Letter of European Commission President Barroso and European Council President Van Rompuy on the key issues of the G20 summit
"European Commission President José Manuel Barroso and European Council President Herman Van Rompuy have sent a letter to the other members of the European Council in order to share their views on the key issues of the G20 summit in Cannes on 3-4 November 2011. They express their hope that these orientations will serve as a good basis for our preparatory exchange of views at the European Council meeting on 23 October. They call for a "renewed collective G20 spirit" and stress that "the fact that France holds the G20 Presidency this year gives Europe a special responsibility. We need to make the Cannes Summit a G20 Summit that restores confidence, supports sustainable growth and job creation, and maintains financial stability".)..."
Source: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/678
Monday, October 31, 2011
Friday, October 28, 2011
IMF - Statement by IMF Managing Director Christine Lagarde on the Eurozone Leaders' Summit
Statement by IMF Managing Director Christine Lagarde on the Eurozone Leaders' Summit
Press Release No.11/382
October 26, 2011
"...I can assure you that the IMF will continue to play its part in supporting the efforts made today to address the challenges facing the Euro Area and to restore growth to its full potential.”"
[Mrt: "...Growth..." :o)]
Source: http://www.imf.org/external/np/sec/pr/2011/pr11382.htm
Press Release No.11/382
October 26, 2011
"...I can assure you that the IMF will continue to play its part in supporting the efforts made today to address the challenges facing the Euro Area and to restore growth to its full potential.”"
[Mrt: "...Growth..." :o)]
Source: http://www.imf.org/external/np/sec/pr/2011/pr11382.htm
BIS - How to cope with the too-big-to-fail problem?
Comments by Mr Stephen G Cecchetti, Economic Adviser and Head of Monetary and Economic Department of the BIS, prepared for the 10th Annual Conference of the International Association of Deposit Insurers, "Beyond the Crisis: The Need for a Strengthened Financial Stability Framework", Warsaw, Poland, 19 October 2011.
Source: http://www.bis.org/speeches/sp111019.htm
BIS - MD - Mario Draghi: 2011 World Savings Day
Mario Draghi: 2011 World Savings Day
"...This is my last official speech as Governor of the Bank of Italy..."
[Mrt: confirms savings patterns in population, Italy]
Source: http://www.bis.org/review/r111027d.pdf?ql=1
Tuesday, October 25, 2011
BdF - TOWARDS WHICH INTERNATIONAL MONETARY SYSTEM?
SESSION 4 (ROUND TABLE) TOWARDS WHICH INTERNATIONAL MONETARY SYSTEM?
Christine LAGARDE
Minister of the Economy, Finance and Industry
France
Dear Mr Noyer, after our February marathon, I am delighted to get together in this magnificent establishment, which many now consider to be an annex of the Banque de France. I know how attached you are to the Golden Gallery, where yesterday evening’s meeting was held. But I also understand that you might wish to free yourself from the weight of history in order to look with confidence to the future of the global economy.
Indeed, we live in a disorderly world, in which the share of emerging markets in the composition of global growth has increased steadily from 30% in 1980 to 45% 30 years on. This world is also increasingly interconnected —exports account for a growing share of wealth creation in our national economies— and increasingly volatile.
...
"The G20 reached agreement on three objectives:
...
"...The next step is for us to reach an agreement, at the forthcoming G20 meeting in Washington, on a list of our imbalance indicators and the way in which they could contribute to economic policy recommendations aimed at rebalancing global growth. We must also examine the initial proposals for reforming the IMS, drawing on preliminary studies by the IMF as well as the World Bank and development banks.
In other words, the Paris G20 meeting laid the foundations for discussions in 2011, which will come to fruition at the summit of Heads of State or Government in Cannes in November. A few days before, together with other Finance Ministers and central bank Governors, we will finalise the proposals for reforming the IMS that we will submit at the summit.
Before that, on 31 March, in Nanjing, a high-level seminar dedicated to the reform of the IMS will provide a forum to freely discuss our views and put a stop to the “currency war” rhetoric in favour of a frank but respectful discussion. As Churchill said, at a White House dinner on 26 June 1954, “To jaw-jaw is always better than to war-war”..."
Source: http://www.banque-france.fr/gb/publications/telechar/seminaires/2011/Session4-Lagarde.pdf
Part of bigger workshop:
"International Symposium of the Banque de France
Source: http://www.banque-france.fr/gb/publications/seminaires/International-Symposium-of-the-Banque-de-France-Regulation-in-the-face-of-global-imbalances-programme.htm
Christine LAGARDE
Minister of the Economy, Finance and Industry
France
Dear Mr Noyer, after our February marathon, I am delighted to get together in this magnificent establishment, which many now consider to be an annex of the Banque de France. I know how attached you are to the Golden Gallery, where yesterday evening’s meeting was held. But I also understand that you might wish to free yourself from the weight of history in order to look with confidence to the future of the global economy.
Indeed, we live in a disorderly world, in which the share of emerging markets in the composition of global growth has increased steadily from 30% in 1980 to 45% 30 years on. This world is also increasingly interconnected —exports account for a growing share of wealth creation in our national economies— and increasingly volatile.
...
"The G20 reached agreement on three objectives:
- ensure the stability of the fi nancial system;
- promote the orderly transition from a world where a small number of economies, with their currencies, represent the bulk of wealth and trade to a multipolar world where emerging countries and their currencies represent a growing if not predominant share;
- avoid disruptive fluctuations in capital flows, disorderly movements in exchange rates and persistent misalignments of exchange rates."
...
"...The next step is for us to reach an agreement, at the forthcoming G20 meeting in Washington, on a list of our imbalance indicators and the way in which they could contribute to economic policy recommendations aimed at rebalancing global growth. We must also examine the initial proposals for reforming the IMS, drawing on preliminary studies by the IMF as well as the World Bank and development banks.
In other words, the Paris G20 meeting laid the foundations for discussions in 2011, which will come to fruition at the summit of Heads of State or Government in Cannes in November. A few days before, together with other Finance Ministers and central bank Governors, we will finalise the proposals for reforming the IMS that we will submit at the summit.
Before that, on 31 March, in Nanjing, a high-level seminar dedicated to the reform of the IMS will provide a forum to freely discuss our views and put a stop to the “currency war” rhetoric in favour of a frank but respectful discussion. As Churchill said, at a White House dinner on 26 June 1954, “To jaw-jaw is always better than to war-war”..."
Source: http://www.banque-france.fr/gb/publications/telechar/seminaires/2011/Session4-Lagarde.pdf
Part of bigger workshop:
"International Symposium of the Banque de France
Regulation in the face of global imbalances Programme"
Source: http://www.banque-france.fr/gb/publications/seminaires/International-Symposium-of-the-Banque-de-France-Regulation-in-the-face-of-global-imbalances-programme.htm
EU - Currency Asymmetry, Global Imbalance, and Reform of International Monetary System
Currency Asymmetry, Global Imbalance, and Reform of International Monetary System
Prof. FAN, Gang,
National Economic Research Institute, Beijing, China
April, 2006
"...The currency disequilibrium is mainly due to the present system with USD as the international currency, and the persistent tendency of devaluation of USD since Nixon shock in 1970s and Plaza Accord in 1980s.
China’s “guilt”is that the wage has been growing less than labor productivity (about 1% per year), due to too many poor rural laborers with 1 dollar per day come to compete for better paid jobs..."
Source: http://ec.europa.eu/economy_finance/events/2006/bxlforum/fan_gang_pres_en.pdf
Prof. FAN, Gang,
National Economic Research Institute, Beijing, China
April, 2006
"...The currency disequilibrium is mainly due to the present system with USD as the international currency, and the persistent tendency of devaluation of USD since Nixon shock in 1970s and Plaza Accord in 1980s.
China’s “guilt”is that the wage has been growing less than labor productivity (about 1% per year), due to too many poor rural laborers with 1 dollar per day come to compete for better paid jobs..."
Source: http://ec.europa.eu/economy_finance/events/2006/bxlforum/fan_gang_pres_en.pdf
Sunday, October 23, 2011
WB - Is the Crisis Problem Growing More Severe?
Is the Crisis Problem Growing More Severe?
Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez-PeriaDecember 2000
"The crisis problem is one of the dominant macroeconomic features of our age. Its
prominence suggests questions like the following: Are crises growing more frequent? Are they
becoming more disruptive? Are economies taking longer to recover? These are fundamentally
historical questions, which can be answered only by comparing the present with the past. To this end,
this paper develops and analyzes a database spanning 120 years of financial history. We find that
crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard
periods and is rivaled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is
something different and disturbing about our age. However, there is little evidence that crises have
grown longer or output losses have become larger..."
Source: http://siteresources.worldbank.org/DEC/Resources/cris_problem_more_severe.pdf
Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez-PeriaDecember 2000
"The crisis problem is one of the dominant macroeconomic features of our age. Its
prominence suggests questions like the following: Are crises growing more frequent? Are they
becoming more disruptive? Are economies taking longer to recover? These are fundamentally
historical questions, which can be answered only by comparing the present with the past. To this end,
this paper develops and analyzes a database spanning 120 years of financial history. We find that
crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard
periods and is rivaled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is
something different and disturbing about our age. However, there is little evidence that crises have
grown longer or output losses have become larger..."
Source: http://siteresources.worldbank.org/DEC/Resources/cris_problem_more_severe.pdf
BIS - Managing international financial stability
Fabrizio Saccomanni: Managing international financial stability
Edited text of remarks by Mr Fabrizio Saccomanni, Director General of the Bank of Italy, at a meeting at the Peterson Institute for International Economics, Washington DC, 11 December 2008.
Instability in the age of globalization
"...International financial instability is a subject that has fascinated and intrigued me since when I was a young economist at the IMF and witnessed with considerable anxiety the collapse of the Bretton Woods system on August 15, 1971. The ensuing decade of instability was mostly attributable to the shock of the downward floating of the dollar and the resulting two oil-shocks of 1974 and 1979. After some unsuccessful attempts to rebuild Bretton Woods, the negotiations for the reform of the international monetary system ended in 1976 with the legalization of freely floating exchange rates and that seemed sufficient to fix the problem. A tired US Treasury Secretary, William Simon, commented: “All is well that ends”.
At the beginning of the 1980s, following the process of liberalization, deregulation and privatisation set in motion by Margaret Thatcher and Ronald Reagan, it was widely expected that full international capital mobility would interact with floating exchange rates to ensure adjustment of balance of payments disequilibria and a stable financial environment. Instead, these new conditions paved the way for the emergence of a global financial system in which financial innovation and the ICT revolution combined to produce an extraordinary expansion of financial sectors and markets compared with the real sector in both industrialized and emerging countries. The seeds of instability were thus planted on fertile soil. Indeed since the 1980s financial disturbances have occurred with increased frequency and intensity and have entailed major international repercussions..."
...
"So, given that the situation has not improved since 2001, what is different and disturbing about the age of globalization? Here are some features that I regard as crucial.
What is different
• The world economy operates under a “market-led international monetary system” in which market forces determine exchange rates and the international allocation of capital. This is the key point of a paper Tommaso Padoa-Schioppa and I wrote for a conference organized by Fred Bergsten and Peter Kenen at this Institute to celebrate the 50th Anniversary of the Bretton Woods System in 1994.3 In the paper we underlined the risk that the increased globalization of financial markets could lead to “disturbances that may have an impact on the stability of the financial system”.
• Global financial intermediaries operate in a highly competitive environment, but with essentially uniform credit allocation strategies, risk management models and reaction functions to macroeconomic developments and credit events.
• Financial innovation (mainly through securitization and derivatives) has greatly enhanced the ability of global players to manage market and credit risks.
What is disturbing
• There is no stability-oriented anchor for the macroeconomic policies pursued by systemically relevant countries.
• Monetary policies targeted exclusively to consumer price inflation are not likely to prevent unsustainable trends in credit flows and in asset prices (equity, real estate, bonds, foreign exchange).
• The procyclicality of the financial system has been enhanced by factors leading to excessive credit creation followed by sharp credit contraction. These factors are related to both market dynamics (underpricing of risk, overestimation of market liquidity, uniformity of financial strategies and of risk management models, information asymmetries, herd behaviour) and to financial regulation (capital requirement, fair value accounting).
• Perverse incentives and loopholes in the regulatory system have made it possible for financial innovation to transfer credit risks to unregulated entities.
• Widespread conflict of interest, between originators of financial products, credit rating agencies and law firms, has facilitated the dissemination of highly complex, risky and opaque instruments among investors with inadequate risk management culture.
...
"...In reviewing the response to the current crisis, I will not address the unprecedented array of immediate crisis management measures undertaken by central banks and national Governments in the major countries to underpin banking and financial systems and to support economic activity. I will rather concentrate on the longer-term work being undertaken in the IMF context, in the G20 and in the Financial Stability Forum (FSF) to reform the international monetary and financial system in order to make it less crisis-prone than the present one and more resilient to shocks. On this more systemic issue, a lively debate has developed involving politicians, academic economists and financial analysts. A recurrent theme in the debate is the call for a “new Bretton Woods” and the recent meeting of the Heads of State and Government of the G20 here in Washington last November was seen by many observers as the starting point of a process that could lead to a fundamental reform of the world’s monetary and financial system..."
"...If by a “new Bretton Woods” one means a system built upon the foundations of the “old” one, it may be appropriate to recall how this was shaped. In essence, the Bretton Woods system was based on three main pillars: (i) a stability-oriented anchor for macroeconomic policies, operating through the par-value regime for member currencies in terms of gold and the US dollar; (ii) an obligation to maintain freedom from restrictions for trade and other current international transactions; (iii) the possibility of introducing restrictions on capital movements for restoring equilibrium in the balance of payments. Obviously, in any reform project, these pillars would have to be adapted to the new reality of financial globalization. Leaving aside for a moment the “anchor” question of the first pillar, it must be noted that in the G20 Summit Declaration of November 15, 2008 one can find encouraging language on the issues covered by the two other pillars..."
...
"...The G20 further outlined the need to strengthen transparency and accountability, to promote integrity in financial markets and to reinforce international cooperation in the regulatory field, broadly endorsing the program and the division of labour agreed upon in this field by the Managing Director of the IMF and the Chairman of the FSF. The FSF, in the words of Chairman Draghi, is working in particular to ensure that financial systems would have more capital, less leverage and would be subject to more effective regulation..."
Source: http://www.bis.org/review/r081217c.pdf?frames=0
Edited text of remarks by Mr Fabrizio Saccomanni, Director General of the Bank of Italy, at a meeting at the Peterson Institute for International Economics, Washington DC, 11 December 2008.
Instability in the age of globalization
"...International financial instability is a subject that has fascinated and intrigued me since when I was a young economist at the IMF and witnessed with considerable anxiety the collapse of the Bretton Woods system on August 15, 1971. The ensuing decade of instability was mostly attributable to the shock of the downward floating of the dollar and the resulting two oil-shocks of 1974 and 1979. After some unsuccessful attempts to rebuild Bretton Woods, the negotiations for the reform of the international monetary system ended in 1976 with the legalization of freely floating exchange rates and that seemed sufficient to fix the problem. A tired US Treasury Secretary, William Simon, commented: “All is well that ends”.
