25m.

Meanwhile, Mr Rutan’s company, Scaled Composites in Mojave, will be doing what it is best at: scaling composites. It will be super-sizing its existing White Knight aeroplane, which can carry rockets—such as SpaceShipOne—of suborbital flight. Other components for the Stratolaunch will be scavenged from second-hand 747s. Mr Rutan plans to start work as soon as he has a hanger large enough to build the giant airframe. The current schedule foresees test flights in 2015, and an initial launch by 2016. But the spaceflight business is hard and unforgiving, and the schedule is likely to slip. Mr Rutan has come a long way since he built his first plane, the dinky two-seater VariViggen, in 1972. With its 6-metre wingspan, he would be able to fit 20 along the Stratolaunch.

Not so far apart

2012-01-13T04:00:00.000-08:00

A FEW years ago a prominent former treasury official came to lunch at The Economistand predicted that the debt level would become a national preoccupation. He expected Americans would grow weary of a large debt burden, but refused to say whether Americans would demand fewer services or higher taxes as a result. It turns out he was correct: Americans are both concerned about the nation's debt, and confused about how to solve the problem. Often lost in this confusion is the important distinction between the current deficit (not such a big deal) and the long-term structural debt (a big problem). The best solution for paying down America's long-term debt is some combination of spending cuts and tax increases. And if you listen closely to both Republicans and Democrats (at least the non-crazy ones) they actually seem to agree on that. Unfortunately they're talking past each other.

This post by Jonathan Chait illustrates the point. He accuses Glenn Hubbard, an advisor to Mitt Romney and Dean of Columbia Business School (full disclosure: I was once his student), of misunderstanding the extent of the long-term debt problem. Referencing the chart below, Mr Hubbard claims that the debt problem is real, largely caused by increases in future spending, and may result in very high future taxes.

We see two scenarios in these charts. The extended-baseline scenario assumes current laws (like the expiration of the Bush tax cuts and the implementation of Obamacare) will not be changed in the future, while the alternative fiscal scenario assumes that "widely expected" changes to current law (ie, revenue as a % of GDP remains the same and entitlement spending is not meaningfully cut) come to pass. According to the CBO, the extended-baseline scenario—what it takes to keep debt levels stable—poses significant costs.

Revenues would reach 23 percent of GDP by 2035—much higher than has typically been seen in recent decades—and would grow to larger percentages thereafter. At the same time, under this scenario, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.

Mr Chait accuses Mr Hubbard of misreading the chart and pushing a lop-sided agenda focused on cutting spending. But Mr Hubbard's position is simply that long-term spending is unsustainable and that the debt problem cannot be solved by tax increases alone. That conclusion is not so different from the research Mr Chait cites from the Center for American Progress, a liberal think tank. There is more common ground here than Mr Chait lets on.

Cutting entitlements and raising future taxes does not necessarily leave people worse off. People live progressively longer and the quality of health-care services, so far, has increased and gotten more expensive. So in principle, you can decrease the length of retirement or the level of benefits paid (especially to higher earners who live longer) and still provide a similar present value of real benefits to future generations. A problem with entitlements is that each new generation expects more than the last, longer retirement and the latest and greatest in health-care technology.

Record-high levels of revenue as a percent of GDP may not be so bad either, so long as society gets progressively richer. Taxing citizens 30% of GDP is a much bigger deal in Angola than Denmark because Angolans have much less income to spare. Though for developed countries the distributional consequences are tricky if income inequality continues to widen. Also there can be second order effects from higher taxes, resulting in lower growth. Fairness to future generations is also important. Punting reform to the future makes it more expensive and places a large burden on the young. Striking the right balance is hard, but possible, and the sooner the better. It is not clear that the current law, associated with the extended baseline scenario, gets it right. That probably requires a more efficent tax code and redefining retirement expectations. It belabours the point of just how necessary a thoughtful dialogue is.

The zero lower bound in our minds

2012-01-13T03:59:00.000-08:00

PRIOR to the crisis, there was a general (if tenuous) accord among macroeconomists of many different stripes, that the Federal Reserve could and would act to stabilise the economy when necessary. Then, in December of 2008, the Fed hit the zero lower bound, when it dropped its target for the federal funds rate to between 0% and 0.25%, where it has sat ever since. At the time, the unemployment rate was 7.3%. It eventually peaked at 10% about a year later, and it has come down, very slowly and fitfully, to just 8.5% since then. For fully three years, America has been a zero lower bound world.

During that time, economists have been working very hard to figure out what the implications of the zero lower bound are for macroeconomic policy and unemployment. Are we stuck, or what?

At a session this morning, I saw a few presentations on the topic. There was a general agreement among them on the nature of the zero lower bound problem and the liquidity trap. There are two different kinds of people in the economy: savers and borrowers. The borrowers borrowed heavily until the shock of the crisis changed the nature of their borrowing constraint and forced them to rapidly deleverage. Without an increase in demand elsewhere, the high rates of saving of the borrowers will plunge the economy into a deep recession. Normally, the real rate of interest should adjust downward until the savers cut their desired saving enough to offset the increase in desired saving of the borrowers; that is, they spend more to make up for the others furiously trying to pay off their bills. But in some cases, the extent of the deleveraging by borrowers may be great enough to drive the market-clearing real interest rate into negative territory. Since the Fed can't cut rates below zero, savers don't spend enough, there is excess saving, and the economy is stuck with high unemployment.

What then? Paul Krugman, who presented a paper in the session with Gauti Eggertsson, noted that fiscal policy was likely to prove effective in such a situation. The government could borrow from those wishing to save more and provide the economy with needed additional demand. At the zero lower bound, government spending doesn't generate crowding out of other investment activities via higher interest rates, so policy is even more effective than usual. And so on. There are other potential solutions, as well; one presenter noted that "unconventional fiscal policy" could replicate an ideal monetary policy through a combination of tax changes—a consumption tax scheduled to rise over time alongside a tax on labour that would decline over time.

But Stanford economist Robert Hall really nailed the crux of the question, so far as I was concerned. At the AEA meetings a year ago in Denver, I listened to Mr Hall speak a few times on this issue and point out that with the market-clearing interest rate below zero the economy was stuck with high unemployment. At the time, I wondered why, if that were true, that the answer wasn't simply a higher rate of inflation, which could combine with a zero nominal interest rate to move the real interest rate below zero.

This time around, Mr Hall addressed the point head on. He noted that in a liquidity trap, the real rate of interest was simply equal to the negative inflation rate. In other words, if the Fed's nominal rate is at 0% and the inflation rate is 2%, then the real rate of interest is -2%. If a -3% real interest rate is necessary to clear the economy, then all that's needed is a higher rate of inflation—3% rather than 2%. Mr Hall noted that this was an important point because potentially the Fed could have an enormously helpful impact on the economy simply by raising inflation just a little. And here's where things got topsy-turvy. Mr Hall argued that:

A little more inflation would have a hugely beneficial impact on labour markets,
And a reasonable central bank would therefore generate more inflation,
And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
The Federal Reserve must not be able to influence the inflation rate.

Now, perhaps there was a political economy subtext to this argument; if so, I missed it. Rather, he seemed to be saying (as others, like Peter Diamond, have intimated) that at the zero lower bound it is simply beyond the Fed's capacity to raise inflation expectations. Now admittedly I haven't done a rigorous analysis, but it seems clear to me that the Fed has been successful at using unconventional policies to reverse falling inflation expectations. Why is Mr Hall—why are so many economists—willing to conclude that the Fed is helpless rather than just excessively cautious? I don't get it; it seems to me that very smart economists have all but concluded that the Fed's unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. And yet...this is not the message resounding through macro sessions. Instead, there are interesting but perhaps irrelevant attempts to model the funny dynamics of a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank. Let's focus our attention on that, for heaven's sake.

Is the liquidity trap almost over?

2012-01-13T03:56:00.000-08:00

LIQUIDITY traps: we can't stop talking about them. Since late 2008, the nominal interest rate target suggested by most standard monetary policy rules has been negative, leaving the American economy in a liquidity trap. Eddy Elfenbein recently ran a monetary policy rule devised by Greg Mankiw through the data and found that an exit from the trap might be closer than many think. The rule is:

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)

And when run against the data it produces:

At this rate, it seems, the recommended policy rate will be positive in no time. Maybe. The recent, steep increase is unlikely to continue. Core inflation is expected to level off and might well decline in 2012. The recent decline in unemployment is also unlikely to continue. Labour force departures have overstated the health of the labour market as captured in the unemployment rate, and if the job market continues to strengthen, then rising labour force participation will prevent a too-rapid drop in the unemployment rate. The rule might recommend a positive rate by the end of the year (2% core inflation and an 8% unemployment rate would just about do it), but it's far from certain that it will.

Neither should the Fed follow the rule right away when it begins recommending rate increases. Monetary policy gains traction in a liquidity trap by raising expected inflation. To achieve that, the Fed has to promise to let inflation rise above what the rule might normally recommend; it needs to credibly signal that there will be some catch-up inflation.

That's a tough thing for a central bank to do, and it gives rise to a time inconsistency problem in liquidity-trap monetary policy. The Fed can promise to behave "irresponsibly" in the future, but if most people think that no matter what Ben Bernanke says now he'll keep inflation at 2% later on, then the Fed will struggle to spark a recovery. A policy that explicitly allows for catch-up inflation, as through a level target, would make liquidity-trap fighting more credible. The Fed is none too anxious to head in that direction, however, lest it "lost credibility" as an inflation fighter. Which, of course, is precisely what's needed.

Cautious on the economy, happy with liquidity

2012-01-13T03:55:00.000-08:00

THE European Central Bank (ECB) kept its main interest rate at 1% following its meeting on January 11th. Speaking after the decision, the bank’s president, Mario Draghi, was cautious in his assessment of the economy. There were tentative signs of stabilisation in activity but only at weak levels and the downside risks to the economy from financial-market tensions remained “substantial”, he said. The latest money-supply figures, though weak, do not suggest that there is a credit crunch. But such problems can take a while to emerge so credit supply will need to be monitored.

Mr Draghi was more positive about the effects of ECB’s long-term refinancing operation (LTRO), carried out on December 21st, at which commercial banks were able to borrow €498 billion for three years at a low interest rate. The scheme had been effective, said Mr Draghi. Some markets for unsecured bank lending had reopened. The banks that bid hardest for the three-year ECB loans were often those that had debts maturing in the present quarter, when some €200 of bank bonds are falling due. The operation may thus have prevented a bank-funding crisis.

What is more, there are signs that the borrowed money is flowing around the economy. The ECB’s balance-sheet shows a big rise in deposits held by commercial banks as excess reserves alongside the increase in ECB lending to banks. But Mr Draghi cautioned against a judgment that banks had borrowed money only to hoard it. The more liquidity the ECB provides, the larger the liabilities side of the ECB’s balance-sheet (which includes deposits) must become. By and large the banks that have borrowed from ECB are not the same as those depositing with it, he said. This suggests that much of the borrowed money had first washed through the financial system before being parked at the ECB.

The flood of liquidity may have helped lower government borrowing costs. Yields on long-dated bonds for Italy and Spain fell sharply today, after successful auctions of bond and bills in both countries. But there was yet not enough evidence to link the fall in long-term rates to buying by banks flush with ECB cash, said Mr Draghi.

Mr Draghi did nothing to suggest that the ECB is ready to cut interest rates again in February. Monetary policy is already accommodative, he said, but the ECB would respond to worsening conditions. The vote to keep rates steady was unanimous, in contrast to the one on the cut in December. One of the likelier dissenters, Germany’s Jürgen Stark, has departed to be replaced on the bank’s executive board by Jörg Asmussen, previously Germany’s deputy finance minister. The other new face around the table was Benoît Coeuré, formerly a senior official at the French Treasury. Their arrival has not obviously shifted the ECB’s stance towards greater activism. But after a hyper-active meeting in December (when rates were cut and the three-year LTRO was announced) that was not a huge surprise.

The Big Mac index

2012-01-12T13:02:00.000-08:00

THE ECONOMIST's Big Mac index is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. This particular basket holds a McDonald's Big Mac, whose price around the world we compared with its American average of $4.20. According to burgernomics the Swiss franc is a meaty 62% overvalued. The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. The cheapest burger is found in India, costing just $1.62. Though because Big Macs are not sold in India, we take the price of a Maharaja Mac, which is made with chicken instead of beef. Nonetheless, our index suggests the rupee is 60% undercooked. The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. The last time we served up our index in July 2011, the euro was 21% overvalued against the dollar, but it is now just 6% overvalued. Other European currencies have also weakened against the dollar since our previous index, notably the Hungarian forint and Czech koruna, which have fallen by 23% and 16% respectively. Six months ago both currencies were close to fair value, but they are now undervalued by 37% and 18%.

For the full data set see here.

Prada is not Walmart

2012-01-12T12:59:00.000-08:00

INDIA, if you believe the government, will be a land in which Starbucks and Prada thrive but where foreign firms will be prohibited from selling onions. It does not seem like much of a cause for celebration, but the announcement on January 11th that foreign “single brand” retailers could own 100% of their operations in India was meant to show the reform process was on track. It followed a debacle late last year when the government first announced that not only would single brand retailing be opened up, but foreign supermarkets would be allowed to operate in India too—and then was quickly forced into a U-turn on the latter promise after facing a rebellion within its own ranks and from the coalition parties it relies on in parliament.

By emphasising that at least the single brand bit of retail reform is still on track, the government hopes to show the world that India is still open for business. But this is a meek change indeed. Single brand retailers, such as fashion chains, were already allowed to own 51% of their operations. And the political stink of last month is likely to scare those who are not already present because swathes of the political class have been shown to be populist and hostile for foreign firms. Individual states may still choose to override the central government’s rules. Lastly, the reform comes with a large catch: 30% of what is sold must be supplied from cottage industries in India. If you are selling a uniform product worldwide—a sofa or handbag made in China—that is a major hassle.

The hope must be that India is on a journey to the right place, stumbling along the way. Perhaps the supplier rule will eventually be dropped, the argument goes. Maybe reluctant states will learn the error of their ways and open up too, after seeing the success of single brand retailers in other states. And maybe, after seeing an influx of investment from single brand retailers, the political climate will change and it will be easier to pass a reform that lets in supermarkets in too.
Interviewed in Delhi earlier in January a government mandarin insisted that the supermarket reform was not dead. Yet all of this seems half hearted. India is a hard enough place as it is for foreign firms to make profits. Adding in a fickle polity just makes things worse. And it is a rather sorry day for progress when a rule tweak to allow Starbucks or Prada to own not 51%, but 100%, of their shops is presented as a meaningful economic reform.

America’s next CEO?