At the beginning of the 1980s, following the process of liberalization, deregulation and privatisation set in motion by Margaret Thatcher and Ronald Reagan, it was widely expected that full international capital mobility would interact with floating exchange rates to ensure adjustment of balance of payments disequilibria and a stable financial environment. Instead, these new conditions paved the way for the emergence of a global financial system in which financial innovation and the ICT revolution combined to produce an extraordinary expansion of financial sectors and markets compared with the real sector in both industrialized and emerging countries. The seeds of instability were thus planted on fertile soil. Indeed since the 1980s financial disturbances have occurred with increased frequency and intensity and have entailed major international repercussions..."
...
"So, given that the situation has not improved since 2001, what is different and disturbing about the age of globalization? Here are some features that I regard as crucial.
What is different
• The world economy operates under a “market-led international monetary system” in which market forces determine exchange rates and the international allocation of capital. This is the key point of a paper Tommaso Padoa-Schioppa and I wrote for a conference organized by Fred Bergsten and Peter Kenen at this Institute to celebrate the 50th Anniversary of the Bretton Woods System in 1994.3 In the paper we underlined the risk that the increased globalization of financial markets could lead to “disturbances that may have an impact on the stability of the financial system”.
• Global financial intermediaries operate in a highly competitive environment, but with essentially uniform credit allocation strategies, risk management models and reaction functions to macroeconomic developments and credit events.
• Financial innovation (mainly through securitization and derivatives) has greatly enhanced the ability of global players to manage market and credit risks.
What is disturbing
• There is no stability-oriented anchor for the macroeconomic policies pursued by systemically relevant countries.
• Monetary policies targeted exclusively to consumer price inflation are not likely to prevent unsustainable trends in credit flows and in asset prices (equity, real estate, bonds, foreign exchange).
• The procyclicality of the financial system has been enhanced by factors leading to excessive credit creation followed by sharp credit contraction. These factors are related to both market dynamics (underpricing of risk, overestimation of market liquidity, uniformity of financial strategies and of risk management models, information asymmetries, herd behaviour) and to financial regulation (capital requirement, fair value accounting).
• Perverse incentives and loopholes in the regulatory system have made it possible for financial innovation to transfer credit risks to unregulated entities.
• Widespread conflict of interest, between originators of financial products, credit rating agencies and law firms, has facilitated the dissemination of highly complex, risky and opaque instruments among investors with inadequate risk management culture.
...
"...In reviewing the response to the current crisis, I will not address the unprecedented array of immediate crisis management measures undertaken by central banks and national Governments in the major countries to underpin banking and financial systems and to support economic activity. I will rather concentrate on the longer-term work being undertaken in the IMF context, in the G20 and in the Financial Stability Forum (FSF) to reform the international monetary and financial system in order to make it less crisis-prone than the present one and more resilient to shocks. On this more systemic issue, a lively debate has developed involving politicians, academic economists and financial analysts. A recurrent theme in the debate is the call for a “new Bretton Woods” and the recent meeting of the Heads of State and Government of the G20 here in Washington last November was seen by many observers as the starting point of a process that could lead to a fundamental reform of the world’s monetary and financial system..."
"...If by a “new Bretton Woods” one means a system built upon the foundations of the “old” one, it may be appropriate to recall how this was shaped. In essence, the Bretton Woods system was based on three main pillars: (i) a stability-oriented anchor for macroeconomic policies, operating through the par-value regime for member currencies in terms of gold and the US dollar; (ii) an obligation to maintain freedom from restrictions for trade and other current international transactions; (iii) the possibility of introducing restrictions on capital movements for restoring equilibrium in the balance of payments. Obviously, in any reform project, these pillars would have to be adapted to the new reality of financial globalization. Leaving aside for a moment the “anchor” question of the first pillar, it must be noted that in the G20 Summit Declaration of November 15, 2008 one can find encouraging language on the issues covered by the two other pillars..."
...
"...The G20 further outlined the need to strengthen transparency and accountability, to promote integrity in financial markets and to reinforce international cooperation in the regulatory field, broadly endorsing the program and the division of labour agreed upon in this field by the Managing Director of the IMF and the Chairman of the FSF. The FSF, in the words of Chairman Draghi, is working in particular to ensure that financial systems would have more capital, less leverage and would be subject to more effective regulation..."
Source: http://www.bis.org/review/r081217c.pdf?frames=0
Thursday, October 20, 2011
CEPR - inancial Crisis Rings Alarm Bells Over Public Debt
Because electoral systems differ in the US, EU and Japan, no single institutional reform will work. As the Report notes, "there is no magic formula for successful fiscal consolidation". But something needs to be done, and the Report points the ways forward:
- In Japan, the level of social benefits paid to older people is far too high. Reducing these benefits is difficult: older people tend to live in rural areas, which are overrepresented in the Diet. Electoral reform is needed.
- In the US, on the other hand, the problem is insufficient tax revenue and an inefficient health system, but the checks and balances built into the US political system have so far made it impossible to agree on adequate measures. A constitutional amendment would work, the Report notes, but would need to allow for countercyclical fiscal policies, effective enforcement and for overrides by a Congressional supermajority.
- In Europe the problem arises from high government expenditure and the moral hazard created by bailouts. The Report argues that each euro area member needs to adopt rules and institutional arrangements appropriate to its own political circumstances. The European Commission should judge whether these national arrangements reduce the deficit bias. Only countries that pass this test would have their debt instruments accepted as collateral by the ECB.
Source: http://www.cepr.org/press/FinancialCrisis2011.htm
Rose - Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed
Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed
Andrew K. Rose*
Revised as of: November 15, 2006
"...Countries have a limited number of choices for their monetary strategy. Historically a large but declining number of countries have fixed their exchange rates. A number of countries have experimented with the idea of setting money growth targets. Some countries pursue hybrid or ill-defined strategies. And an increasing number of countries grant their central banks independence to pursue a domestic inflation target.
Inflation targeters let their exchange rates float, usually without controls on capital flows and often without intervention. Because the goal of monetary policy is aligned with national interests, inflation targeting seems remarkably durable, especially by way of contrast with the alternatives. It is striking that no country has ever been forced to abandon an inflation-targeting regime. But the domestic focus of inflation targeting does not seem to have observable international costs. Countries that target inflation experience lower exchange rate volatility and fewer “sudden stops” of capital flows than their counterparts; nor do they have different current accounts imbalances, or reserve levels.
As a result of its manifest success, inflation targeting has continued to spread; it now includes a number of developing countries as well as a large chunk of the OECD. Indeed the spread of this monetary strategy has been remarkably fast in the conservative world of monetary policy. The system of domestically-oriented monetary policy with floating exchange rates and capital mobility was not formally planned. It does not have a central role for the United States, gold, or the International Monetary Fund. In short, it is the diametric opposite of the postwar system; Bretton Woods, reversed.
Sustainability is currently the biggest policy issue in international monetary affairs. There is much heated discussion over global imbalances and the Chinese-American exchange rate; is there a “revived” Bretton Woods system? In the midst of this debate, we should not lose sight of the resilience and stability of the emerging international monetary system, which can be accurately described as “Bretton Woods, reversed.”...
Source: http://faculty.haas.berkeley.edu/arose/ReverseBW.pdf
Andrew K. Rose*
Revised as of: November 15, 2006
"...Countries have a limited number of choices for their monetary strategy. Historically a large but declining number of countries have fixed their exchange rates. A number of countries have experimented with the idea of setting money growth targets. Some countries pursue hybrid or ill-defined strategies. And an increasing number of countries grant their central banks independence to pursue a domestic inflation target.
Inflation targeters let their exchange rates float, usually without controls on capital flows and often without intervention. Because the goal of monetary policy is aligned with national interests, inflation targeting seems remarkably durable, especially by way of contrast with the alternatives. It is striking that no country has ever been forced to abandon an inflation-targeting regime. But the domestic focus of inflation targeting does not seem to have observable international costs. Countries that target inflation experience lower exchange rate volatility and fewer “sudden stops” of capital flows than their counterparts; nor do they have different current accounts imbalances, or reserve levels.
As a result of its manifest success, inflation targeting has continued to spread; it now includes a number of developing countries as well as a large chunk of the OECD. Indeed the spread of this monetary strategy has been remarkably fast in the conservative world of monetary policy. The system of domestically-oriented monetary policy with floating exchange rates and capital mobility was not formally planned. It does not have a central role for the United States, gold, or the International Monetary Fund. In short, it is the diametric opposite of the postwar system; Bretton Woods, reversed.
Sustainability is currently the biggest policy issue in international monetary affairs. There is much heated discussion over global imbalances and the Chinese-American exchange rate; is there a “revived” Bretton Woods system? In the midst of this debate, we should not lose sight of the resilience and stability of the emerging international monetary system, which can be accurately described as “Bretton Woods, reversed.”...
Source: http://faculty.haas.berkeley.edu/arose/ReverseBW.pdf
EU - Global currencies for tomorrow: A European perspective
Global currencies for tomorrow: A European perspective
A report on options for, and implications of, reforms of the international monetary system prepared for the European Commission in the context of Contract No. ECFIN/220/2010/573686 by a Bruegel and CEPII team composed of:
Ignazio Angeloni, Agnès Bénassy-Quéré, Benjamin Carton,
Zsolt Darvas, Christophe Destais, Jean Pisani-Ferry, André Sapir, and Shahin Vallée
Introduction
"...After three decades of apathy, the debate on the international monetary system (hereafter IMS) is back. In the 1960s and 1970s, discussions had been raging about international liquidity provision, the pros and cons of abandoning the gold exchange standard, and the initial difficulties of the free-floating regime. In the 1980s, interest had already shrunk to correcting large and persistent exchange-rate misalignments between key currencies. In the 1990s discussions about reforming the IMS virtually disappeared from the international agenda. The focus shifted to more specific issues such as the choice of exchange-rate regimes for emerging and developing countries, the management and resolution of balance-ofpayment and financial crises, and the set-up of regional exchange arrangements, like the euro or the Chiang Mai initiative. Even among scholars, the topic of the international monetary system lost appeal, gradually moving to the realm of economic history. The predominant view was that a market-driven combination of (managed) floating exchange rates, dollar dominance and a lack of a formal global price anchor was the only viable arrangement in a world where internal objectives, such as full employment and price stability, had superseded external ones on a permanent basis.
Four recent developments have led to a revival of the discussion on reforming the IMS:
• One is the rise of global imbalances and their role in the global crisis. A widespread though far from unanimous opinion among academics (see for example Eichengreen, 2009b, Portes 2009) and policymakers (see Larosière, 2009, Turner, 2009 and King, 2010) is that the interplay between macro-imbalances and financial market developments and innovation was an essential ingredient in the genesis of the crisis. There is also broad (but again not unanimous) recognition that macro-imbalances were facilitated by the lack of incentives for policy adjustment and the weakness of multilateral disciplines. Hence, discussion about the prevention of future crises brought IMS reform back on the agenda;
• Second, dissatisfaction with capital flows volatility has revived the debate about the costs and benefits of free capital mobility. The general consensus established in the 1990s about the benefits of financial globalisation has been undermined, not only because of the crisis but also, and more simply, because many emerging countries have been repeatedly overwhelmed by surges of capital inflows followed by sudden outflows. Also, a large set of countries (China, India and a number of emerging economies) have demonstrated that they could perform economically while retaining tight capital controls;
• Third, the accumulation of very large international reserves by still relatively poor countries raises concerns about the welfare cost of holding reserves and capital allocation at global level. Foreign-exchange reserves are mostly invested in high-quality and low-yielding liquid assets. Such an investment strategy has welfare costs for countries that accumulate reserves and it has implications for international capital flows that are undesirable from an allocative viewpoint. Moreover, there is a growing fear among large official reserves holders that the present system exposes them to the risk of large capital losses, should the dollar depreciate in a disorderly way. In brief, foreign-exchange reserves seem to offer an unfavourable risk-return trade-off. Rising concerns in the developing and emerging world were vividly exposed in a widely commented post by China’s central bank governor in March 2009 (Zhou, 2009), in which he unexpectedly called for a reform of the IMS based on a revival of the Special Drawing Rights (SDR);
• Fourth, disputes over the pegging strategies of emerging countries, and monetary policies in the advanced countries, emphasise the increasingly evident need for an emancipation of monetary policies in large emerging countries. The process started before the crisis with the adoption of inflation-targeting monetary policy strategies by many emerging economies. However, fear of floating and collective-action problems led many other countries to maintain the objective of a stable exchange rate and to sterilise the monetary consequences of increased net capital inflows. In the wake of the crisis, the large growth differential between the ‘North’ and the ‘South’ has made such double-target model unworkable without raising barriers to capital flows. These developments have prompted fears of ‘currency wars’.
...
3.2 Is the current regime unipolar or multipolar?
"...The current regime has alternatively been characterised as a multipolar regime (in which several currencies play international roles) or as a unipolar one (in which there is a dominant international currency). Some authors (for example Rose, 2007) claim that what has emerged from the ashes of the Bretton Woods order is a system in which there is ‘no role for a centre country, the IMF, or gold’, but in which a growing number of advanced and emerging countries have adopted some form of inflation-targeting and float independently. Others (for example Padoa Schioppa, 2010, or, implicitly, Zhou Xiaochuan, 2009) see the current international monetary regime as one where the US retains the privileges (as well as duties) accruing to the issuer of the international currency. Others again (for example Dooley, Folkerts Landau and Garber, 2004) claim that part of the world has moved to a floating regime of the sort described by Rose while another part lives under a revived Bretton Woods regime centred on the US dollar, which leads Aglietta (2010) to call it a semi-dollar standard. To clarify this debate, it is useful to refer to data on the international role of major currencies. Table 2 shows how the use of the euro and that of the dollar have changed between 1999 and 2009. First, the table reveals that the euro has gained importance as a reserve currency for both the official and the private sectors. An analysis of yearly data suggests that this happened primarily in the early years of EMU, while in later years the euro’s shares have stabilised. A parallel increase occurred in the international securities and loan markets. In all dimensions, the euro had by the end of its first decade achieved a significant market share, but it is far from challenging the primacy of the US dollar. For instance, once exchange-rate variations are accounted for, Dorrucci and McKay (2011) show that the share of the dollar in global, allocated foreign-exchange reserves remained stable at around 60 percent between 2002 and 2010, and that of the euro also stable at just below 30 percent. The share of the yen slightly declined (from 5 to 3 percent) while those of the British pound and residual currencies slightly increased. At current exchange rates, the share of the dollar declines but remains largely dominant.
As for the unit-of-account functions, the dollar remains key for commodity and energy markets, although it is less so for manufacturing trade. It also remains dominant for monetary anchoring. For example, Bénassy-Quéré et al (2006) have estimated that, from 1999-2004, 92 percent of a sample of 59 currencies were de facto pegged. Among them, 56 percent were pegged to the US dollar, 14 percent to the euro and 22 percent to a basket.11 For 2007, Goldberg (2010) finds that out of 207 countries, 96 were either dollarised or had their currency pegged to the dollar and another eight were in a managed float against the dollar, resulting in 36 percent of non-US world GDP being linked to the dollar. This is evidence of the importance of the ‘Bretton Woods 2’ regime of Dooley et al (2004)12 and also confirms that the euro is still a regional rather than a global currency (Pisani-Ferry and Posen, 2009). On the whole, the dollar remains the main pivotal currency for all three monetary functions (means of payment, unit of account, store of value), while the euro’s role grew to about onethird/ one-half of that of the dollar in the early years of its existence, but has not developed further in later years. This still-central role of the dollar contrasts strongly with the emergence of a tripolar economy in which the US will weigh no more than either Europe or East Asia in the next decades,..."