2012-01-12T12:57:00.000-08:00

Paint it grey
Start with the advantages. The most important fact about Mr Romney is that he is a non-ideological man who did something that America needs a lot more of. In 2002 he was elected to govern Massachusetts, normally a Democratic stronghold. He passed a version of health-care reform that is at once his proudest achievement and his biggest liability. Back then a system based on obliging everyone to buy private health insurance was a conservative idea, and Mr Romney did a good job of working with a hostile legislature to get it passed. (Today, his party viscerally opposes Mr Obama’s health reforms, which are closely modelled on Mr Romney’s; such are the twists of politics.) He also turned round Massachusetts’s finances, just as he had earlier righted the Salt Lake City Winter Olympics. Mr Romney needs to make these successes count for more than they have so far. Once the primaries are over, and America’s independents rather than the Republican Party faithful become the electorate to win over, he may be able to.
Second, Mr Romney has something that the president and his Republican rivals sorely lack: business experience. For 25 years he made himself and the management consultancies BCG and Bain a lot of money by making companies more efficient which, yes, sometimes means firing people, but also drives economic growth (see article). So far, Mr Romney has done a poor job of defending himself against attacks which are really aimed at the creative destruction which is the essence of capitalism itself. He says he created a net 100,000 jobs during his time at Bain. That figure is impossible to prove, but he could do more to argue that the benefits outweigh the costs. His task has not been helped by disgraceful attacks from fellow-Republicans on corporate restructuring.
Third, Mr Romney seems sure-footed. It is hard to think of a single misstep in this campaign. He may be wooden, but no scandal has ever attached to him. His family life is impeccably monogamous and progenitive. Those who have worked closely with him tend to admire him. On both the economic and the foreign-policy sides, he has already put together impressive and above all sensibly moderate teams.
The debit side of the ledger
A useful list, to be sure: but can it outweigh the negatives? Mr Romney’s pragmatism has an inconvenient flip side: no one is quite sure where he stands. The Republican base does not think he is reliable on such things as gay rights and abortion. That will not matter so much to independents (who will probably also accept that any Republican has to say a few mad things to win a nomination). But people have to trust a president on the main issues, and, despite publishing a long economic manifesto, Mr Romney remains vague over how a lot of it is to be accomplished.

Explore our interactive map and guide to the race for the Republican candidacy

It is not at all clear how he would reform America’s ruinously expensive health-care and pensions systems. His views on what he wants to do about America’s 12m illegal immigrants are also unsettlingly gnomic. And where he has been clear, he has sometimes been wrong: his insistence that, on day one of his presidency, he will brand China as a currency manipulator represents dangerous pandering to populists. His pledge to cut federal spending to no more than 20% of GDP, a sop to his party’s fiscal extremists, would also be dangerous if applied as quickly as he implies.
Mr Romney will have other problems in wooing the electorate. He would be the richest candidate ever to win a big-party nomination and he reeks of privilege. His father was a governor as well, and he himself studied law at Harvard. On the other hand, Mr Obama is a millionaire several times over, can give a fair impression of having come from the planet Vulcan, and also studied law at Harvard. Mr Romney’s lack of charisma is a problem; but perhaps America wants fewer soaring speeches and more pragmatic restructuring plans.
Mr Romney’s last difficulty is one that should not be a problem at all. He is a Mormon and, despite Mormons’ protestations to the contrary, a third of Americans do not consider them to be Christians. There is not much Mr Romney can do about this. He could explain the Mormons’ extraordinary missionary work, but he can hardly risk saying that it is not really any more incredible that God communicated His plans to man in upstate New York in 1820 than He did in Palestine in 0AD. We recall, however, that America was for decades “not ready” for a Catholic president, or for a black one. Eventually, Americans thought better of those attitudes. Prejudice would be a silly reason for the Republicans to reject a man who offers their best chance of beating Mr Obama.

Gold, God and forgiveness

2012-01-11T04:00:00.000-08:00

Gold, God and forgiveness

DO BANKERS inevitably go to hell? What many people today merely hope will come to pass was for Christians in the early 1400s a matter of faith. After all, the Bible, like the Koran, was explicit in its condemnation of lending money at interest, the basis of most banking operations. So in many parts of Christendom moneylending was left to Jews. In several northern cities of medieval Italy, however, ingenious Christians started to find ways round the banking ban. Their contrivances, though legal, were not popular with the church, which held that usurers, by charging for the duration of a loan, were not trading in goods but in time, and this was God’s.
The prospect of an eternity of hellfire was particularly acute in Florence, since it was here that the foundations of modern banking were being laid. As it happened, Florence was also witnessing the first stirrings of an extraordinary flowering of the arts. Before long guilt-ridden bankers were commissioning great works of religious art in the hope that they might after death escape the damnation that the scriptures foretold. In this way were the birth of the international financial industry and that of the Renaissance intimately connected.

The connection might perhaps be reduced to a single word, whether patronage, or atonement, or Medici. A
longer, and far more pleasurable, elaboration can be found in text, pictures and objects at the Palazzo Strozzi in Florence, where an exhibition devoted to “Money and Beauty” continues into 2012. Subtitled “Bankers, Botticelli and the Bonfire of the Vanities”, it explores the motives of Florence’s bankers in their artistic commissions; the reactions of churchmen to rich Florentines’ displays of luxury and wealth; and the effects of both penitential patronage and ecclesiastical reproach on the works of art that, throughout the 1400s, or Quattrocento, tumbled forth from Florence like coins from a slot machine.
In the background of the exhibition are the Medici, the wool-traders turned bankers who held sway over the Florentine republic in its golden age under Lorenzo the Magnificent, and who produced popes and queens and Tuscan grand dukes until the last of the dynasty died in 1737. Their grip was interrupted by the invasion of Charles VIII of France in 1494, which brought in its wake the brief rule of Girolamo Savonarola, the austere Dominican friar from Ferrara who berated the Florentines for their luxuries, gambling, carnivals, and particularly their wanton paintings, which made “the Virgin Mary look like a harlot”. He called for children to spy upon their parents, prostitutes to be chastised, sodomites burned alive and irreligious frivolities prohibited. Hence the great Bonfires of the Vanities in the Piazza della Signoria in 1497 and 1498, when countless works of art, as well as cards, books and dresses, went up in flames.
Sandro Botticelli, a central figure, was not one of the artists who flung their paintings onto the fires, but he nevertheless fell under Savonarola’s spell, as his later works clearly show. Gone, in these, were the sensuous depictions of idealised beauty seen in his early paintings, such as the “Birth of Venus”. Now Botticelli’s figures were more likely to bear agonised expressions of intense piety, as in “Madonna and Child with the Young St John”.
In between came works like “The Calumny” (pictured above). This shows Midas on his throne, receiving the counsels of Ignorance and Suspicion, with a hooded Envy clasping the hand of Calumny, who in turn, with Deception and Fraud attending, is dragging the unidentified victim by the hair, while Penitence turns hopefully towards stark-naked Truth. Though not overtly religious, the sentiment is morally correct and therefore Savonarola-suitable, as is the turbulent mood, so far removed from the sumptuous lyricism of Botticelli’s earlier, mythological works. When those were made, as the chronicler Giorgio Vasari noted over half a century later, he worked happily for many Florentine families painting “very nude women”.
“Money and Beauty” was proposed in 2006, just after the birth of the foundation that runs the Palazzo Strozzi, a 15th-century building in the middle of Florence built by mercantile rivals of the Medici. Five years of incubation, however, have only improved the show’s timeliness, allowing reflections not just on the role of bankers in general but even on some familiar banking terms whose origins are Tuscan. The most notable may be “risk”, which derives from Tuscan rischio, the amount considered necessary to cover costs when lending money, ie, a euphemism for interest. Another is “florin”. First coined in Florence, florins circulated widely in Europe for centuries—in Britain until 1971—and may yet perhaps make a post-euro return.
It is not just its timing, though, that makes this show so successful. Its themes, and the abundance of artefacts and paintings on which the curators could draw, allow every point to be illustrated with a wonderful work of art: a panel commissioned by the mint; an altar painting showing Filippo Strozzi, who paid for it, almost as prominently as the entire Holy Family; keys, locks, letters of exchange; an account book pointing to the perils of sovereign default (three banks had gone bust when Edward III of England reneged on large loans); a codex containing the sumptuary laws that forbade flashy clothes and ostentatious funerals. (Even Fra Angelico—see next story—so pious he could not paint a crucifix without tears running down his cheeks, chose to depict the Virgin’s obsequies in the manner of an unashamedly opulent 15th-century Florentine funeral.)
The images are merciless. Miserly bishops are shown being whipped with their own moneybags; St Anthony causes a usurer’s heart to be found in a strongbox; a moneylender meets the figure of Death. Balancing these are numberless images of devotional scenes, the Nativity, the Madonna and other religious figures. And also shown are the events with which Lorenzo’s magnificent era ended: Charles VIII’s entry into Florence, Savonarola preaching against luxuries in a city that derived so much wealth from making them, and the fundamentalist friar’s own execution in the very square in which the Bonfires of the Vanities had been held. This is the visual telling of a tale of beauty and bloodshed, lucre and licentiousness, morality, hypocrisy and propitiation.
The telling is not all the work of the Quattrocento. The exhibits benefit enormously from the commentaries of two curators, Ludovica Sebregondi, a specialist in the religious art of the Renaissance, and Tim Parks, a British novelist and author of “Medici Money” (2005). While one puts the exhibits in their art-historical context, the other explains the social and wider significance. With different styles, and sometimes conflicting views, they add considerably to the pleasure of the show.
And should today’s bankers take heed? Though usury has long since lost its power to inspire any penitential effort among Christians, modern moneylenders are accused of other sins: Pope Benedict calls for “moral renewal” in Italy and the Church of England agonises about the godlessness of the City of London. Yet most bankers seem to dread damnation in the hereafter as little as censure in the here and now. Too bad. Without the fear of God, they are unlikely to pay for a new Renaissance.

Reimagining the future

2012-01-10T16:20:00.000-08:00

“
THAT city will, in the course of time, become the granary of the world, the emporium of commerce, the seat of manufactures, the focus of great monied operations,” predicted DeWitt Clinton, governor of New York in 1824. He was speaking about the effects of the Erie Canal, which connected the Great Lakes to the Hudson River. Originally derided as “Clinton’s folly”, the canal helped to open up the west, allowing New York to benefit enormously from an explosion of trade. Within 15 years of the opening, New York was the busiest port in America, moving more than Boston, Baltimore and New Orleans combined. The plan to open an applied sciences university campus in New York City, reckons Seth Pinsky, who heads New York’s Economic Development Corporation, is an “Erie Canal moment”.
The city’s embrace of high-tech has already begun. Tech clusters have emerged in Manhattan’s Flatiron District and Brooklyn’s Dumbo, home to firms like STELLAService and Etsy. Venture-capital firms and angel investors have been looking at New York more seriously than they once did. Henry Blodget, of Business Insider, notes “the financing ecosystem has also gotten very well developed, from late-stage private equity right down to angel investing.” Some $1.2 billion was invested by venture-capital firms in New York in 2010. The Big Apple even overtook Massachusetts in venture-capital funding for internet and tech start-ups, making it second only to Silicon Valley. And in the third quarter of last year, it surpassed it in venture capital in all categories. Between 2005 and 2010 employment in New York’s high-tech sector grew by nearly 30%. Google alone has about 1,200 engineers in the city.
Much of this growth has been organic, but there has been some help from City Hall. Since 2002 the city has set up more than 40 projects to help the biotech sector and helped create a network of incubators supporting start-ups in that area. It also established a $22m municipal entrepreneurial fund, the first of its kind outside Silicon Valley. A year ago Michael Bloomberg, a tech entrepreneur before he became New York’s mayor, called on universities to pitch plans to develop and operate a new tech campus in New York in exchange for access to city-owned land and up to $100m in public money.
New York received seven proposals from 17 top institutions, including Stanford University which did so much to create Silicon Valley. Almost 6,000 companies, including Google, Hewlett-Packard and LinkedIn, trace their beginnings to Stanford. But Stanford withdrew from the competition last month, days before the mayor announced the winning proposal, which came from Cornell, an Ivy League university, and its partner Technion, an Israeli technology institute. The latter is considered to be one of the driving forces in Israel’s tech industry. It helped turn Israel from a country of orchards to one of semiconductors. Some 4,000 start-up companies are located around its campus.
The two bodies have plans to build a $2 billion 2m square feet (610,000 square metres) campus on Roosevelt Island, one subway stop from mid-town. Cornell and Technion hope to have a temporary facility up and running as soon as this autumn and complete their permanent home by 2017. The bid had huge support from Cornell alumni, including a $350m gift from Charles Feeney, who made his fortune through the Duty Free Shopping Group. That is one of the largest donations in the history of American higher education.
According to the city’s analysis, over the next 30 years the campus will generate more than $7.5 billion in economic activity, with 600 companies spinning out of the new school directly; these are projected to create 30,000 jobs. Some 20,000 construction jobs will also be created, not to mention about $1.4 billion in extra tax revenue. And it should help quench the never-ending demand for qualified engineers. The mayor has not ruled out naming additional winners. And some of the losing plans will go forward regardless. So New York could soon have several applied sciences campuses. Look out, Silicon Valley.

Behind every cloud, another cloud

2012-01-10T16:12:00.000-08:00

A decade ago, Britain came through the dotcom bust with barely a scratch, thanks to a consumer-credit boom and deficit-financed public spending. Those days of easy credit are long gone: consumers are paying down their debts and government finances are deep in the red. The economy’s best hope lies with export demand, but this is growing scarce. The economic outlook for America, Britain’s biggest single-country export market, looks dark. The euro zone, where half of Britain’s exports go, is at risk of imploding.

In September the IMF cut its forecast for Britain’s GDP growth in 2012 to a sluggish 1.6%. Even that may soon look too optimistic; the Economist Intelligence Unit, a sister company of The Economist, expects 0.7% (see “The world in figures”). It seems far likelier that the economy will disappoint than offer a pleasant surprise. The British policy brass feels vindicated for its wariness about the single European currency but scepticism will be no protection against the fallout from the euro’s troubles. Britain is the one big country outside the currency zone that is heavily exposed to euro trouble through its trade and financial links.
The continuing crisis in Europe will have implications for Britain’s deficit-cutting plans. The logic behind the government’s fiscal austerity is that the bond market’s ire can turn quickly from errant euro-zone countries to others (such as Britain) that have large budget deficits. But as Europe’s woes deepen, the harm done by sticking rigidly to the fiscal plan is likely to prove greater than any damage done by deviating from it.
That is in part because money pulled from the euro zone’s trouble-spots has to go somewhere. Some of it will end up in British government bonds, which will look among the soundest of the rich-country credits (admittedly not a healthy peer group). Meanwhile, a dearth of export orders for British companies will push the government to adopt measures in support of the economy. Deep cuts in the state’s day-to-day running costs, including reductions in welfare benefits, will go ahead as planned. But the Treasury will find itself having to finance new capital projects to make up for a shortfall in aggregate demand.
The economy will be lucky to avoid at least one quarter of contraction during 2012. The unemployment rate will be stuck above 8%, the highest rate since the mid-1990s. But two factors militate against a deep downturn.
First, businesses anxious about the economic outlook and fearful of a renewed tightening of credit conditions tend to trim their stocks, postpone planned investment and stop hiring new employees. But this tendency to conserve cash will be limited in the coming months because many British companies have already been piling up rainy-day money. The excess of corporate income over spending has risen above 4% of GDP. That offers a degree of protection against savage cuts in stocks, investment and jobs.
Easy does it
A second helpful factor is the prospect of lower inflation. It is set to fall steadily from a peak of 5% to around 2% by the end of 2012, as vat and energy-price increases drop out of the annual rate (see chart). That will bring some relief to hard-pressed consumers, who suffered a large fall in real income during 2011. Lower inflation will also make it easier for the Bank of England to justify a more aggressive dose of “quantitative easing” (QE)—boosting the money supply by buying government bonds. Because investors will be increasingly reluctant to finance commercial banks, amid worries about their exposure to the euro zone’s sovereign-debt problems, the Bank of England will find itself compelled (with Treasury backing) to buy long-term bonds issued by banks as part of its QE programme.