...
Starting from this hybrid system, we review three scenarios for the IMS and assess their implications from various perspectives, including for the EU economy. The three scenarios are the following:
• A repair-and-improve scenario whereby changes to current arrangements are introduced through incremental reforms. These are inter alia enhanced surveillance, a voluntary reform of exchange-rate arrangements, especially in Asia; improved international liquidity facilities; accompanying domestic reforms such as the development of home-currency financial markets; and regional initiatives to complement current IMF facilities. Under this scenario, the international role of key currencies remains broadly constant and the US dollar retains its dominant role, the euro’s role remains broadly unchanged, and the one of the Chinese renminbi increases, but remains marginal in comparison to the dollar and the euro.
• A multipolar scenario in which a system structured around two or three international currencies - presumably the dollar, the euro and the renminbi – emerges over a 10-15 year horizon. Although a move to a multipolar system is generally viewed as a remote prospect, especially in the case of the renminbi, it corresponds to the long-run evolution of the world economy. The Chinese authorities have taken significant steps in this direction through various schemes and their currency has a strong potential for internationalisation. As for the euro, it has already developed as a diversification currency and in this scenario the euro area overcomes its current difficulties and the euro graduates from a mainly regional to a truly global currency. Yet we also examine an alternative bipolar scenario with the dollar and the renminbi which may occur if the euro remains handicapped.
• A multilateral scenario in which participants agree to take steps towards a strengthened international monetary order. In contrast with the multipolar scenario, which will largely rely on market forces and national policies, renewed multilateralism would require a fairly intense degree of international coordination and the development of new instruments to help escape the pitfalls of regimes based on the dominant role of one or a few national currencies, foster macroeconomic discipline and provide for international liquidity management. A system of this sort could build on the existing SDR or rely on other, new vehicles.
While recognising the potential merits of a truly multilateral monetary order, we doubt it could materialise in the foreseeable future and therefore conclude that, at the 10-15 year horizon, the probability of the multipolar scenario is relatively high and that this scenario could contribute to mitigating some (albeit not all) flaws of the present IMS. The transition to a multipolar system however entails some specific risks, such as of an abrupt reserve diversification, that would require tighter coordination during the transition..."
[Mrt: Do I read a timeframe here?]
Soure: http://ec.europa.eu/economy_finance/publications/economic_paper/2011/pdf/ecp444_en.pdf
A report on options for, and implications of, reforms of the international monetary system prepared for the European Commission in the context of Contract No. ECFIN/220/2010/573686 by a Bruegel and CEPII team composed of:
Ignazio Angeloni, Agnès Bénassy-Quéré, Benjamin Carton,
Zsolt Darvas, Christophe Destais, Jean Pisani-Ferry, André Sapir, and Shahin Vallée
Introduction
"...After three decades of apathy, the debate on the international monetary system (hereafter IMS) is back. In the 1960s and 1970s, discussions had been raging about international liquidity provision, the pros and cons of abandoning the gold exchange standard, and the initial difficulties of the free-floating regime. In the 1980s, interest had already shrunk to correcting large and persistent exchange-rate misalignments between key currencies. In the 1990s discussions about reforming the IMS virtually disappeared from the international agenda. The focus shifted to more specific issues such as the choice of exchange-rate regimes for emerging and developing countries, the management and resolution of balance-ofpayment and financial crises, and the set-up of regional exchange arrangements, like the euro or the Chiang Mai initiative. Even among scholars, the topic of the international monetary system lost appeal, gradually moving to the realm of economic history. The predominant view was that a market-driven combination of (managed) floating exchange rates, dollar dominance and a lack of a formal global price anchor was the only viable arrangement in a world where internal objectives, such as full employment and price stability, had superseded external ones on a permanent basis.
Four recent developments have led to a revival of the discussion on reforming the IMS:
• One is the rise of global imbalances and their role in the global crisis. A widespread though far from unanimous opinion among academics (see for example Eichengreen, 2009b, Portes 2009) and policymakers (see Larosière, 2009, Turner, 2009 and King, 2010) is that the interplay between macro-imbalances and financial market developments and innovation was an essential ingredient in the genesis of the crisis. There is also broad (but again not unanimous) recognition that macro-imbalances were facilitated by the lack of incentives for policy adjustment and the weakness of multilateral disciplines. Hence, discussion about the prevention of future crises brought IMS reform back on the agenda;
• Second, dissatisfaction with capital flows volatility has revived the debate about the costs and benefits of free capital mobility. The general consensus established in the 1990s about the benefits of financial globalisation has been undermined, not only because of the crisis but also, and more simply, because many emerging countries have been repeatedly overwhelmed by surges of capital inflows followed by sudden outflows. Also, a large set of countries (China, India and a number of emerging economies) have demonstrated that they could perform economically while retaining tight capital controls;
• Third, the accumulation of very large international reserves by still relatively poor countries raises concerns about the welfare cost of holding reserves and capital allocation at global level. Foreign-exchange reserves are mostly invested in high-quality and low-yielding liquid assets. Such an investment strategy has welfare costs for countries that accumulate reserves and it has implications for international capital flows that are undesirable from an allocative viewpoint. Moreover, there is a growing fear among large official reserves holders that the present system exposes them to the risk of large capital losses, should the dollar depreciate in a disorderly way. In brief, foreign-exchange reserves seem to offer an unfavourable risk-return trade-off. Rising concerns in the developing and emerging world were vividly exposed in a widely commented post by China’s central bank governor in March 2009 (Zhou, 2009), in which he unexpectedly called for a reform of the IMS based on a revival of the Special Drawing Rights (SDR);
• Fourth, disputes over the pegging strategies of emerging countries, and monetary policies in the advanced countries, emphasise the increasingly evident need for an emancipation of monetary policies in large emerging countries. The process started before the crisis with the adoption of inflation-targeting monetary policy strategies by many emerging economies. However, fear of floating and collective-action problems led many other countries to maintain the objective of a stable exchange rate and to sterilise the monetary consequences of increased net capital inflows. In the wake of the crisis, the large growth differential between the ‘North’ and the ‘South’ has made such double-target model unworkable without raising barriers to capital flows. These developments have prompted fears of ‘currency wars’.
...
3.2 Is the current regime unipolar or multipolar?
"...The current regime has alternatively been characterised as a multipolar regime (in which several currencies play international roles) or as a unipolar one (in which there is a dominant international currency). Some authors (for example Rose, 2007) claim that what has emerged from the ashes of the Bretton Woods order is a system in which there is ‘no role for a centre country, the IMF, or gold’, but in which a growing number of advanced and emerging countries have adopted some form of inflation-targeting and float independently. Others (for example Padoa Schioppa, 2010, or, implicitly, Zhou Xiaochuan, 2009) see the current international monetary regime as one where the US retains the privileges (as well as duties) accruing to the issuer of the international currency. Others again (for example Dooley, Folkerts Landau and Garber, 2004) claim that part of the world has moved to a floating regime of the sort described by Rose while another part lives under a revived Bretton Woods regime centred on the US dollar, which leads Aglietta (2010) to call it a semi-dollar standard. To clarify this debate, it is useful to refer to data on the international role of major currencies. Table 2 shows how the use of the euro and that of the dollar have changed between 1999 and 2009. First, the table reveals that the euro has gained importance as a reserve currency for both the official and the private sectors. An analysis of yearly data suggests that this happened primarily in the early years of EMU, while in later years the euro’s shares have stabilised. A parallel increase occurred in the international securities and loan markets. In all dimensions, the euro had by the end of its first decade achieved a significant market share, but it is far from challenging the primacy of the US dollar. For instance, once exchange-rate variations are accounted for, Dorrucci and McKay (2011) show that the share of the dollar in global, allocated foreign-exchange reserves remained stable at around 60 percent between 2002 and 2010, and that of the euro also stable at just below 30 percent. The share of the yen slightly declined (from 5 to 3 percent) while those of the British pound and residual currencies slightly increased. At current exchange rates, the share of the dollar declines but remains largely dominant.
As for the unit-of-account functions, the dollar remains key for commodity and energy markets, although it is less so for manufacturing trade. It also remains dominant for monetary anchoring. For example, Bénassy-Quéré et al (2006) have estimated that, from 1999-2004, 92 percent of a sample of 59 currencies were de facto pegged. Among them, 56 percent were pegged to the US dollar, 14 percent to the euro and 22 percent to a basket.11 For 2007, Goldberg (2010) finds that out of 207 countries, 96 were either dollarised or had their currency pegged to the dollar and another eight were in a managed float against the dollar, resulting in 36 percent of non-US world GDP being linked to the dollar. This is evidence of the importance of the ‘Bretton Woods 2’ regime of Dooley et al (2004)12 and also confirms that the euro is still a regional rather than a global currency (Pisani-Ferry and Posen, 2009). On the whole, the dollar remains the main pivotal currency for all three monetary functions (means of payment, unit of account, store of value), while the euro’s role grew to about onethird/ one-half of that of the dollar in the early years of its existence, but has not developed further in later years. This still-central role of the dollar contrasts strongly with the emergence of a tripolar economy in which the US will weigh no more than either Europe or East Asia in the next decades,..."
...
Starting from this hybrid system, we review three scenarios for the IMS and assess their implications from various perspectives, including for the EU economy. The three scenarios are the following:
• A repair-and-improve scenario whereby changes to current arrangements are introduced through incremental reforms. These are inter alia enhanced surveillance, a voluntary reform of exchange-rate arrangements, especially in Asia; improved international liquidity facilities; accompanying domestic reforms such as the development of home-currency financial markets; and regional initiatives to complement current IMF facilities. Under this scenario, the international role of key currencies remains broadly constant and the US dollar retains its dominant role, the euro’s role remains broadly unchanged, and the one of the Chinese renminbi increases, but remains marginal in comparison to the dollar and the euro.
• A multipolar scenario in which a system structured around two or three international currencies - presumably the dollar, the euro and the renminbi – emerges over a 10-15 year horizon. Although a move to a multipolar system is generally viewed as a remote prospect, especially in the case of the renminbi, it corresponds to the long-run evolution of the world economy. The Chinese authorities have taken significant steps in this direction through various schemes and their currency has a strong potential for internationalisation. As for the euro, it has already developed as a diversification currency and in this scenario the euro area overcomes its current difficulties and the euro graduates from a mainly regional to a truly global currency. Yet we also examine an alternative bipolar scenario with the dollar and the renminbi which may occur if the euro remains handicapped.
• A multilateral scenario in which participants agree to take steps towards a strengthened international monetary order. In contrast with the multipolar scenario, which will largely rely on market forces and national policies, renewed multilateralism would require a fairly intense degree of international coordination and the development of new instruments to help escape the pitfalls of regimes based on the dominant role of one or a few national currencies, foster macroeconomic discipline and provide for international liquidity management. A system of this sort could build on the existing SDR or rely on other, new vehicles.
While recognising the potential merits of a truly multilateral monetary order, we doubt it could materialise in the foreseeable future and therefore conclude that, at the 10-15 year horizon, the probability of the multipolar scenario is relatively high and that this scenario could contribute to mitigating some (albeit not all) flaws of the present IMS. The transition to a multipolar system however entails some specific risks, such as of an abrupt reserve diversification, that would require tighter coordination during the transition..."
[Mrt: Do I read a timeframe here?]
Soure: http://ec.europa.eu/economy_finance/publications/economic_paper/2011/pdf/ecp444_en.pdf
Wednesday, October 19, 2011
LBMA - The Physical Side of the Precious Metals Investment Boom
The Physical Side of the Precious Metals Investment Boom
By Wolfgang Wrzesniok-Rossbach, Head of Sales and Marketing, Heraeus Metallhandelsgesellschaft mbH
Source: http://www.lbma.org.uk/assets/Alch6106Wrzesniokrossbach.pdf
By Wolfgang Wrzesniok-Rossbach, Head of Sales and Marketing, Heraeus Metallhandelsgesellschaft mbH
Source: http://www.lbma.org.uk/assets/Alch6106Wrzesniokrossbach.pdf
LBMA - The Shanghai Gold Exchange and its future development
The Shanghai Gold Exchange and its future development
By WANG Zhe, Chairman and President of the Shanghai Gold Exchange
Source: http://www.lbma.org.uk/assets/The_Shanghai_Gold_Exchange.pdf
By WANG Zhe, Chairman and President of the Shanghai Gold Exchange
Source: http://www.lbma.org.uk/assets/The_Shanghai_Gold_Exchange.pdf
EU - A return to the convertibility principle? Monetary and fiscal regimes in historical perspective. The international evidence
Number 159 September 2001
A return to the convertibility principle?
Monetary and fiscal regimes in historical perspective.
The international evidence
by
Michael D. Bordo and Lars Jonung
ECFIN
Abstract:
"...With the establishment of the EMU and the ECB, the interaction between monetary and fiscal polices is now a major policy issue in the Euro-area, dealt with in detail in the Maastricht and Amsterdam treaties and in the Stability and Growth pact. This paper provides a background to this issue by exploring the long-run relationship between monetary and fiscal policies. We examine a large set of data covering major economies, including eleven out of the fifteen present members of EU, during the past 115 years. The evidence suggests the existence of a close interaction between the monetary regime, that is the behaviour of the central bank, and the fiscal regime, that is the tax and spending behaviour of governments as reflected in the evolution of budget deficits and public debt.
In the past, a monetary regime based on the commitment to convertibility of the domestic currency into specie, the 'convertibility principle', was the prevailing pattern in the world economy. According to this principle, the fiscal regime is subordinated to the monetary regime. The major exception to this pattern occurred during major wars and their immediate aftermath when fiscal demands determined monetary policy. Since the mid 1960s and especially after the breakdown of the Bretton Woods system in the period 1971-73, monetary policy has abandoned the 'convertibility principle' and in many countries has been geared towards domestic stabilization goals, especially that of full employment. This led to a build-up of inflationary pressures in the 1970s which has been largely rolled back since the early 1980s. In the same period bond-financed fiscal policy has been used as a stabilization policy tool, when many countries accumulated debt to income ratios sufficient to threaten monetary stability.
The establishment of the EMU and the creation of the Euro should properly be regarded as a return to the convertibility principle. The European central bank (ECB) declared in 1998 price stability as the primary goal of its policy. The present twelve members of the Euro-area are committed to support this goal by a policy of fiscal prudence. In short, the new European monetary regime is designed to dominate the fiscal regime in order to guarantee the credibility and sustainability of the goal of price stability..."
...
"..The return to the convertibility principle implies a return to a rule or rule-like behaviour in which monetary policy is geared towards the goal of low inflation and the level of debt is to be kept sufficiently low to avoid threatening monetary stability. In many ways the advent of inflation targeting or ”price stability” as the primary goal of monetary policy has great similarities with the gold standard period. However, there is an important difference. The monetary system is today based on a managed fiat system - not on an automatic specie system. The anchor is thus a managed not an automatic one.
The establishment of the EMU and the creation of the single currency, the Euro, should properly be regarded as a return to the convertibility principle. The European central bank (ECB) declared in 1998 price stability – a rate of inflation below two per cent per year over the medium term – as the primary goal of its policy. The present twelve members of the Euro-area are committed to support this goal by a policy of fiscal prudence. The fiscal policy process is co-ordinated through the Stability and Growth Pact and other procedures to guarantee that the budgetary policy of any single member or group of members is consistent with the overriding goal of price stability. In short, the new European monetary regime is designed to dominate the fiscal regime in order to guarantee the credibility and sustainability of the goal of price stability.
For the future our prediction is that if fiscal balance is achieved in most major economies, monetary regimes based on either an internal commitment norm like price stability or an external commitment to a foreign currency will prevail. Thus, a nominal anchor, similar to what was once embodied in the specie convertibility principle will again keep monetary and fiscal policies in check..."
Source: http://ec.europa.eu/economy_finance/publications/publication876_en.pdf
A return to the convertibility principle?
Monetary and fiscal regimes in historical perspective.
The international evidence
by
Michael D. Bordo and Lars Jonung
ECFIN
Abstract:
"...With the establishment of the EMU and the ECB, the interaction between monetary and fiscal polices is now a major policy issue in the Euro-area, dealt with in detail in the Maastricht and Amsterdam treaties and in the Stability and Growth pact. This paper provides a background to this issue by exploring the long-run relationship between monetary and fiscal policies. We examine a large set of data covering major economies, including eleven out of the fifteen present members of EU, during the past 115 years. The evidence suggests the existence of a close interaction between the monetary regime, that is the behaviour of the central bank, and the fiscal regime, that is the tax and spending behaviour of governments as reflected in the evolution of budget deficits and public debt.
In the past, a monetary regime based on the commitment to convertibility of the domestic currency into specie, the 'convertibility principle', was the prevailing pattern in the world economy. According to this principle, the fiscal regime is subordinated to the monetary regime. The major exception to this pattern occurred during major wars and their immediate aftermath when fiscal demands determined monetary policy. Since the mid 1960s and especially after the breakdown of the Bretton Woods system in the period 1971-73, monetary policy has abandoned the 'convertibility principle' and in many countries has been geared towards domestic stabilization goals, especially that of full employment. This led to a build-up of inflationary pressures in the 1970s which has been largely rolled back since the early 1980s. In the same period bond-financed fiscal policy has been used as a stabilization policy tool, when many countries accumulated debt to income ratios sufficient to threaten monetary stability.
The establishment of the EMU and the creation of the Euro should properly be regarded as a return to the convertibility principle. The European central bank (ECB) declared in 1998 price stability as the primary goal of its policy. The present twelve members of the Euro-area are committed to support this goal by a policy of fiscal prudence. In short, the new European monetary regime is designed to dominate the fiscal regime in order to guarantee the credibility and sustainability of the goal of price stability..."
...
"..The return to the convertibility principle implies a return to a rule or rule-like behaviour in which monetary policy is geared towards the goal of low inflation and the level of debt is to be kept sufficiently low to avoid threatening monetary stability. In many ways the advent of inflation targeting or ”price stability” as the primary goal of monetary policy has great similarities with the gold standard period. However, there is an important difference. The monetary system is today based on a managed fiat system - not on an automatic specie system. The anchor is thus a managed not an automatic one.
The establishment of the EMU and the creation of the single currency, the Euro, should properly be regarded as a return to the convertibility principle. The European central bank (ECB) declared in 1998 price stability – a rate of inflation below two per cent per year over the medium term – as the primary goal of its policy. The present twelve members of the Euro-area are committed to support this goal by a policy of fiscal prudence. The fiscal policy process is co-ordinated through the Stability and Growth Pact and other procedures to guarantee that the budgetary policy of any single member or group of members is consistent with the overriding goal of price stability. In short, the new European monetary regime is designed to dominate the fiscal regime in order to guarantee the credibility and sustainability of the goal of price stability.
For the future our prediction is that if fiscal balance is achieved in most major economies, monetary regimes based on either an internal commitment norm like price stability or an external commitment to a foreign currency will prevail. Thus, a nominal anchor, similar to what was once embodied in the specie convertibility principle will again keep monetary and fiscal policies in check..."
Source: http://ec.europa.eu/economy_finance/publications/publication876_en.pdf
EU - Sui Generis EMU
Sui Generis EMU
Barry Eichengreen*
"Abstract:
The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU."
JEL Classification: F15 and N14
Keywords: European Monetary Union
[Mrt: Interesting comparison to other monetary unions]
Source: http://ec.europa.eu/economy_finance/publications/publication12091_en.pdf
Barry Eichengreen*
"Abstract:
The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU."
JEL Classification: F15 and N14
Keywords: European Monetary Union
[Mrt: Interesting comparison to other monetary unions]
Source: http://ec.europa.eu/economy_finance/publications/publication12091_en.pdf
EU-LBMA - Public consultation - Update for units of measurement directive
Subject : Consultation on the Units of Measurement Directive (80/181/EEC)
Please see the attached letter together with a submission from the LBMA on the Use of the Troy Ounce in
the Bullion Market.
R192
March 2007
Submission from the London Bullion Market Association
on the European Commission's Consultation
on the Units of Measurement Directive (80/181/EEC)
This document is submitted by the London Bullion Market Association (“LBMA”) in response to the Commission’s consultation document of December 2006 concerning the Units of Measurement Directive (80/181/EEC).
...
"...As mentioned, the US gold and silver markets also use the troy ounce, the main markets being exchange based (COMEX in New York and the CBOT in Chicago). Although they do operate a physical market, this tends to be domestic. Therefore, if business were to be diverted from London it is probably more likely to migrate to Switzerland rather than the U.S.A.
The Swiss market, although much smaller than the London market, is a physical market. Previously when the London market was closed temporarily in 1968 following the collapse of the Gold Pool, a lot of business was diverted to Switzerland and it took many years to win that business back. Over the years, the Zurich market has suffered from a combination of bank mergers and transfers of key functions to the London market but there are currently clear signs that the Swiss market is eager to compete with London again. Moreover, the London market until recently had two Good Delivery gold refiners but these have now closed whereas Switzerland has five active gold refiners. Consequently if the London Market were to suffer disruption and / or became less competitive, there is a real possibility that the business would flow to Switzerland to the detriment of the UK’s (and the EU’s) financial market earnings..."
Source: http://ec.europa.eu/enterprise/sectors/legal-metrology-and-prepack/files/r192_en.pdf
[Mrt: A very important document, I posted it on Fofoa long time ago, now to here as well.]
Please see the attached letter together with a submission from the LBMA on the Use of the Troy Ounce in
the Bullion Market.
R192
March 2007
Submission from the London Bullion Market Association
on the European Commission's Consultation
on the Units of Measurement Directive (80/181/EEC)
This document is submitted by the London Bullion Market Association (“LBMA”) in response to the Commission’s consultation document of December 2006 concerning the Units of Measurement Directive (80/181/EEC).
...
"...As mentioned, the US gold and silver markets also use the troy ounce, the main markets being exchange based (COMEX in New York and the CBOT in Chicago). Although they do operate a physical market, this tends to be domestic. Therefore, if business were to be diverted from London it is probably more likely to migrate to Switzerland rather than the U.S.A.
The Swiss market, although much smaller than the London market, is a physical market. Previously when the London market was closed temporarily in 1968 following the collapse of the Gold Pool, a lot of business was diverted to Switzerland and it took many years to win that business back. Over the years, the Zurich market has suffered from a combination of bank mergers and transfers of key functions to the London market but there are currently clear signs that the Swiss market is eager to compete with London again. Moreover, the London market until recently had two Good Delivery gold refiners but these have now closed whereas Switzerland has five active gold refiners. Consequently if the London Market were to suffer disruption and / or became less competitive, there is a real possibility that the business would flow to Switzerland to the detriment of the UK’s (and the EU’s) financial market earnings..."
Source: http://ec.europa.eu/enterprise/sectors/legal-metrology-and-prepack/files/r192_en.pdf
[Mrt: A very important document, I posted it on Fofoa long time ago, now to here as well.]
LPMCL - London Precious Metals Clearing Limited
Introduction:
"...LOCO LONDON is the indisputable international standard for gold and silver dealing and settlement.
Most global ‘over-the-counter’ gold and silver trading is cleared through the London clearing system, managed by the London Precious Metal Clearing Limited (LPMCL), which operates a central electronic metal clearing hub, with deals between parties throughout the world settled and cleared in London. The fact that many Government Institutions and Central Banks entrust their gold to the Bank of England, and in some instances with the London bullion clearing commercial banks, underlines the confidence that exists in London as the key marketplace for bullion.
The most widely traded market for bullion dealing globally is for delivery of metal in London. Consequently, the volume of loco London metal settlements between counterparties requires an effective and efficient daily clearing system of paper transfers, which avoids the security risks and costs inherent in the physical movement of metal. LPMCL which is operated by six market making members of The London Bullion Market Association, provides an electronic matching system to effect the daily settlements in gold and silver.
Each member of LPMCL is a signatory to a code of practice on clearing under which members undertake to operate unallocated gold and silver accounts between themselves. These are utilised for the settlement of both mutual trades and on behalf of the clients of the London Bullion Market...."
...
"Could a clearing house replace the London bullion clearing system?
Yes, but it would prove to be less efficient and more expensive than the current arrangement. It would also most likely need strong financial backing and insurance cover – which then directs us back to the London bullion clearing banks, as above, all of whom are first tier global institutions."
Source: http://www.lpmcl.com/
"...LOCO LONDON is the indisputable international standard for gold and silver dealing and settlement.
Most global ‘over-the-counter’ gold and silver trading is cleared through the London clearing system, managed by the London Precious Metal Clearing Limited (LPMCL), which operates a central electronic metal clearing hub, with deals between parties throughout the world settled and cleared in London. The fact that many Government Institutions and Central Banks entrust their gold to the Bank of England, and in some instances with the London bullion clearing commercial banks, underlines the confidence that exists in London as the key marketplace for bullion.
The most widely traded market for bullion dealing globally is for delivery of metal in London. Consequently, the volume of loco London metal settlements between counterparties requires an effective and efficient daily clearing system of paper transfers, which avoids the security risks and costs inherent in the physical movement of metal. LPMCL which is operated by six market making members of The London Bullion Market Association, provides an electronic matching system to effect the daily settlements in gold and silver.
Each member of LPMCL is a signatory to a code of practice on clearing under which members undertake to operate unallocated gold and silver accounts between themselves. These are utilised for the settlement of both mutual trades and on behalf of the clients of the London Bullion Market...."
...
"Could a clearing house replace the London bullion clearing system?
Yes, but it would prove to be less efficient and more expensive than the current arrangement. It would also most likely need strong financial backing and insurance cover – which then directs us back to the London bullion clearing banks, as above, all of whom are first tier global institutions."
Source: http://www.lpmcl.com/
LBMA - A Guide to the London Precious Metals Markets
A Guide to the London Precious Metals Markets
"This guide to the London precious metal markets was
produced and is published jointly by the London Bullion
Market Association (“LBMA”) and the London Platinum and
Palladium Market (“LPPM”). It updates the previous guide
issued by the LBMA in 2001 (which covered the markets for
gold and silver bullion) and extends the coverage to include
platinum and palladium. The publishers are pleased to
acknowledge the contribution of Douglas Beadle to the
preparation of the text describing the platinum and
palladium markets.
Any comments or questions about the guide should be
sent to its editor, Ms Susanne Capano at the LBMA."
"...The LBMA is a trade association that acts as the co-ordinator for
activities conducted on behalf of its Members and other
participants in the London bullion market..."
Source: http://www.lppm.com/OTCguide.pdf
"This guide to the London precious metal markets was
produced and is published jointly by the London Bullion
Market Association (“LBMA”) and the London Platinum and
Palladium Market (“LPPM”). It updates the previous guide
issued by the LBMA in 2001 (which covered the markets for
gold and silver bullion) and extends the coverage to include
platinum and palladium. The publishers are pleased to
acknowledge the contribution of Douglas Beadle to the
preparation of the text describing the platinum and
palladium markets.
Any comments or questions about the guide should be
sent to its editor, Ms Susanne Capano at the LBMA."
"...The LBMA is a trade association that acts as the co-ordinator for
activities conducted on behalf of its Members and other
participants in the London bullion market..."
Source: http://www.lppm.com/OTCguide.pdf
Tuesday, October 18, 2011
BB - Currency blocs in the 21st century
Currency blocs in the 21st century
Christoph Fischer
Discussion Paper
Series 1: Economic Studies
No 12/2011
"Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country’s currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the US dollar without having close economic affinities with the bloc. The estimated parameters are consistent with an additive random utility model interpretation. A currency bloc equilibrium in the spirit of Alesina and Barro (2002) is derived empirically."
"...With regard to the first of these questions, the study finds that the number of countries and territories that belong to either of the two blocs was the same in 2008. In terms of combined GDP measured in purchasing power parities, the US dollar bloc is around double the size of the euro bloc. This changes considerably, however, as soon as China de-pegs its currency, the renminbi, from the dollar. In contrast to the euro bloc, there is a high degree of fluctuation into and out of the dollar bloc...."
"...As regards the second set of questions, the results of a nested logit regression suggest that long-term structural economic variables significantly explain the choice between a floating and a fixed exchange rate regime and, at the same time, the anchor currency choice given that a country has opted for a peg. Trade integration plays a major role in a country’s anchor currency choice in the case of both the dollar and the euro bloc. The distance to the location of the central monetary authority of the two blocs, Washington, DC, and Frankfurt am Main, respectively, is a significant factor for anchor currency choice with regard to the euro bloc, but not to the dollar bloc. This might imply that the US dollar is of global importance as an anchor currency and that the euro is not. Separate regressions qualify such a conclusion, however, by showing that this result is entirely due to a group of countries that peg their currencies only temporarily to the US dollar..."
"...Addressing the third set of questions, the study computes a currency bloc equilibrium in which all countries have adopted the utility-maximising exchange rate regime and anchor. It is found that, in equilibrium, the US dollar bloc is smaller and the euro bloc is larger than at present. The equilibrium is characterised by several Asian and African countries having de-pegged from the US dollar and by additional European countries having adopted a fixed exchange rate to the euro. Moreover, the calculations suggest that, structurally, the potential for the formation of a renminbi bloc is low..."
...
"...6.2.2 Oil-exporting countries stop using the US dollar as invoice currency
Currently, the US dollar is used as the invoice currency for oil exports. In recent years, there have been discussions in some countries about whether this could or should be changed. Until now, a majority of OPEC countries have rejected the idea (cf Eichengreen, 2011, p 123). Nevertheless, Khan (2009) reports for the Middle East,
where many countries peg their currencies to the dollar and, at the same time, are net oil exporters, that “there is considerable discussion in the region about reducing the dominance of the dollar and increasing the relative importance of the euro” (p 139). In an analysis of this issue, Louis et al (2010) find that an anchor to a currency basket may be superior to a dollar peg for the countries of the Gulf Cooperation Council. It may therefore be of interest to investigate the repercussions of a counterfactual in which oilexporting countries stop using the dollar as the invoice currency. Technically, this has been done, first, by setting the parameters of the percentage of oil in total exports and its variances and covariances to zero and, then, re-computing the new currency bloc equilibrium.