The pound is set to fall further against the dollar

London will look a cheap holiday destination for Americans next summer but a lot of Europeans are likely to stay at home. The pound is set to fall further against the dollar in the early months of 2012, in part because of Britain’s exposure to the euro zone but also because the dollar rises against other currencies when the world is in trouble. At the low point for the global economy in March 2009, the pound fell to $1.38. It could easily fall as far again in 2012 given how fearful investors are likely to become.
Only the euro looks more vulnerable to a fall. But it will not be much comfort for Britons that some other European economies will be in even worse shape than their own.

How to run the euro?

2012-01-10T04:38:00.000-08:00

How to run the euro?

er during the euro crisis: the markets and the politicians. In 2012 the battle will become a lot more complicated, as the politicians splinter into factions. It sounds dangerous—and it is—but thrashing out political arguments is an essential part of bringing the crisis to an end.

Amid the banks’ plunging shares and the soaring yields of government bonds, it is easy to lose sight of the political questions being asked of Europe. Markets have forced Europe’s troubled economies to confront austerity and reform, but politics will determine how they do so. Markets have demanded that Germany and other creditor nations finance a rescue, but politics will decide what they demand in return. Markets want a revamp of the euro’s governance, but politics will ordain how energetically the European Union embraces federalism.

Austerity and a rescue are now under way, though a descent of Greece into anarchy could yet throw them off course. But the third element—renovating the governance of the euro—is still highly uncertain. In 2012 Germany’s Angela Merkel and her fellow euro-zone leaders will set out the sketches for that design.

Try this for a blueprint

If you were sitting down with a blank sheet of paper, you would advise the euro zone to complement its one-size-fits-all monetary policy by pooling sovereignty and creating new institutions. You would set up a European mini-IMF (call it an EMF) with enough funds to tide over troubled countries as they adjusted their economies. A pan-European banking regulator and a bail-out fund could ensure that large European banks were not at the mercy of their vulnerable sovereign borrowers. To stop the markets from picking off weaklings, you might organise centralised borrowing—in which all countries jointly stood behind the debt of each government. And, to stop spendthrift governments from exploiting these mechanisms, euro-zone countries would agree to submit their fiscal policies to the say-so of everyone else.

It amounts to a blueprint for the United States of Europe. And it is utterly beyond reach.

For starters nobody can agree on which central authority should hold all these new powers. France and Germany would refuse to boost the European Commission, which they mistrust. Smaller countries and Germany’s constitutional court would refuse to endow an ad hoc intergovernmental council. Many national leaders heartily detest the European Parliament.

Moreover, many governments are nervous about other euro-zone countries having a say about their own public spending. And the entire EU was scarred by the eight-year-long attempt to restructure the union, first by writing a new constitution—rejected and abandoned—and later by repackaging the constitution into the Lisbon treaty, which limped into force in 2009. You do not find much appetite in Brussels for a repeat performance.

Shape up, for the euro’s sake

Where does that leave the redesign of the euro? Euro-zone governments have agreed that leaders will meet at twice-yearly summits. They have set up a proto-EMF and a European Banking Authority. And they have agreed to monitor the economies of euro-zone members in a souped-up Stability and Growth Pact.

New sanctions might require a new treaty

But more is needed, especially with sanctions. Some could be enforced at the level of the nation. Euro-zone members might have to write caps on deficits and debt into their constitutions, or create independent offices of statistics and budget sustainability, rather as they must have an independent central bank today.

Ultimately, though, new sanctions might require a new treaty. But new treaties take a long time. Countries can weigh them down with their own agendas (Britain, for instance, wants to repatriate powers even though it is not a member of the euro zone). And referendums can reject treaties (just ask the Irish).

These difficulties have answers and the EU has had more than enough practice in fashioning compromises out of unpromising ingredients. But if the euro zone gets it wrong in 2012, it will be laying the foundations of the next currency crisis.

Going for gold

2012-01-10T04:36:00.000-08:00

The arts were always meant to be part of the Olympics, as envisioned by the so-called father of the modern games, Pierre de Coubertin. For decades the events included competitions in categories such as sculpture, painting and music, all tethered to a sporty theme. These days, medals for setting records in the arts tend to be doled out by auction houses—and, awkwardly, it pays to be dead. But in London in 2012 artists and performers will be jockeying for position alongside the world’s finest athletes. Unlike Beijing, which used its games in 2008 to prove its graduation to long trousers, London wants to reaffirm its eminence as an international cultural destination.
Brits could be forgiven for not noticing, but London’s Cultural Olympiad began in 2008, with nationwide events and commissions designed to culminate in a big festival in June-September 2012. In practice this meant little before Tony Hall, head of the Royal Opera House, became involved in 2009 and then anointed Ruth Mackenzie as the Olympiad’s director in early 2010. With some £94m ($147m) to play with, largely from lottery funds, Ms Mackenzie and the festival’s organisers have curated more than 1,000 events, many of them free and aesthetically daring, for an estimated audience of 10m people. Though London will enjoy the lion’s share, the festivities will be spread throughout Britain—a crucial bit of diplomacy given the use of national taxes.
What to see? The most inescapable bit of cultural cool will be Bus-Tops, a public-art installation on the roofs of London bus shelters, designed by Alfie Dennen and Paula Le Dieu. Part of a programme called Artists Taking the Lead, funded by the UK Arts Councils, this is one of 12 commissioned projects throughout the country, one for each region.
Much of the Olympiad is designed to be enjoyed outdoors—rain or shine—to maximise participation. This includes a big, free music event on Hackney Marshes on June 23rd and 24th, courtesy of the BBC and Radio 1. There is also something called Big Dance, a festival of moving and shaking in unexpected places (parks, lidos, shopping centres). Bigger still is a summer-long celebration of performances by disabled and deaf artists called the Unlimited festival.
All 37 plays in 37 different languages
In these grim times for arts funding, many institutions are seeing the benefits of collaboration. Sadler’s Wells and the Barbican are working together for the first time to produce a grand tribute to the career of Pina Bausch, a German choreographer who died in 2009. Then there’s Metamorphosis: Titian 2012, from the Royal Ballet and the National Gallery, based around three Titians, including one important recent acquisition. This project features three new ballets, each inspired by a Titian painting, and several new Titian-influenced works by contemporary artists, including Chris Ofili and Mark Wallinger, which will hang alongside the originals in the museum. Mr Ofili is also one of 12 visual artists commissioned to design posters for the games, along with Tracey Emin, Martin Creed, Bridget Riley and Rachel Whiteread.
To be or not to be, in Lithuanian
Other highlights include “Dr Dee”, a new opera from Damon Albarn of the band Blur, directed by Rufus Norris at the ENO; a rare show of David Hockney’s landscape work at the Royal Academy (January 21st to April 9th); and an exhibition of Lucian Freud’s portraits at the National Portrait Gallery (February 9th to May 27th). Britain’s largest-ever poetry festival, Poetry Parnassus, will take place on the South Bank and feature 205 poets, one from each of the Olympic nations. Then there will be Britain’s biggest piece of public art, Anish Kapoor’s towering, looping, £19.1m ArcelorMittal Orbit near the Olympic park, which people will climb for unparalleled views of the city. Funded mostly by Lakshmi Mittal, a steel magnate who gave £16m and donated the steel (around 1,400 tonnes of it), the tower “would have boggled Gustave Eiffel,” Boris Johnson, London’s mayor, has boasted.
But the jewel in the London 2012 crown promises to be the World Shakespeare Festival, a collaboration of more than 50 arts groups and thousands of performers in a celebration of the bard as “the world’s playwright”. The Royal Shakespeare Company has been working with international troupes to create a roster of new productions, either of or inspired by Shakespeare’s plays. And the open-air Globe theatre on the South Bank will stage a six-week, Babel-flouting programme of all 37 plays in 37 different languages, beginning on April 23rd (Shakespeare’s birthday). This means an “All’s Well That Ends Well” in Gujarati, “The Comedy of Errors” in Dari, “The Merchant of Venice” in Hebrew and a Lithuanian “Hamlet” the critics love. Who better than the bard to highlight London as a global city where more than 250 languages are spoken?