Since the significance of the net oil export parameters in the baseline estimates is weak at best, it might be expected that the counterfactual arrives at virtually the same equilibrium as the baseline scenario. Such a conjecture is supported by the results for the pooled estimates, where the switch in invoice currency simply raises Azerbaijan’s estimated utility gain of de-pegging its currency from the dollar to significant levels. Moreover, Chad has chosen to float its currency instead of pegging it to the US dollar in the new counterfactual equilibrium. When the 2008 data estimates are used, the repercussions of a change in the oil trade invoice currency are more severe. The new counterfactual equilibrium differs from the baseline equilibrium by the fact that not only Azerbaijan has chosen to de-peg its currency from the dollar and let it float but also Ecuador, Kazakhstan and Saudi Arabia. Angola is computed to switch directly from the US dollar to the euro bloc...."
"...6.2.3 Former colonial ties no longer bind
In the estimations, the parameter of the dummy for former dependency on one of the euro bloc countries is highly significant. However, for most countries, several decades have passed since they obtained political independence. Network effects will have played a role in maintaining ties between former colony and colonial power. The counterfactual of this section assumes that these ties no longer bind. Technically, a new equilibrium is computed much like in the previous section after having set the parameter and covariances of the colony dummy to zero. In the resulting counterfactual equilibrium, nearly all the African countries that presently peg their currencies to the euro have left the euro bloc.18 Most of these countries have adopted a regime of flexible exchange rates. The Republic of the Congo and Gabon, both of which are net oil exporters, have switched directly from a euro peg to a dollar peg..."
[Mrt: It would be great to see an overview of countries which obtained gold during the described time-frame and how they have managed their reserve asset portfolio.]
Source: http://www.bundesbank.de/download/volkswirtschaft/dkp/2011/201112dkp.pdf
Christoph Fischer
Discussion Paper
Series 1: Economic Studies
No 12/2011
"Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country’s currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the US dollar without having close economic affinities with the bloc. The estimated parameters are consistent with an additive random utility model interpretation. A currency bloc equilibrium in the spirit of Alesina and Barro (2002) is derived empirically."
"...With regard to the first of these questions, the study finds that the number of countries and territories that belong to either of the two blocs was the same in 2008. In terms of combined GDP measured in purchasing power parities, the US dollar bloc is around double the size of the euro bloc. This changes considerably, however, as soon as China de-pegs its currency, the renminbi, from the dollar. In contrast to the euro bloc, there is a high degree of fluctuation into and out of the dollar bloc...."
"...As regards the second set of questions, the results of a nested logit regression suggest that long-term structural economic variables significantly explain the choice between a floating and a fixed exchange rate regime and, at the same time, the anchor currency choice given that a country has opted for a peg. Trade integration plays a major role in a country’s anchor currency choice in the case of both the dollar and the euro bloc. The distance to the location of the central monetary authority of the two blocs, Washington, DC, and Frankfurt am Main, respectively, is a significant factor for anchor currency choice with regard to the euro bloc, but not to the dollar bloc. This might imply that the US dollar is of global importance as an anchor currency and that the euro is not. Separate regressions qualify such a conclusion, however, by showing that this result is entirely due to a group of countries that peg their currencies only temporarily to the US dollar..."
"...Addressing the third set of questions, the study computes a currency bloc equilibrium in which all countries have adopted the utility-maximising exchange rate regime and anchor. It is found that, in equilibrium, the US dollar bloc is smaller and the euro bloc is larger than at present. The equilibrium is characterised by several Asian and African countries having de-pegged from the US dollar and by additional European countries having adopted a fixed exchange rate to the euro. Moreover, the calculations suggest that, structurally, the potential for the formation of a renminbi bloc is low..."
...
"...6.2.2 Oil-exporting countries stop using the US dollar as invoice currency
Currently, the US dollar is used as the invoice currency for oil exports. In recent years, there have been discussions in some countries about whether this could or should be changed. Until now, a majority of OPEC countries have rejected the idea (cf Eichengreen, 2011, p 123). Nevertheless, Khan (2009) reports for the Middle East,
where many countries peg their currencies to the dollar and, at the same time, are net oil exporters, that “there is considerable discussion in the region about reducing the dominance of the dollar and increasing the relative importance of the euro” (p 139). In an analysis of this issue, Louis et al (2010) find that an anchor to a currency basket may be superior to a dollar peg for the countries of the Gulf Cooperation Council. It may therefore be of interest to investigate the repercussions of a counterfactual in which oilexporting countries stop using the dollar as the invoice currency. Technically, this has been done, first, by setting the parameters of the percentage of oil in total exports and its variances and covariances to zero and, then, re-computing the new currency bloc equilibrium.
Since the significance of the net oil export parameters in the baseline estimates is weak at best, it might be expected that the counterfactual arrives at virtually the same equilibrium as the baseline scenario. Such a conjecture is supported by the results for the pooled estimates, where the switch in invoice currency simply raises Azerbaijan’s estimated utility gain of de-pegging its currency from the dollar to significant levels. Moreover, Chad has chosen to float its currency instead of pegging it to the US dollar in the new counterfactual equilibrium. When the 2008 data estimates are used, the repercussions of a change in the oil trade invoice currency are more severe. The new counterfactual equilibrium differs from the baseline equilibrium by the fact that not only Azerbaijan has chosen to de-peg its currency from the dollar and let it float but also Ecuador, Kazakhstan and Saudi Arabia. Angola is computed to switch directly from the US dollar to the euro bloc...."
"...6.2.3 Former colonial ties no longer bind
In the estimations, the parameter of the dummy for former dependency on one of the euro bloc countries is highly significant. However, for most countries, several decades have passed since they obtained political independence. Network effects will have played a role in maintaining ties between former colony and colonial power. The counterfactual of this section assumes that these ties no longer bind. Technically, a new equilibrium is computed much like in the previous section after having set the parameter and covariances of the colony dummy to zero. In the resulting counterfactual equilibrium, nearly all the African countries that presently peg their currencies to the euro have left the euro bloc.18 Most of these countries have adopted a regime of flexible exchange rates. The Republic of the Congo and Gabon, both of which are net oil exporters, have switched directly from a euro peg to a dollar peg..."
[Mrt: It would be great to see an overview of countries which obtained gold during the described time-frame and how they have managed their reserve asset portfolio.]
Source: http://www.bundesbank.de/download/volkswirtschaft/dkp/2011/201112dkp.pdf
BDF - First anniversary of Banque de France's reserve management facility
Jean-Paul REDOUIN, First Deputy Governor
« First anniversary of Banque de France's reserve management facility »
in New York October 11, 2011
"...Allow me now to offer you a French and central banker point of view of the current situation...."
"...At this stage, the euro area is paying a double price. One for its mistakes and one for its virtues. The mistakes were to allow the piling up of debt through unsustainable fiscal policies over a decade, and then to create ex nihilo a doubt as to their ability to pay those debts. But we are also paying a price for our virtue as we refuse to liquefy our debt through massive monetization of our fiscal deficits.
Will our virtue be rewarded at the end? I strongly believe so and I will explain why. In the next decade, the world can be grouped in two categories: on the one hand, advanced economies, with high absorption capacity, low savings and high debt with ratios close to 100%. On the other, emerging economies, with high savings, low debt (around 30% GDP on average) and less absorption capacity. Our common prosperity will therefore depend on our ability to create stable channels of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. But, as I have argued from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, could be the currency itself. Markets will trust currencies that are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with realistic optimism. I see the recent decision by the Swiss central bank to peg the Swiss franc to the euro as an illustration of this conviction..."
Source: http://www.banque-france.fr/gb/instit/discours/first-anniversary-of-banque-de-france-s-reserve-management-facility-11-10-2011.htm
Monday, October 17, 2011
BCRA - The Global Financial System: Known Unknowns and Some Implications for Regulatory Reform
The Global Financial System: Known Unknowns and Some Implications for Regulatory Reform
Leonardo Burlamaqui
Prepared for the Conference “Monetary and Balance of Payments Policy, Financial
Restructuring and Regulation: Towards a Sustainable and Fairer Economy”
Buenos Aires, Argentina
June 30th – July 1st
Source: http://www.bcra.gov.ar/pdfs/eventos/jornadas_2011_Burlamaqui.pdf
Leonardo Burlamaqui
Prepared for the Conference “Monetary and Balance of Payments Policy, Financial
Restructuring and Regulation: Towards a Sustainable and Fairer Economy”
Buenos Aires, Argentina
June 30th – July 1st
Source: http://www.bcra.gov.ar/pdfs/eventos/jornadas_2011_Burlamaqui.pdf
Friday, October 14, 2011
CEMLA - V MEETING OF CENTRAL BANK TREASURERS
V MEETING OF CENTRAL BANK TREASURERS
Mexico D.F., October 4th to 6th, 2000
PROGRAMME
...
Thursday, October 5th
...
...
[Mrt: What does this mean? Anyone? Puzzled.]
After some time:
Here is more, Mrt:
http://www.federalreserve.gov/boarddocs/testimony/2002/20020517/default.htm
http://search.newyorkfed.org/board_public/search?text=%22Golden+Dollar%22&Search.x=13&Search.y=8
By DP: "Yup, its those SusanB coins, being superceded by the new Sags from 2000 then."
Source: http://www.cemla.org/pdf/tes-conv-en-00.pdf
Mexico D.F., October 4th to 6th, 2000
PROGRAMME
...
Thursday, October 5th
...
11:00 – 11:30 The New Gold Dollar.
Mr. Jon Cameron. Board of Governors of the Federal Reserve System....
[Mrt: What does this mean? Anyone? Puzzled.]
After some time:
Here is more, Mrt:
http://www.federalreserve.gov/boarddocs/testimony/2002/20020517/default.htm
http://search.newyorkfed.org/board_public/search?text=%22Golden+Dollar%22&Search.x=13&Search.y=8
By DP: "Yup, its those SusanB coins, being superceded by the new Sags from 2000 then."
Source: http://www.cemla.org/pdf/tes-conv-en-00.pdf
CEMLA - Assessment of the application of the international accounting standards to central banks
Assessment of the application of the international accounting standards to central banks
Prepared by: Central Bank Accounting and Budgeting Aspects Committee
June 2007
[Mrt: a must read - pg.: 6 a section: "2. Is gold a financial instrument or stock of merchandise?"]
Source: http://www.cemla.org/gruposdetrabajo/contabilidad/AccountingStandards2010.pdf
Prepared by: Central Bank Accounting and Budgeting Aspects Committee
June 2007
[Mrt: a must read - pg.: 6 a section: "2. Is gold a financial instrument or stock of merchandise?"]
Source: http://www.cemla.org/gruposdetrabajo/contabilidad/AccountingStandards2010.pdf
CEMLA - The Dollar Standard and Its Crisis-Prone Periphery: New Rules for the Game
The Dollar Standard and Its Crisis-Prone Periphery: New Rules for the Game
by
Ronald I. McKinnon
Stanford University
September 9, 2002
...
New Rules for the Dollar Standard Game
"Suppose that the American government finally recognizes its central position in the world monetary system and the “unfair” asymmetry in current financial arrangements. It also becomes determined to reduce financial fragility on the American periphery—looking at the periphery as being a collectivity of developing countries whose regional fortunes interact. The IMF as lender of first resort would stay as crisis manager, but the US itself would formally agree to be the residual source of finance— the lender of last resort. The combined IMF-U.S. entity would have sufficient resources to act sooner and more assuredly to limit financial crises on the periphery.
What then would be appropriate rules for this new relationship between the United States and developing countries on its periphery? What is the appropriate conditionality on which crisis lending should be based? Recognizing the underlying currency asymmetry, consider first a set of rules for the developing countries. Then follow with complementary rules governing the position of the United States itself. In the accompanying Box, rules 1 through 4 apply to the developing countries. These rules are intended to be guidelines for policy makers there and for professional advice-giving financial-support organizations such as the IMF or World Bank—or even the U.S. Treasury. Rules 5 through 8 in the Box apply to the center country. Besides identifying the role of the United States as lender of last resort, these rules restrain American behavior. Their success depends mainly on the United States’s understanding the underlying currency asymmetry in the world economy, and then of its own volition doing something about it. International agencies have very little leverage over American behavior. These eight rules are hardly all encompassing. Yet they go some distance to resolve the philosophical impasse over the dangers of moral hazard in international rescue operations versus the need to take collective action to prevent a financial breakdown in one country from spreading to neighboring ones..."
New Rules for the Dollar Standard Game
Developing Countries
Rule 1. Recognize that the greater fragility of financial systems on the
periphery requires prudential financial regulations more
stringent than those appropriate within the industrial economies.
To supplement domestic regulatory restraints on foreign
exchange exposure by banks, capital controls may be needed.
Rule 2. Recognize that “soft” pegging to the dollar helps reduce risk
in peripheral countries whose domestic financial markets are
incomplete—and becomes absolutely necessary in the
presence of capital controls or severe limits on net foreign
exchange exposure by banks. Desist from advising them to
float their exchange rates against the world’s dominant
money, and against their neighbors.
Rule 3. Aim for mutual exchange rate stability within natural economic
regions such as South America or East Asia. Lend collectively
through regional stabilization funds as well as to individual
distressed economies. Using the dollar as the anchor currency,
set long-term exchange-rate objectives for the group to limit
contagion from beggar-thy-neighbor devaluations.
Rule 4. Restrict short-term private borrowing by countries under IMF
or World Bank programs. Private and sovereign debt
contracts must provide for the deferral of repayment should
that country be declared in crisis.
United States
Rule 5. Conduct an independent monetary policy to limit inflation and
stabilize the purchasing power of the dollar. Provide a stable
nominal anchor for the price levels of developing countries.
Rule 6. Supplement the resources of the IMF in major crises and, if
necessary, act as lender of last resort—subject to the
conditionality laid out in Rules 1 through 4.
Rule 7. In noncrisis periods, remain passive in the foreign exchanges
without exchange rate targets. Allow foreigners to transact
freely in dollars. No capital controls for the center country.
Rule 8. Do not force developing countries to open their financial
markets—and cease pushing the entry of American banks and
other financial institutions into their domestic economies.
...
Conclusion
"An important reason for the great financial instability in developing countries is the doctrinal failure to come to grips with international currency asymmetry. Most of the world is on a dollar standard with a strong central money where one set of rules is appropriate, and a periphery of more fragile monies where a somewhat different set of rules and modes of operation are necessary (see Box). One manifestation of this doctrinal failure has been the advice commonly given to developing countries “float your exchange rate and open up your domestic capital to foreign capital flows and foreign banks”. Here, I have tried to show that such advice is misplaced for most developing countries, which need to cosset their financial systems until they become industrialized and their long-term bond markets are developed. Even more serious is the failure of such advice to consider cross-country spillover effects from changes in exchange rates. On the periphery, exchange rate policy should be a collective endeavor within economic regions whose economies are linked in trade and finance. In contrast, the capital markets for the center country, the United States, must remain open so that foreigners can freely transact in, and hold, dollar assets at all terms to maturity. Otherwise the world’s payment mechanism would be seriously impaired. So too should the United States generally remain passive in the foreign exchange markets except in major crises where its unique access to capital makes it the natural lender of last resort. Finally, the United States should not use leverage from its central position in the international monetary system (which, after all, is just an accident of history) to push the commercial interests of American commercial and investment banks in foreign markets."
Source: http://www.cemla.org/pdf/pub-lib-rm.pdf
by
Ronald I. McKinnon
Stanford University
September 9, 2002
...