Will 2012 be another stellar year for gold investors?

2012-01-10T04:25:00.000-08:00

NEW YORK -

In contrast to the closing months of 2011, gold has begun the new year on a more positive note. Whatever the metal's short-term prospects - indeed even if gold takes another dive - we believe 2012 will be another stellar year for gold investors.

Gold topped out at an all-time high just over $1,924 an ounce in early September - a whopping gain of some $600 or about 50 percent from last January's low point. But as investors know all too well, gold prices can be quite volatile - with big upswings often followed by big downturns, albeit around a rising long-term trend. Such has been the experience of the past four months with gold shedding roughly 30 percent from its all-time high to its recent late-year low point of $1,522. But, let's not forget, even allowing for this deep price correction, gold still closed the past year with just about the best annual gain of any asset class!

Looking ahead, 2012 could well turn out looking much like the past year for gold - with sizable gains, possibly as much as 50 percent (or more) from the recent lows, but also with occasional big declines that may lead many observers of the gold scene to mistakenly declare an end to the yellow metal's bull market. Just as gold bears have been wrong over and over again in the past decade, so will they continue to be wrong in 2012.

The story of gold in recent years has been a tale of institutional traders and speculators - including hedge funds, commodity funds, and the trading desks at the big banks and financial firms - producing great two-way volatility as they rushed into gold (as we saw last summer) and then, not just unwinding long positions, but shorting the metal in a big way (as we saw this past fall).

Driving these institutional players, in addition to momentum and technical trading indicators, has been the flight from the euro into U.S. dollar assets - and the appearance of dollar strength pushing gold lower, particularly at times of massive euro capital flight.

Importantly, much of this negative activity has taken place in gold derivative markets - but, all the while, long-term physical demand has remained fairly robust.

Buying from the Asian gold-market giants - China and India - for both jewelry and investment has continued to remain firm in spite of higher prices that years ago might have discouraged continued accumulation.

Having just returned from two weeks in China and meetings with many players in the country's gold market, I can tell you that gold demand remains strong despite the recent slowdown in economic activity, thanks to personal income growth albeit at a slower pass, rising wealth among those most likely to buy gold, and also inflation fears. Moreover, higher gold prices, rather than discouraging demand, have attracted new investors to the market.

Meanwhile, global net central bank gold buying has not just continued but has accelerated as reserve managers look for opportunities to shed U.S. dollars - and euros too - in favor of something that has a longer track record as a reliable store of value.

Central bank reserve managers, ever sensitive to buying without disrupting the market, have used episodes of price weakness to step up their buying. This behavior now reduces downside risk while it is also helping set the stage for a surprising sizable snap-back in the metal's price.

What few gold pundits realize is that the amount of physical gold available in the world gold market - the "free float" - is shrinking, thanks not only to Chinese and other Asian buyers, many of whom are unlikely to sell, but also due to renewed interest and accumulation of gold by a growing number of central banks. For central banks, the holding period may be measured in decades if not longer. As a consequence, future demand will have a much more high-powered affect on the price of gold - and this is one of the reasons we expect much higher prices in the years ahead.

Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility - and can trigger significant price corrections - but, in my book, it does not affect the long-term price trend. What governs the price of gold over the long term are the market's real-world supply and demand fundamentals - and these have been decidedly bullish and are becoming even more so. Hence, my long-standing long-term forecast of higher gold prices over the next several years.

Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading gold and precious metals economist for over 25 years. He is also Senior economic Advisor to Rosland Capital. See www.nicholsongold.com

LBMA Forecasters See Gold Reaching $2,055 This Year

2012-01-10T04:23:00.000-08:00

The London Bullion Market Association published the results of its Forecast on Monday, the firm’s annual survey on the direction of precious metals prices for the coming year. The large majority of respondents – comprised of analysts and strategists from investment banks and other financial firms across the globe – predicted that gold will rise for a 12th consecutive year on its way to further new all-time highs.

The average maximum gold price estimate among the 26 respondents came in at $2,055 per ounce, a 6.9% increase over the yellow metal’s $1,923 record high in 2011. In addition, the highest individual estimate came from UBS’s Edel Tully – last year’s most accurate gold price forecaster – who predicted that gold will reach a high of $2,500 per ounce in 2012.

The average of the mean gold estimates was $1,766 per ounce, 12.3% above the $1,572 average price in 2011.

While the analysts were quite bullish on gold in the year ahead, they were considerably less constructive on other precious metals. The average estimate for silver in 2012 came in at $33.98 per ounce, 3.2% below 2011′s average of $35.11 per ounce. Platinum’s 2012 average estimate was $1,624, 5.6% below 2011′s average of $1,720 per ounce. Lastly, palladium’s 2012 average estimate of $735.52 per ounce was just 0.3% above 2011′s average of $733.63 per ounce.

The numerical results of the LBMA Forecast are available at the web address below:

http://www.lbma.org.uk/assets/LBMA%20Press%20Release%202012%20Forecast%2020120106.pdf

The LBMA also noted that “The full survey, including specially written commentaries together with analysis of the historical performance of the Forecast, will be published later this month and posted on the LBMA website in mid-January.”

Hildebrand says he 'acted correctly' on deals

2012-01-08T15:15:00.000-08:00

Swiss central bank chief Philipp Hildebrand on Thursday defended himself against criticism of foreign currency transactions made by his family last year and suggested "political motives" were at work.
Speaking publicly for the first time about the scandal, Hildebrand told media in Zurich that he had complied with all the regulations of the central bank.
"I acted correctly on every count," he said, following days of media speculation over allegations of insider trading.
It emerged last month that his wife Kashya Hildebrand profited after buying $504,000 in August, just weeks before an intervention by the SNB to halt the rise of the franc -- a move that saw the dollar rise significantly against the Swiss currency.
The purchase, which investigators said appeared to have been carried out without her husband's knowledge, was deemed "sensitive" by auditors who nevertheless cleared the couple of any wrongdoing.
"I immediately allowed an investigation and allowed the investigators to look at all my records," Hildebrand said.
Bank Sarasin in Basel this week dismissed an employee who allegedly transmitted transaction details to a lawyer close to the far-right Swiss People's Party whose chief Christoph Blocher is a Hildebrand critic.
Zurich prosecutors have launched a criminal case against a 39-year-old former bank worker.

The history of gold trading

2012-01-08T15:13:00.000-08:00

Throughout history, gold has been highly valued for coinage, jewellery and the arts. Gold is considered a unique store of value and the symbol of power, strength and wealth. Since April 2001 it has more than quintupled in value, writes Nicolas Shamtanis, Dealing Room Manager at easy-forex.com.
The poet Virgil describes man's underlying lust for gold when he wrote “Auri Sacra Fames” (the accursed thirst for gold). In the 19th century, gold mining expanded around the world with the 1848 California gold rush which helped the settlement of the American West. In 1869, South Africa became a major source of the world’s gold after the discovery of the Witwatersrand basin and the Canadian Yukon gold rush followed in 1896.

Approximately 65% of all the gold in the world has been mined since 1950 and the finite supply of gold adds to its rarity and attraction. But how did it all begin?

Various forms of livestock, in particular cattle, and grains were the earliest forms used to settle trades and payment for good goods and services. Cattle are hard to carry in your pocket and grains spoil so an alternative currency was needed.