New Rules for the Dollar Standard Game
"Suppose that the American government finally recognizes its central position in the world monetary system and the “unfair” asymmetry in current financial arrangements. It also becomes determined to reduce financial fragility on the American periphery—looking at the periphery as being a collectivity of developing countries whose regional fortunes interact. The IMF as lender of first resort would stay as crisis manager, but the US itself would formally agree to be the residual source of finance— the lender of last resort. The combined IMF-U.S. entity would have sufficient resources to act sooner and more assuredly to limit financial crises on the periphery.
What then would be appropriate rules for this new relationship between the United States and developing countries on its periphery? What is the appropriate conditionality on which crisis lending should be based? Recognizing the underlying currency asymmetry, consider first a set of rules for the developing countries. Then follow with complementary rules governing the position of the United States itself. In the accompanying Box, rules 1 through 4 apply to the developing countries. These rules are intended to be guidelines for policy makers there and for professional advice-giving financial-support organizations such as the IMF or World Bank—or even the U.S. Treasury. Rules 5 through 8 in the Box apply to the center country. Besides identifying the role of the United States as lender of last resort, these rules restrain American behavior. Their success depends mainly on the United States’s understanding the underlying currency asymmetry in the world economy, and then of its own volition doing something about it. International agencies have very little leverage over American behavior. These eight rules are hardly all encompassing. Yet they go some distance to resolve the philosophical impasse over the dangers of moral hazard in international rescue operations versus the need to take collective action to prevent a financial breakdown in one country from spreading to neighboring ones..."
New Rules for the Dollar Standard Game
Developing Countries
Rule 1. Recognize that the greater fragility of financial systems on the
periphery requires prudential financial regulations more
stringent than those appropriate within the industrial economies.
To supplement domestic regulatory restraints on foreign
exchange exposure by banks, capital controls may be needed.
Rule 2. Recognize that “soft” pegging to the dollar helps reduce risk
in peripheral countries whose domestic financial markets are
incomplete—and becomes absolutely necessary in the
presence of capital controls or severe limits on net foreign
exchange exposure by banks. Desist from advising them to
float their exchange rates against the world’s dominant
money, and against their neighbors.
Rule 3. Aim for mutual exchange rate stability within natural economic
regions such as South America or East Asia. Lend collectively
through regional stabilization funds as well as to individual
distressed economies. Using the dollar as the anchor currency,
set long-term exchange-rate objectives for the group to limit
contagion from beggar-thy-neighbor devaluations.
Rule 4. Restrict short-term private borrowing by countries under IMF
or World Bank programs. Private and sovereign debt
contracts must provide for the deferral of repayment should
that country be declared in crisis.
United States
Rule 5. Conduct an independent monetary policy to limit inflation and
stabilize the purchasing power of the dollar. Provide a stable
nominal anchor for the price levels of developing countries.
Rule 6. Supplement the resources of the IMF in major crises and, if
necessary, act as lender of last resort—subject to the
conditionality laid out in Rules 1 through 4.
Rule 7. In noncrisis periods, remain passive in the foreign exchanges
without exchange rate targets. Allow foreigners to transact
freely in dollars. No capital controls for the center country.
Rule 8. Do not force developing countries to open their financial
markets—and cease pushing the entry of American banks and
other financial institutions into their domestic economies.
...
Conclusion
"An important reason for the great financial instability in developing countries is the doctrinal failure to come to grips with international currency asymmetry. Most of the world is on a dollar standard with a strong central money where one set of rules is appropriate, and a periphery of more fragile monies where a somewhat different set of rules and modes of operation are necessary (see Box). One manifestation of this doctrinal failure has been the advice commonly given to developing countries “float your exchange rate and open up your domestic capital to foreign capital flows and foreign banks”. Here, I have tried to show that such advice is misplaced for most developing countries, which need to cosset their financial systems until they become industrialized and their long-term bond markets are developed. Even more serious is the failure of such advice to consider cross-country spillover effects from changes in exchange rates. On the periphery, exchange rate policy should be a collective endeavor within economic regions whose economies are linked in trade and finance. In contrast, the capital markets for the center country, the United States, must remain open so that foreigners can freely transact in, and hold, dollar assets at all terms to maturity. Otherwise the world’s payment mechanism would be seriously impaired. So too should the United States generally remain passive in the foreign exchange markets except in major crises where its unique access to capital makes it the natural lender of last resort. Finally, the United States should not use leverage from its central position in the international monetary system (which, after all, is just an accident of history) to push the commercial interests of American commercial and investment banks in foreign markets."
Source: http://www.cemla.org/pdf/pub-lib-rm.pdf
CEMLA - SHOULD CENTRAL BANKS BE SUBJECT TO INTERNATIONAL ACCOUNTING STANDARDS?
SHOULD CENTRAL BANKS BE SUBJECT TO INTERNATIONAL ACCOUNTING STANDARDS?
Antonio Rosas Cervantes
February 2006
"...Taking as given the inverse relationship between independence and inflation and bearing in mind that the organic and functional factors measuring the degree of independence have already been extensively analysed, this paper focuses on the effects that accounting standards may have on central bank financial independence. More specifically, it analyses to what extent application of International Accounting Standards, along with the central bank’s legal framework in respect of profit distribution and/or capitalisation capacity, may impair its financial independence and hamper fulfilment of the objective that justifies its existence. What is the thrust behind the application of International Accounting Standards to central banks?
For the purposes of this paper, references to international accounting standards will invariably be to those issued by the International Accounting Standards Board (IASB), whether they are called International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs)..."
"The application of these universal and general standards has been propelled during the last few years by two main factors:
a) As a result of globalisation, a broad consensus has arisen across doctrines, institutions, markets, etc. on the pressing need for a harmonised accounting framework to be applied by companies. Accordingly, IASs/IFRSs have thus been prescribed from 2005 onwards by the EU for the consolidated financial statements of listed companies, with some exceptions in the banking field. Likewise, governments, regulators, accounting practitioners, etc. from many different countries are addressing this requirement and analysing how to reduce differences between IFRSs and local accounting standards.
b) For different reasons, including the numerous scandals surrounding the application of so called "creative accounting" or accounting manipulation, investors, regulators, markets, the media and the public in general have become much more interested in companies' financial reporting, particularly in order to establish quality comparisons among financial statements..."
...
" SPECIFIC IFRSs WHOSE APPLICATION TO CENTRAL BANKS IS PROBLEMATIC
The general reasons outlined and those that might be added seek to highlight that the basic conception of IASs/IFRSs is far removed from the nature and objectives of central banks, and that their application to these institutions can only be made by means of overstretched interpretations. Set out below are the IASs/IFRSs that pose more marked problems for these institutions. The standards representing considerable difficulties in respect of application for central banks are, essentially, numbers 21 “The Effects of Changes in Foreign Exchange Rates”, 39 “Financial Instruments: Recognition and Measurement” and 37 “Provisions, Contingent Liabilities and Contingent Assets”.
The first of these (IAS 21) is problematic because it states that unrealised exchange rate gains and losses which are realised following their marking to market should be recorded in the income statement for the year. Central banks with no legal power to segregate this effect when it comes to distributing their profits may, as will be seen later, incur certain problems.
The same occurs in IAS 39 as in IAS 21 for the so-called trading securities portfolios, but in this case regarding the market price of the financial instruments included therein.
IAS 37 establishes, inter alia, the criteria for recognising provisions for risks. It prohibits recognising provisions for future risks (exchange rate and interest rate risks, for instance) as it stipulates as a basic requirement for their recognition that possible future losses should depend on a past event. If, along with this accounting prohibition, a central bank has no legal power to set up reserves, the outcome will be that this institution will have no coverage against the risks it will no doubt be facing.
Irrespective of the fact that the three above-mentioned standards are the most problematic ones, there are still other standards whose application by central banks would not serve thepurpose for which the related IAS was established. There are also situations particular to central banks to which no specific accounting standard can be applied. An example of the first instance is IAS 1 on the “Presentation of financial statements”. This prescribes, inter alia, the preparation of a cash flow statement to provide users with a basis to “assess the ability of the entity to generate cash and cash equivalents”, which is not of great use to a central bank19. Furthermore, a paradigmatic case of the absence of applicable IASs/IFRSs in respect of central banks is monetary gold. For central banks, monetary gold is a financial asset and it would not therefore be possible to apply IAS 2 on “Inventories” which, as far as gold is concerned, considers it to be a commodity. Nor could IAS 39 on financial instruments be applied, as it establishes a definition of such instruments that excludes monetary gold..."
Source: http://www.cemla.org/pdf/acp/dp-0504-bde.pdf
Antonio Rosas Cervantes
February 2006
"...Taking as given the inverse relationship between independence and inflation and bearing in mind that the organic and functional factors measuring the degree of independence have already been extensively analysed, this paper focuses on the effects that accounting standards may have on central bank financial independence. More specifically, it analyses to what extent application of International Accounting Standards, along with the central bank’s legal framework in respect of profit distribution and/or capitalisation capacity, may impair its financial independence and hamper fulfilment of the objective that justifies its existence. What is the thrust behind the application of International Accounting Standards to central banks?
For the purposes of this paper, references to international accounting standards will invariably be to those issued by the International Accounting Standards Board (IASB), whether they are called International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs)..."
"The application of these universal and general standards has been propelled during the last few years by two main factors:
a) As a result of globalisation, a broad consensus has arisen across doctrines, institutions, markets, etc. on the pressing need for a harmonised accounting framework to be applied by companies. Accordingly, IASs/IFRSs have thus been prescribed from 2005 onwards by the EU for the consolidated financial statements of listed companies, with some exceptions in the banking field. Likewise, governments, regulators, accounting practitioners, etc. from many different countries are addressing this requirement and analysing how to reduce differences between IFRSs and local accounting standards.
b) For different reasons, including the numerous scandals surrounding the application of so called "creative accounting" or accounting manipulation, investors, regulators, markets, the media and the public in general have become much more interested in companies' financial reporting, particularly in order to establish quality comparisons among financial statements..."
...
" SPECIFIC IFRSs WHOSE APPLICATION TO CENTRAL BANKS IS PROBLEMATIC
The general reasons outlined and those that might be added seek to highlight that the basic conception of IASs/IFRSs is far removed from the nature and objectives of central banks, and that their application to these institutions can only be made by means of overstretched interpretations. Set out below are the IASs/IFRSs that pose more marked problems for these institutions. The standards representing considerable difficulties in respect of application for central banks are, essentially, numbers 21 “The Effects of Changes in Foreign Exchange Rates”, 39 “Financial Instruments: Recognition and Measurement” and 37 “Provisions, Contingent Liabilities and Contingent Assets”.
The first of these (IAS 21) is problematic because it states that unrealised exchange rate gains and losses which are realised following their marking to market should be recorded in the income statement for the year. Central banks with no legal power to segregate this effect when it comes to distributing their profits may, as will be seen later, incur certain problems.
The same occurs in IAS 39 as in IAS 21 for the so-called trading securities portfolios, but in this case regarding the market price of the financial instruments included therein.
IAS 37 establishes, inter alia, the criteria for recognising provisions for risks. It prohibits recognising provisions for future risks (exchange rate and interest rate risks, for instance) as it stipulates as a basic requirement for their recognition that possible future losses should depend on a past event. If, along with this accounting prohibition, a central bank has no legal power to set up reserves, the outcome will be that this institution will have no coverage against the risks it will no doubt be facing.
Irrespective of the fact that the three above-mentioned standards are the most problematic ones, there are still other standards whose application by central banks would not serve thepurpose for which the related IAS was established. There are also situations particular to central banks to which no specific accounting standard can be applied. An example of the first instance is IAS 1 on the “Presentation of financial statements”. This prescribes, inter alia, the preparation of a cash flow statement to provide users with a basis to “assess the ability of the entity to generate cash and cash equivalents”, which is not of great use to a central bank19. Furthermore, a paradigmatic case of the absence of applicable IASs/IFRSs in respect of central banks is monetary gold. For central banks, monetary gold is a financial asset and it would not therefore be possible to apply IAS 2 on “Inventories” which, as far as gold is concerned, considers it to be a commodity. Nor could IAS 39 on financial instruments be applied, as it establishes a definition of such instruments that excludes monetary gold..."
Source: http://www.cemla.org/pdf/acp/dp-0504-bde.pdf
CEMLA - IX Meeting of International Reserve Management
(extract)
DATE:
Buenos Aires, Argentina, April 27th to 29th, 2011.
OBJECTIVE:
Analyze the strategic currency allocation of international reserves and the role of gold as a reserve asset after the financial crisis; the impact of the crisis on risk tolerance and the investment in non-traditional assets, on the role of credits ratings, on risk management tools and on the diversification and the changes in asset correlations.
PARTICIPANTS:
The meeting is aimed at senior officers from CEMLA members and other invited institutions with management responsibilities related to the international reserves.
AGENDA:
1. Strategic view and decisions on currencies
The role of the main currencies before and after the recent crises: Dollar, Euro and Yen. The role of gold and emerging market currencies as a reserve asset.
Currency value from a fundamental point of view. Long term view vs. fair-value models.
Strategic currency allocation in central banks
Optimization and strategic currency decisions.
2. Investment and tactical decisions on currencies
Currency overlay strategies: Does deviation in currencies generate alpha?
Tactical allocation of currencies. Currency management tools in central banks.
Currency quantitative models.
3. Asset allocation after the crisis
The impact of the crisis on risk tolerance and the investment in non-traditional assets.
The role of credit ratings after the crisis. Changes in risk-management tools and new considerations to enhance risk analysis.
Diversification in times of crisis and changes in asset correlations.
Source: http://www.cemla.org/actividades/2011/2011-04-InternationalReserveManagement.htm
[Mrt: Interesting that now the CEMLA states go for gold as a reserve asset. See their latest purchases.]
DATE:
Buenos Aires, Argentina, April 27th to 29th, 2011.
OBJECTIVE:
Analyze the strategic currency allocation of international reserves and the role of gold as a reserve asset after the financial crisis; the impact of the crisis on risk tolerance and the investment in non-traditional assets, on the role of credits ratings, on risk management tools and on the diversification and the changes in asset correlations.
PARTICIPANTS:
The meeting is aimed at senior officers from CEMLA members and other invited institutions with management responsibilities related to the international reserves.
AGENDA:
1. Strategic view and decisions on currencies
The role of the main currencies before and after the recent crises: Dollar, Euro and Yen. The role of gold and emerging market currencies as a reserve asset.
Currency value from a fundamental point of view. Long term view vs. fair-value models.
Strategic currency allocation in central banks
Optimization and strategic currency decisions.
2. Investment and tactical decisions on currencies
Currency overlay strategies: Does deviation in currencies generate alpha?
Tactical allocation of currencies. Currency management tools in central banks.
Currency quantitative models.
3. Asset allocation after the crisis
The impact of the crisis on risk tolerance and the investment in non-traditional assets.
The role of credit ratings after the crisis. Changes in risk-management tools and new considerations to enhance risk analysis.
Diversification in times of crisis and changes in asset correlations.
Source: http://www.cemla.org/actividades/2011/2011-04-InternationalReserveManagement.htm
[Mrt: Interesting that now the CEMLA states go for gold as a reserve asset. See their latest purchases.]