In 560 BC, the Greek state of Lydia in Asia Minor introduced the first gold coins. The use of gold coins as currency spread quickly throughout the Mediterranean and Middle East regions. The Romans mined gold extensively and Venice introduced the gold “Ducat” which became the most popular coin in the world for the next 500 years. In 19th century America, a movement to use silver coins and adopt a bimetallic monetary system emerged. The US Congress did not authorise the printing of paper money until 1861.

For most of the early 20th century, Americans were forbidden to buy or trade gold. In 1946, the Bretton Woods agreement fixed the price of gold at $35 an ounce, creating a gold standard and the US dollar (USD) became backed by gold. A gold standard is defined as a monetary system in which the standard economic unit of account is a fixed mass of gold.

The Bretton Woods agreement of fixed exchange rates was implemented to combat deflationary pressures, economic dislocations and currency instability which emerged after World War I and II. Soon after the agreement was signed, the USD became the world’s reserve currency.

In the following years, there were significant strains on the system of fixed exchange rates as the US balance of payments with the rest of the world grew dramatically. Foreign central banks exercised their gold convertibility rights causing a sharp decline in US gold reserves.

In 1971, the Bretton Woods system was abandoned when there was no longer enough gold to cover all the paper money in circulation. The USD became a “fiat” currency backed by nothing more than the health of the US economy and the promise of the US government. A fiat currency’s value is based on the issuing authority's promise to pay; not an intrinsic value or extrinsic backing. In 1974, the ban on US ownership of gold bars was lifted and US citizens were allowed to trade gold.

The end of the gold standard ushered in the current system of floating exchange rates. In 1972, the Chicago Mercantile Exchange (CME) launched futures trading in seven currencies and in 1974 the first gold futures contract was traded on the COMEX exchange in New York. The 1980’s experienced a sharp expansion of over-the-counter trading in currencies and gold and the beginning of online trading.

Recently, we have seen gold prices surging to an all-time high as nations, institutions and investors seek safe haven and are using gold as a hedge against inflation and protection against losses in other assets like stocks and bonds and commodities. Investors buying gold are sometimes called “gold bugs.” Gold bugs are also described as a person opposed to the use of fiat currency and are supportive of a return to the gold standard.

Unlike a fiat currency, money backed by gold cannot be created arbitrarily by government action. The supply of gold is finite and printing of paper limitless. The term gold bug is thought to have been derived from an Edgar Allen Poe poem the “Gold -bug.” In the poem, two adventurers decipher a secret message that leads to a buried treasure.

Since April 2001, the price of gold has more quintupled in value and hit all-time high of $1913.50 in August 2011. The price movement in gold has been quite volatile with prices rising and falling quickly. Investors have shown high levels of interest in trading gold.

Like foreign currency (forex), trading with gold rates does not require the "physical" purchase or sale of the real material. If you buy forex gold for the price of 1850.97USD, you do not have an ounce of gold that you can hold in your pocket, but you rather have the obligation to buy gold (XAU) at $1850.97. When you close your forex deal, you sell the gold and close your obligation. If you sell it for the price of $1853.00, you have made a profit of $2.03 for every ounce (unit) of gold in your contract.

Rising gold prices can also affect other currencies. Higher gold prices can be especially important to the currencies of major gold-producing countries. Australia, Canada and South Africa are all large producers of gold, so if you believe the price of gold will continue to rise, you can establish trades in the Australian dollar (AUD), the Canadian dollar (CAD) or the South African Rand (ZAR) because those currencies may become stronger.

It may be wise to keep an eye on gold prices when the international political or economic situation is changing, such as during times when global inflation is rising. If the gold price starts to increase, you might expect it to go higher in the next periods of trading.

Article sponsored by www.easy-forex.com.

gold rebounds for second straight day on eurozone cues

2012-01-08T15:06:00.000-08:00

The price of gold rebounded on Monday after it suffered losses last Friday. Gold traded higher Monday on the hope that the leadership of the European countries are striving to find solution to the protracted debt crisis the continent of Europe has been struggling with and as at today, Tuesday, the price of gold remains steady as it continues to gain momentum amidst it rising demand globally.
On Monday, gold got a boost as it gained about 2% upon the recognition that many European policymakers are putting more efforts into solving the debt crisis which had plagued the Eurozone nations for more than twenty four months now.
Though the price of gold inched up higher last week to reach $1,718.48 it fell on Friday to $1,679.15. As at today, the price of gold has inched up by 0.16% to attain $1,714.60 per ounce.
It could be surprising to see many investors snapping up gold after it had almost lost its safe-haven status by displaying the features similar to risky assets in the past couple of months. Jeremy Friesen, one of the Hong Kong commodities strategists said they were having their focus on gold to have a bullish run knowing that the solutions to the perennial economic challenges would require very intense monetary policy applications which will guarantee upward price gain for gold.
Friesen was optimistic that the price of gold will go up higher in 2012 when the effects of the application of monetary policies will favor increases in its price though ‘’much may not be seen now that the year is fast running out’’ according to him.

The Fukushima black box

2012-01-08T15:01:00.000-08:00

The government was almost as clueless. Naoto Kan, then prime minister, had a crisis headquarters on the fifth floor of the Kantei, his office building. But emergency staff from various ministries were relegated to the basement, and there was often miscommunication, not least because mobile phones did not work underground. Crucial data estimating the dispersion of radioactive matter were not given to the prime minister’s office, so that evacuees like those from Namie were not given any advice on where to go. That is why they drove straight into the radioactive cloud. The report faults the government for providing information that was often bogus, ambiguous or slow. Perhaps the biggest failure was that nobody in a position of responsibility—neither TEPCO nor its regulators—had sought to look beyond the end of their noses in disaster planning. No one seems ever to have tried to “think the unthinkable”.
In America official reports such as those on the September 11th attacks or the Deepwater Horizon oil spill have become acclaimed books. This one is hardly a page-turner. A privately funded foundation, headed by Yoichi Funabashi, a former editor of the Asahi Shimbun newspaper, is doing a separate investigation, based partly on the testimony of TEPCO whistle-blowers. (One, according to Mr Funabashi, says the earthquake damaged the reactors before the tsunami, a claim that officials have always rejected.) It at least promises to have literary merit. Mr Funabashi, a prominent author, draws parallels between the roots of the disaster and Japan’s failures in the second world war. They include the use of heroic front-line troops with out-of-touch superiors; rotating decision-makers too often; narrow “stovepipe” thinking; and the failure to imagine that everything could go wrong at once.
Complex systems, jerry-rigged
For now, the risk is that the interim report does not get the attention it deserves. So far it seems to have aroused more interest on a techie website called Physics Forums, beloved of nuclear engineers, than in the Japanese press. The government, led by Yoshihiko Noda, has not yet used it as a rallying call for reform. One of its recommendations, an independent new regulatory body, will soon be set up. Others, such as new safety standards and broader evacuation plans, would take months to implement.
Such reports are, after all, confidence-building exercises. They are meant to reassure the public that, by exposing failures, they will help to prevent them from being repeated. In the case of Fukushima Dai-ichi there is still plenty to be nervous about. Although the government declared on December 16th that the plant had reached a state of “cold shutdown”, much of the cooling system is jerry-rigged and probably still not earthquake-proof. On January 1st a quake temporarily caused water levels to plunge in a pool containing highly radioactive spent-fuel rods.
Meanwhile, across Japan, 48 out of 54 nuclear reactors remain out of service, almost all because of safety fears. Until somebody in power seizes on the report as a call to action, its findings, especially those that reveal sheer ineptitude, suggest that the public has every reason to remain as scared as hell.