BoE - THE REPERTOIRE OF OFFICIAL SECTOR INTERVENTIONS IN THE FINANCIAL SYSTEM: LAST RESORT LENDING, MARKET-MAKING, AND CAPITAL
PAUL TUCKER
DEPUTY GOVERNOR, FINANCIAL STABILITY, BANK OF ENGLAND
at the Bank of Japan 2009 International Conference
Financial System and Monetary Policy: Implementation
Bank of Japan, Tokyo
27-28 May 2009
2009 INTERNATIONAL CONFERENCE: FINANCIAL SYSTEM AND MONETARY POLICY
IMPLEMENTATION, BANK OF JAPAN, 27-28 MAY 2009
THE REPERTOIRE OF OFFICIAL SECTOR INTERVENTIONS IN THE FINANCIAL
SYSTEM: LAST RESORT LENDING, MARKET-MAKING, AND CAPITAL
Everything – and I mean everything – about central banking stems from our liabilities being the base
money of the economy. From this flow our roles in monetary policy and financial stability. And, in
consequence, the manner in which central banks supply our money – overnight, intra-day, and for term
maturities; in routine and in various stressed circumstances – just could not matter more, even if much
of the time it seems like an obscure corner of the financial system’s plumbing.
Source: http://www.bankofengland.co.uk/publications/speeches/2009/speech390.pdf
DEPUTY GOVERNOR, FINANCIAL STABILITY, BANK OF ENGLAND
at the Bank of Japan 2009 International Conference
Financial System and Monetary Policy: Implementation
Bank of Japan, Tokyo
27-28 May 2009
2009 INTERNATIONAL CONFERENCE: FINANCIAL SYSTEM AND MONETARY POLICY
IMPLEMENTATION, BANK OF JAPAN, 27-28 MAY 2009
THE REPERTOIRE OF OFFICIAL SECTOR INTERVENTIONS IN THE FINANCIAL
SYSTEM: LAST RESORT LENDING, MARKET-MAKING, AND CAPITAL
Everything – and I mean everything – about central banking stems from our liabilities being the base
money of the economy. From this flow our roles in monetary policy and financial stability. And, in
consequence, the manner in which central banks supply our money – overnight, intra-day, and for term
maturities; in routine and in various stressed circumstances – just could not matter more, even if much
of the time it seems like an obscure corner of the financial system’s plumbing.
Source: http://www.bankofengland.co.uk/publications/speeches/2009/speech390.pdf
Thursday, October 13, 2011
CEMLA - Reserve Assets and Reserve Asset Transactions.
CEMLA = The CEMLA is the regional association of Latin American and Caribbean central banks. Its main objective since 1952 is cooperation amongst its members in order to promote a better knowledge of monetary and financial topics in the region.
Reserve Assets and Reserve Asset Transactions.
"This work purports to be a contribution to the analysis of some accounts
comprising the caption of International Reserves and their most characteristic
transactions to try to reach a consensus on future technical accounting
recommendations on this subject.
Toward this end, the accounting caption will be presented, as well as the most
typical transactions..."
Wednesday, October 12, 2011
oil - The Globalization of Oil - A Prelude to a Critical Political Economy
CYRUS BINA
The Globalization of Oil
A Prelude to a Critical Political Economy
An analytic statement requires us to analyze the statement alone in order
to ascertain its truth. … Synthetic statements are meaningful statements
which are not analytic. The physical theories that we employ to understand
the Universe are always synthetic. They tell us things that can only
be checked by looking at the world. They are not logically necessary.
They assert something about the world, whereas analytic statements do
not.
—John D. Barrow
Theories of Everything (1991)
pg 6:
"...Alarmed by the rapidity with which the price war has spread from India to America and then back to Europe, the heads of the three dominant international majors met at Achnacarry Castle in Scotland to prevent the recurrence of such disturbances. Walter C. Teague, then president of Exxon [Standard Oil of New Jersey], was quoted by a trade journal as saying, “Sir John Cadman, head of the Anglo–Persian Oil Co. [BP] and myself were guests of Sir Henri Deterding [head of the Royal Dutch–Shell] and Lady Deterding at Achnacarry for the grouse shooting, and while the game was a primary object of the visit, the problem of the world’s petroleum industry naturally came in for a great deal of discussion.” Referred to generally as the As Is Agreement of 1928 or the Achnacarry Agreement, the product of this discussion was a document, dated September 17, 1928 , setting forth a set of seven principles and outlining in general terms the policies and procedures to be followed in applying them. The principles provided for:
pg 9:
"...This basing-point system, erected upon the wellhead price of U.S. oil (at the Gulf of Mexico), was used as a universal (accounting) yardstick for pricing of oil anywhere in the world (Federal Trade Commission 1952). Given the new and bountiful discoveries of cheaper oil in the Persian Gulf region, the new oil has not only displaced the U.S. markets in the west of Suez but also continued toward markets on the U.S. eastern seaboard. Thus the regional oil markets adjacent to the Western Hemisphere were supplied with the oil from the Persian Gulf. This has prompted the international oil cartel to cut the Persian Gulf posted prices in order to prevent the interregional flow of oil toward the U.S. market, thus complying with the tenet of the 1928 As Is Agreement reached in the Achnacarry. Historically, the posted price at both Gulfs functioned as an allocating mechanism for transferring and disbursing crude within the worldwide networks of the cartel. Therefore, while cutting the Persian Gulf posted price reduced the flow of oil from this region, it also diminished the oil royalties for this region both in terms of the magnitude (per barrel) and the quantity of output. The founding of OPEC was a response to the continuous cuts in the posted prices by the International Petroleum Cartel in the late 1950s. The posted price of oil was cut due to a combination of factors, such as the 1958 recession, expansion of Russian oil production, and imposition of the 1959 oil import quota on the U.S. domestic oil market, which was by far the largest in the world. The last factor, which was devised to discourage competition from the U.S. independent producers, is indeed the tip of the iceberg of U.S. government endorsement of As Is (the Achnacarry Agreement) at the expense of both the U.S. domestic consumers and the royalty earners of the Persian Gulf oil region. This was, however, concealed by the U.S. government under the convenient cloak of “national security.” It is noteworthy to point out in passing that once the deception of national security—and the pretense of “strategic oil”— was concocted, the tensions between the Anti-Trust Division of the U.S. Justice Department and the State Department over the violation of the Sherman Anti-Trust Act of 1890 and the pertinent antitrust law of 1911 subsided once and for all. This ingenious invention is only the tip of the blunder associated with the myopic, immature, and reactionary foreign policy of this period (see Blair 1976: ch. 7)..."
[Mrt: An interesting opinion, thought supply-demand price leads, important is the production cost & reserves. An insight into pre OPEC world. Needs more study. Some interesting snips.]
Valorization of the Oil Deposits
[Mrt: This part is very interesting. It supports Another´s view that US needed higher oil price at some level.]
e.g.:
"...In U.S. domestic oil, given the rule of capture, the fragmentation of oil leases, particularly when the size of the reservoir is huge, has long been troublesome for adequate unitization of the oilfields for secondary and tertiary oil recovery..."
"...Finally, post-1970s global oil was beset with volatility and universal uncertainty. The lack of rapid response to the increasing access demand by the price relates to two conundrums: (a) the requirement of long lead time for building a new capacity in the presence of market volatility and uncertain future prices and (b) the dilemma of switching off from shuting capacity and back, without sustaining a considerable economic cost due to the loss of technical efficiency and possible damage to the reservoir. This situation is worse in the case of excess supply. The levels of shut-in capacity have already been set normally in advance in the majority of oilfields, including those that regulate the global price of production. These regulating oilfields are particularly hard-pressed in the case of declining prices. The plugging of oil wells is one (costly) option. However, once they are plugged the oil is lost forever. To avoid damaging the reservoir, another option is to keep operating the oilfields and hope for better market prices tomorrow. ..."
"...That is why the regulating price of production does not decline immediately unless there is a prolonged excess supply, in which case the levels of risks and losses are too great for these producers to continue. This situation may indeed trigger an oil crisis, leading to a worldwide restructuring of capital, a new regulating price of production, and the corresponding market prices within the global oil industry...."
"...Thus, the characteristic of such crises must be explained from within, that is, from the standpoint of the oil industry’s internal dynamics, not according to the circumstances arising from the external contingencies. And oftentimes relying on power as both the premise and the end result (such as market power or political power) further mystifies the subject that has already attained the highest degree of complexity in the contemporary political economy...."
"...In the remainder of this section we need to clear up two additional, yet interrelated, issues: (a) the alleged cartelization of oil even after the oil crisis of 1973–74 and (b) the credibility of conspiracy theories. On both of these points that potentially feed each other and that perhaps may have possible implications for the questions, such as U.S. alleged hegemony or U.S. intervention in Iraq, it is worth quoting Fine and Harris at length, via two separate paragraphs. The authors simultaneously illuminate and obscure the very essence of the 1973–74 oil crisis as follows:
From Notes:
"The Redline Agreement is the infamous Cartel decision, which made the Iraq Petroleum Company (IPC) conspire against Iraq and withheld 99.5 percent of Iraqi territory from any attempt at exploration. This agreement was a part of a larger gentlemen’s secret arrangement made in the Achnacarry Castle, Scotland, in September 1928. For further suppression of the oil discoveries in the Middle East see Blair (1976: 81–85). Blair rightly observes:
Contrary to the widespread and long-standing impression that cartels are somehow inherent in the nature of things, the fashioning of these arrangements was the product of a great deal of very hard work.
According to the cartel’s minutes, which came into the hands of the Swedish investigating committee, the group held 55 meetings in 1937 at which 897 subjects were discussed; in 1938, 49 meetings were held at which 656 subjects were discussed; and in 1939, 51 meetings were held at which 776 subjects were discussed.
(1976: 65, emphasis added)"
---
ANOTHER: QBall, This is true. The Middle East nations, in particular, have shown their reserves to be much greater than ever thought possible. These "new/ larger" reserves have come to be known about, only in the last eight years. It was the "possible existence" of this oil that created much fear in the American Capitol, prior to the 1970s. In that time, it was known that the Western economy was growing on low priced energy. This growth would soon consume all "local / domestic" reserves that, in turn, would bring much dependence on low cost Middle East oil. The reserves in this region were, and now even more so, are the lowest cost to produce in the world. As all oil was sold in dollars, and US$s were then, still somewhat attached to gold, the ME producers had "no need" to raise prices! The political forces in the West needed much higher oil prices to "stimulate exploration" to avoid the "strategic problem" of "all oil supply from one region".
Source: ideas.repec.org/a/mes/ijpoec/v35y2006i2p4-34.html
The Globalization of Oil
A Prelude to a Critical Political Economy
An analytic statement requires us to analyze the statement alone in order
to ascertain its truth. … Synthetic statements are meaningful statements
which are not analytic. The physical theories that we employ to understand
the Universe are always synthetic. They tell us things that can only
be checked by looking at the world. They are not logically necessary.
They assert something about the world, whereas analytic statements do
not.
—John D. Barrow
Theories of Everything (1991)
pg 6:
"...Alarmed by the rapidity with which the price war has spread from India to America and then back to Europe, the heads of the three dominant international majors met at Achnacarry Castle in Scotland to prevent the recurrence of such disturbances. Walter C. Teague, then president of Exxon [Standard Oil of New Jersey], was quoted by a trade journal as saying, “Sir John Cadman, head of the Anglo–Persian Oil Co. [BP] and myself were guests of Sir Henri Deterding [head of the Royal Dutch–Shell] and Lady Deterding at Achnacarry for the grouse shooting, and while the game was a primary object of the visit, the problem of the world’s petroleum industry naturally came in for a great deal of discussion.” Referred to generally as the As Is Agreement of 1928 or the Achnacarry Agreement, the product of this discussion was a document, dated September 17, 1928 , setting forth a set of seven principles and outlining in general terms the policies and procedures to be followed in applying them. The principles provided for:
(1) accepting and maintaining as their share of markets the status quo of each member;
(2) making existing facilities available to competitors on a favorable basis, but not at less than actual cost to the owner;
(3) adding new facilities only as actually needed to supply increased requirements of consumers;
(4) maintaining for each producing area the financial advantage of its geographical location;
(5) drawing supplies from the nearest producing area; and
(6) preventing any surplus production in a given geographical area from upsetting the price structure in any other area.
The last point asserted that the observance of these principles would benefit not only the industry but consumers as well. (1976: 55).."pg 9:
"...This basing-point system, erected upon the wellhead price of U.S. oil (at the Gulf of Mexico), was used as a universal (accounting) yardstick for pricing of oil anywhere in the world (Federal Trade Commission 1952). Given the new and bountiful discoveries of cheaper oil in the Persian Gulf region, the new oil has not only displaced the U.S. markets in the west of Suez but also continued toward markets on the U.S. eastern seaboard. Thus the regional oil markets adjacent to the Western Hemisphere were supplied with the oil from the Persian Gulf. This has prompted the international oil cartel to cut the Persian Gulf posted prices in order to prevent the interregional flow of oil toward the U.S. market, thus complying with the tenet of the 1928 As Is Agreement reached in the Achnacarry. Historically, the posted price at both Gulfs functioned as an allocating mechanism for transferring and disbursing crude within the worldwide networks of the cartel. Therefore, while cutting the Persian Gulf posted price reduced the flow of oil from this region, it also diminished the oil royalties for this region both in terms of the magnitude (per barrel) and the quantity of output. The founding of OPEC was a response to the continuous cuts in the posted prices by the International Petroleum Cartel in the late 1950s. The posted price of oil was cut due to a combination of factors, such as the 1958 recession, expansion of Russian oil production, and imposition of the 1959 oil import quota on the U.S. domestic oil market, which was by far the largest in the world. The last factor, which was devised to discourage competition from the U.S. independent producers, is indeed the tip of the iceberg of U.S. government endorsement of As Is (the Achnacarry Agreement) at the expense of both the U.S. domestic consumers and the royalty earners of the Persian Gulf oil region. This was, however, concealed by the U.S. government under the convenient cloak of “national security.” It is noteworthy to point out in passing that once the deception of national security—and the pretense of “strategic oil”— was concocted, the tensions between the Anti-Trust Division of the U.S. Justice Department and the State Department over the violation of the Sherman Anti-Trust Act of 1890 and the pertinent antitrust law of 1911 subsided once and for all. This ingenious invention is only the tip of the blunder associated with the myopic, immature, and reactionary foreign policy of this period (see Blair 1976: ch. 7)..."
[Mrt: An interesting opinion, thought supply-demand price leads, important is the production cost & reserves. An insight into pre OPEC world. Needs more study. Some interesting snips.]
Valorization of the Oil Deposits
[Mrt: This part is very interesting. It supports Another´s view that US needed higher oil price at some level.]
e.g.:
"...In U.S. domestic oil, given the rule of capture, the fragmentation of oil leases, particularly when the size of the reservoir is huge, has long been troublesome for adequate unitization of the oilfields for secondary and tertiary oil recovery..."
"...Finally, post-1970s global oil was beset with volatility and universal uncertainty. The lack of rapid response to the increasing access demand by the price relates to two conundrums: (a) the requirement of long lead time for building a new capacity in the presence of market volatility and uncertain future prices and (b) the dilemma of switching off from shuting capacity and back, without sustaining a considerable economic cost due to the loss of technical efficiency and possible damage to the reservoir. This situation is worse in the case of excess supply. The levels of shut-in capacity have already been set normally in advance in the majority of oilfields, including those that regulate the global price of production. These regulating oilfields are particularly hard-pressed in the case of declining prices. The plugging of oil wells is one (costly) option. However, once they are plugged the oil is lost forever. To avoid damaging the reservoir, another option is to keep operating the oilfields and hope for better market prices tomorrow. ..."
"...That is why the regulating price of production does not decline immediately unless there is a prolonged excess supply, in which case the levels of risks and losses are too great for these producers to continue. This situation may indeed trigger an oil crisis, leading to a worldwide restructuring of capital, a new regulating price of production, and the corresponding market prices within the global oil industry...."
"...Thus, the characteristic of such crises must be explained from within, that is, from the standpoint of the oil industry’s internal dynamics, not according to the circumstances arising from the external contingencies. And oftentimes relying on power as both the premise and the end result (such as market power or political power) further mystifies the subject that has already attained the highest degree of complexity in the contemporary political economy...."
"...In the remainder of this section we need to clear up two additional, yet interrelated, issues: (a) the alleged cartelization of oil even after the oil crisis of 1973–74 and (b) the credibility of conspiracy theories. On both of these points that potentially feed each other and that perhaps may have possible implications for the questions, such as U.S. alleged hegemony or U.S. intervention in Iraq, it is worth quoting Fine and Harris at length, via two separate paragraphs. The authors simultaneously illuminate and obscure the very essence of the 1973–74 oil crisis as follows:
If we now put aside the oil crisis of the early 1970s and examine its results, we can see how the oil industry discovered a solution to the erosion of the world cartel and the pressures on domestic U.S. production. The large increases in the price of oil have sustained the profitability of producers in the U.S.A. and have guaranteed sufficient revenue in the world production to bind the majors and nonmajors together in a cartel that now includes both. The result of this has been to create enormous surpluses on the production of oil from those reserves, nearly all, that are less costly to exploit than those in the U.S.A. What . . . OPEC nations and other countries have been able to do is to appropriate some of those surpluses. That they can do so is a result and not the cause of the oil price increase. (1985: 86– 87, emphasis added)
To some extent, this might read like a conspiracy theory of the oil price increases in which the latter was a solution to the problem of the industry. Certainly, such a possibility should not be discounted and such theories abound in discussion of the oil crisis. Some argue that the crisis was a U.S. device to improve its competitive position relative to its industrial rivals by forcing a high price of oil upon them, others that it was a device to improve the U.S. balance of payments position through the recycling of petro dollars. These may or may not have been the effects or the intentions of the actions of the various agencies involved, but the solution to the industry’s problems came about through a definite process that can be recognized. (1985: 87, emphasis added)..."
From Notes:
"The Redline Agreement is the infamous Cartel decision, which made the Iraq Petroleum Company (IPC) conspire against Iraq and withheld 99.5 percent of Iraqi territory from any attempt at exploration. This agreement was a part of a larger gentlemen’s secret arrangement made in the Achnacarry Castle, Scotland, in September 1928. For further suppression of the oil discoveries in the Middle East see Blair (1976: 81–85). Blair rightly observes:
Contrary to the widespread and long-standing impression that cartels are somehow inherent in the nature of things, the fashioning of these arrangements was the product of a great deal of very hard work.
According to the cartel’s minutes, which came into the hands of the Swedish investigating committee, the group held 55 meetings in 1937 at which 897 subjects were discussed; in 1938, 49 meetings were held at which 656 subjects were discussed; and in 1939, 51 meetings were held at which 776 subjects were discussed.
(1976: 65, emphasis added)"
---
7/19/98 ANOTHER (THOUGHTS!)
REPLYS:
From Q Ball: I would like to ask Another his opinion on this. What are his thoughts on what some people are predicting to be a dominance of OPEC nations in terms of oil production. Specifically forcasted in the following page says that OPEC production will surpass NON-OPEC in about the year 2006.
ANOTHER: QBall, This is true. The Middle East nations, in particular, have shown their reserves to be much greater than ever thought possible. These "new/ larger" reserves have come to be known about, only in the last eight years. It was the "possible existence" of this oil that created much fear in the American Capitol, prior to the 1970s. In that time, it was known that the Western economy was growing on low priced energy. This growth would soon consume all "local / domestic" reserves that, in turn, would bring much dependence on low cost Middle East oil. The reserves in this region were, and now even more so, are the lowest cost to produce in the world. As all oil was sold in dollars, and US$s were then, still somewhat attached to gold, the ME producers had "no need" to raise prices! The political forces in the West needed much higher oil prices to "stimulate exploration" to avoid the "strategic problem" of "all oil supply from one region".
Source: ideas.repec.org/a/mes/ijpoec/v35y2006i2p4-34.html
Tuesday, October 11, 2011
oil - 1928 - Two Agreements, Gulbenkian & Another
1928
A) Draft Achnacarry Agreement, 18 August 1928
[Mrt - Note: "...The U.S. Gulf prices shall be the basis until further notice by the Association)..."]
B) Keeping Iraq's Oil In the Ground
3/
Calouste Gulbenkian
Source: http://en.wikipedia.org/wiki/Calouste_Gulbenkian
[Mrt: Lets look at what Another said about this particular piece of puzzle:]
4/
---
Date: Sat Apr 04 1998 19:55
ANOTHER (THOUGHTS!) ID#60253:
All:
I do try and go back to complete where we left off. This question was offered for thought:
But, in the same time frame, all central banks did sell gold to all persons, even the US. All treasuries held gold and dollars as reserves. To what end did the world financial system gain with the dollar off gold backing, and then allowed to "dirty float" against all currencies? Would the world not have been better off to find gold revalued to, say $300 and then begin a "dirty float"? Noone would have lost, and the inflation would have , at best, not have been worse!
Truly, I tell the reason for this action. The US oil companies knew that the cheap reserves were found. The governments knew this also. The only low cost oil reserves in the world at this time were in the Middle East, and their cost to find and produce was very low. It was known, that, in time, ALL oil would come from this land. As much higher US dollar prices were needed to allow exploration and production of other reserves, worldwide. But, how to get crude prices, up, when the Gulf States were OK to pump and produce in exchange for "gold backed dollars"? I will not name the gentlemen that brought this thinking to the surface in that era, but it was discussed. It was known that oil liked gold. It was known that "local oil" would be used up without higher prices. What if, the US dollar was taken off the gold standard, and gold was managed "upward" to say, $208 per ounce? The dynamics of the market would force oil to rise and allow for much needed capital to search for the higher priced oil that was known to exist! The producers would find shelter in gold even as the price of oil was increased in terms of a now "non gold dollar"! Price inflation would rise, but gold and oil would also increase. The dollar would continue to be used as the only payment for oil, and in doing so replace gold as the backing for this "reserve currency". All would be fair.
The war in 1973 and the Iran problem did make markets "overshoot", but all did work to the correct end. The result was "a needed higher price for a commodity that was, as reserves, in much over supply by the wrong countries"! It was known that the public would never have accepted this "proposition" as fair. To this end, we have come.
And it is from this end, that the gold markets are managed for today! I do now take you to my post to Junior:
Look now and see if the US dollar does not "fight" for a high oil price! In every way, the question of supply disruptions is shown as the need for other suppliers. But, other suppliers cannot produce at a lower price? If the gulf states are allowed to bring oil "down" to it's true "fair" production price, in terms of a "correctly higher revalued" gold price, the US dollar would no longer be priced and backed by oil. Any paper trading currency would do. I would say, "if the Euro is strong in gold, and crude oil is allowed to be devalued by gold at $10,000 to $30,000, then all other paper currency reserves held against the EURO would be , "for show?"
"The world is going off the dollar standard as the dollar is going off the oil standard ", find this event "in your time"! We watch this new gold market, together, yes?
- July 31: Red Line Agreement The Red Line Agreement is the name given to an agreement signed by partners in the Turkish Petroleum Company (TPC) on July 31, 1928. The aim of the agreement was to formalize the corporate structure of TPC and bind all partners to a self-denial clause that prohibited any of its shareholders from independently seeking oil interests in the ex-Ottoman territory. It marked the creation of an oil monopoly, or cartel, of immense influence, spanning a vast territory. The cartel preceded easily by three decades the birth of another cartel, the Organization Petroleum Exporting Countries (OPEC), which was formed in 1960.
- Achnacarry served as the meeting place for global petroleum producers in an effort to set production quotas.
- September 17: The Achnacarry Agreement or "As-Is Agreement" was an early attempt to restrict petroleum production
2/
Here is more reading:
(Note that those are unknown sources to me.)A) Draft Achnacarry Agreement, 18 August 1928
[Mrt - Note: "...The U.S. Gulf prices shall be the basis until further notice by the Association)..."]
B) Keeping Iraq's Oil In the Ground
3/
Calouste Gulbenkian
Source: http://en.wikipedia.org/wiki/Calouste_Gulbenkian
[Mrt: Lets look at what Another said about this particular piece of puzzle:]
4/
7/19/98 ANOTHER (THOUGHTS!)
REPLYS:
From Q Ball: I would like to ask Another his opinion on this. What are his thoughts on what some people are predicting to be a dominance of OPEC nations in terms of oil production. Specifically forcasted in the following page says that OPEC production will surpass NON-OPEC in about the year 2006.
ANOTHER: QBall, This is true. The Middle East nations, in particular, have shown their reserves to be much greater than ever thought possible. These "new/ larger" reserves have come to be known about, only in the last eight years. It was the "possible existence" of this oil that created much fear in the American Capitol, prior to the 1970s. In that time, it was known that the Western economy was growing on low priced energy. This growth would soon consume all "local / domestic" reserves that, in turn, would bring much dependence on low cost Middle East oil. The reserves in this region were, and now even more so, are the lowest cost to produce in the world. As all oil was sold in dollars, and US$s were then, still somewhat attached to gold, the ME producers had "no need" to raise prices! The political forces in the West needed much higher oil prices to "stimulate exploration" to avoid the "strategic problem" of "all oil supply from one region". Make no mistake, there is enough oil reserves in the ME to supply "all world" for "many grandchildren"! It was in this time that the events created by the "politics of dollar currency", allowed the decision to remove the gold backing from the US$. This move, broke the "gold bond to oil", and created a need for more dollars per barrel of ME oil. The oil producers, as expected, did create "Beirut Resolution titled XXI. 122"!
Partial reprint from report by others:
"Shortly after the gold window was closed in August 1971, OPEC called an emergency meeting with U.S. and other nations' finance ministers in Beirut. The result of the meeting was the Beirut Resolution titled XXI. 122. It called for adjustments to OPEC's crude oil pricing whenever the dollar had been devalued. The resolution called for OPEC's price adjustments to be triggered whether or not dollar devaluation was caused by government action or by market forces. If the dollar lost purchasing power, OPEC could raise its prices."
QBall, this was the beginning of a move by dollar advocates to raise this commodity price by inflating the "world reserve currency". As an "also", the ME was shown to be and caused to be "unstable" for dependence for oil production. Not all nations agreed with this move. The French and Germans did not, and by 1980, Europe was working with the BIS to implement a new "reserve currency". They did long for a "money" that would resolve "Beirut XXI" and allow for the purchase of low cost reserves, not the high US$ cost "world oil supply" , of perceived strategic importance to America alone.
The "new Euro" did take much longer to create, and the Gulf War did create a crisis of payment for oil. In this time, early 1990s, the currency of gold was brought "into use" as a "temporary" partial payment until the Euro could be presented. A paper gold market, of sufficient size, was created, that as such, it could hide discount payments to a few producers for oil. Today, if these claims on paper were converted into bids for physical, it would take all of the "tradable gold" in existence! It was this "leverage" that forced the Euro makers into gold. Gold backing for the Euro would not be enough! Only "exchange reserves of gold" would allow oil priced in Euros. We move to this end today. Tomorrow will see ME oil in good supply for a new trading block of nations.
Thank You---
Date: Sat Apr 04 1998 19:55
ANOTHER (THOUGHTS!) ID#60253:
All:
I do try and go back to complete where we left off. This question was offered for thought:
" Date: Wed Mar 25 1998 23:31This question has more impact on the gold market of today than it did then! In days past, it was held as good knowledge that the US stopped gold backing to protect the dollar and keep gold from leaving to other shores.
ANOTHER ( THOUGHTS! ) ID#60253:
All: I ask you, why did the world go off the gold standard in the early 70s? You have an answer, yes? For all the problems this created, could the countries not just revalue gold upward, to say $300 ( back then ) ? What was the real reason the world entered a period of "freely traded" "managed gold"? "
But, in the same time frame, all central banks did sell gold to all persons, even the US. All treasuries held gold and dollars as reserves. To what end did the world financial system gain with the dollar off gold backing, and then allowed to "dirty float" against all currencies? Would the world not have been better off to find gold revalued to, say $300 and then begin a "dirty float"? Noone would have lost, and the inflation would have , at best, not have been worse!
Truly, I tell the reason for this action. The US oil companies knew that the cheap reserves were found. The governments knew this also. The only low cost oil reserves in the world at this time were in the Middle East, and their cost to find and produce was very low. It was known, that, in time, ALL oil would come from this land. As much higher US dollar prices were needed to allow exploration and production of other reserves, worldwide. But, how to get crude prices, up, when the Gulf States were OK to pump and produce in exchange for "gold backed dollars"? I will not name the gentlemen that brought this thinking to the surface in that era, but it was discussed. It was known that oil liked gold. It was known that "local oil" would be used up without higher prices. What if, the US dollar was taken off the gold standard, and gold was managed "upward" to say, $208 per ounce? The dynamics of the market would force oil to rise and allow for much needed capital to search for the higher priced oil that was known to exist! The producers would find shelter in gold even as the price of oil was increased in terms of a now "non gold dollar"! Price inflation would rise, but gold and oil would also increase. The dollar would continue to be used as the only payment for oil, and in doing so replace gold as the backing for this "reserve currency". All would be fair.
The war in 1973 and the Iran problem did make markets "overshoot", but all did work to the correct end. The result was "a needed higher price for a commodity that was, as reserves, in much over supply by the wrong countries"! It was known that the public would never have accepted this "proposition" as fair. To this end, we have come.
And it is from this end, that the gold markets are managed for today! I do now take you to my post to Junior:
Date: Wed Mar 25 1998 23:58All:
ANOTHER ( THOUGHTS! ) ID#60253:
" You state: "The USA/IMF and its'Hegemoney currency could not withstand cheap oil prices." ?
" Mr. Junior,
Be very sure to understand this: They can "stand cheap oil prices". But, it is the loss of having the US$ removed as the "world reserve currency" that makes them "fight" a lower oil price, and the new "world oil currency" that it would bring. Bring this thought into focus and you will understand why Iran and Iraq did fight so long. And why Iraq invaded. The warships are an attempt to keep prices from "falling"! You think long and hard on this! "
Look now and see if the US dollar does not "fight" for a high oil price! In every way, the question of supply disruptions is shown as the need for other suppliers. But, other suppliers cannot produce at a lower price? If the gulf states are allowed to bring oil "down" to it's true "fair" production price, in terms of a "correctly higher revalued" gold price, the US dollar would no longer be priced and backed by oil. Any paper trading currency would do. I would say, "if the Euro is strong in gold, and crude oil is allowed to be devalued by gold at $10,000 to $30,000, then all other paper currency reserves held against the EURO would be , "for show?"
"The world is going off the dollar standard as the dollar is going off the oil standard ", find this event "in your time"! We watch this new gold market, together, yes?
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