2011 was a poor year gold stocks

2011-12-31T17:27:00.000-08:00

Throughout 2011 we were reluctant to increase our exposure to the mining sector and only made one purchase which was back in February 2011. We did produce a number of articles questioning the wisdom of investing in mining stocks as we were of the opinion that they were not performing despite the constant mantra that supports this tiny sector.

about 2011 summy og gold and selver interest and opportunites for trading

2011-12-27T03:11:00.000-08:00

If you're bullish about the long term for gold and silver, it's mouthwatering to watch them undergo a major correction after taking earlier profits that added to your deployable cash. For a little historical perspective on pullbacks, consider the following charts.

The current 15.6% gold decline, while considered a "major" correction, is not out of the ordinary, particularly following the late summer spike. And after each big selloff, there was a price consolidation phase that in every instance led to higher prices. The message: hold on, and buy the big dips.

Not surprisingly, silver's biggest corrections are larger than gold's. This is also true for the rebounds; they've been quite dramatic. If we apply the biggest three-month recovery of 44.3% to the current correction, that would take silver to $40.63… meaning we probably shouldn't expect $60 silver by year-end.
[There's still time to capitalize on the anomaly in the metals market that will bring amazing profits to those who are positioned for it. This report will help you get started… and offers a special bonus, too. Don't delay – the tide could turn very soon.]
Regarding www.skoptionstrading.com. We have just closed another trade which generated a profit of around 23%, however, we had two trades that were not profitable so the profit on our portfolio now stands at 374.43% since inception.
Please be aware that discussions are taking place regarding an increase in the price for this service for new members, so if you are thinking about joining us, then do it sooner rather later in order to save yourself a fair few bucks by avoiding this additional expense.
Our model portfolio is up 374.43% since inception
An annualized return of 94.38%
Average return per trade of 36.57%
92 completed trades, 85 closed at a profit
A success rate of 92.39%
Average trade open for 48.13 days
So, the question is: Are you going to make the decision to join us today?
Also many thanks to those of you who have already joined us and for the very kind words that you sent us regarding the service so far, we hope that we can continue to put a smile on your faces.

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US Real Interest Rates Indicate Gold Slightly Undervalued

2011-12-27T03:09:00.000-08:00

n this update, we look at the latest trend emerging in US real rates. US real rates continue to fall and as a result we remain bullish on gold.
We have covered the dynamics of the relationship between gold and U.S. real rates before, but for new readers and those wanting a refresher, here’s an excerpt from a previous article:

“Gold investors tend to focus overwhelmingly on the relationship between the US dollar and gold, citing that a lower dollar leads to higher gold prices in US dollars. Whilst this may be generally true, there is another relationship that does not get as much attention as we believe it deserves, and that is the relationship gold has with US real interest rates. For the first few years of this gold bull market, it was sufficient simply to acknowledge the USD down, therefore gold up dynamic, but now things have changed. Over the past couple of years gold has rallied when the greenback has been making gains, as well as when it was weakening, therefore investors must now take note of the inverse relationship between US real interest rates and gold, which has been observed consistently over the last couple of years.
The basic fundamentals behind this inverse relationship are that when US monetary policy is looser, real rates fall and therefore investors buy gold for a number of reasons.

Firstly, lower real rates could imply higher inflationary expectations in the future therefore gold is bought as a hedge against this possible inflation.

Secondly, lower real returns in Treasuries drives investors into risk assets in search of a higher return. This also sends gold higher but it also sends most commodities, risk currencies and equities higher too.

Thirdly, lower real returns on Treasuries reduce demand of US dollars, causing the dollar to fall and therefore the gold price to rise in US dollars.

Finally, looser monetary policy implies that the economic situation is not as rosy as many would like to believe, so if the Federal Reserve acts by loosening monetary policy and driving down real interest rates then that send a message that the economy is in a bad place therefore investors buy gold as a safe haven asset. There are probably many more reasons for this relationship, but we have just tried to cover the main ones.”
We believe the above explanation of U.S. real rates is the key tool for predicting gold movements. Our analysis and subsequent forecasts have been proved correct in the past and our current view is this:

In the past few months we have observed further deterioration in 10 year U.S. real rates to their current level of 0%.

As noted this is a bullish sign for gold. We would expect gold to have risen over this period to about $1800-$1900, but it is currently lagging below $1700/oz. For this reason we currently see gold as slightly undervalued, however not considerably. Any short term weakness will see us adding to our positions.

The situation in Europe looks unlikely to improve in the short to medium term. Economic reform is in the works, but this has a long term focus and will not have any effect on the underlying debt issues currently upon us. Any solution arrived at by the ECB will only buy time; the problems at hand will not be resolved long term. In fact recent ECB comments suggest that there will be no monetary easing in Europe in the short term . Comments by Draghi such as “lending money to the IMF to buy Euro bonds is not compatible with the treaty” and emphasis that the ECB’s primary remit is price stability, indicates that talk of quantitative easing in Europe appears to be off the table in the short term. Therefore, whilst we still view the downside in gold as limited, the upside over the short term is now also looking more contained.
The U.S. economy remains timid and additional deterioration in Europe would not help their plight. Further easing in early 2012 therefore, is more than possible.
In August, the Fed promised to keep interest rates at zero for the next two years. On the back of this announcement, gold shot up 15% in a couple of weeks. With the Fed promising to keep interest rates at zero, half the equation is satisfied for real rates to stay low, at least on the short end of the curve. Further expectations of interest rate hikes (of lack of hikes) will dictate what happens at the long end of the curve, and therefore what will happen to key indicators such as the yield on 10 year TIPS.

Given such definite announcements from the Fed, the direction of real rates isn’t the difficult part of the question. The timing is. Real rates could possibly sit at their current level for a year or more, with gold correspondingly standing still. Or the U.S. economy could find itself in further strife even in the coming months and real rates could drop more in the short term. We see the second scenario the more likely of the two, but the actual outcome will lie somewhere between the two. Given the Fed’s August announcement and the U.S.’s bleak economic outlook we do not see real rates increasing any time soon.

Returning to Europe for a moment, we see no positive news coming out of this area of the world for some time. Whilst the impact of the Euro crisis on gold isn’t as direct as the impact of the U.S. economy, the secondary effect of the Euro on the U.S. and hence gold is significant. The most likely scenario is further deterioration in Europe and the global economic outlook will lead to more difficulty in the U.S. triggering further easing, lower real rates and rising gold prices.
Some are predicting the start of QE3 in early 2012, if this eventuates, one would undoubtedly see lower real rates and gold pushing the $2000/oz mark in early 2012. We see QE3 as a very real possibility and any announcement, or hint will have us opening fresh positions. The next month or so could well be the calm before the storm.

The E.U says F.U. to Every Member State

2011-12-27T03:08:00.000-08:00

Daniel Hannan is a writer and journalist, and has been Conservative MEP for South East England since 1999. He speaks French and Spanish and loves Europe, but believes that the European Union is making its constituent nations poorer, less democratic and less free.

European Parliament, Strasbourg, 13 December 2011

• Speaker: Nigel Farage MEP, UKIP leader, Co-President of the EFD Group in the European Parliament (Europe of Freedom and Democracy group)

• Debate: European Council and Commission statements - Conclusions of the European Council meeting of the 8-9 December 2011 - with José Manuel Barroso and Herman Van Rompuy

- 'Blue Card' question: Alyn Smith MEP (Scottish National Party)
Group of the Greens/European Free Alliance

Please click here.

So dear readers, what do think the chances are that Britain will still be a member of the European Union this time next year?

Regarding www.skoptionstrading.com. We have just closed another trade which generated a profit of around 23%, so our portfolio has now generated a profit of 374.43% since inception.
Please be aware that discussions are taking place regarding an increase in the price for this service for new members, so if you are thinking about joining us, then do it sooner rather later in order to avoid this additional expense.

Our model portfolio is up 384.33% since inception
An annualized return of 94.73%
Average return per trade of 36.42%
93 completed trades, 86 closed at a profit
A success rate of 92.47%
Average trade open for 49.25 days

So, the question is: Are you going to make the decision to join us today?