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Authored by Huw van Steenis, op-ed via The Financial Times,

As central bankers weigh up cutting interest rates deeper into negative territory, investors should consider when the risks of this trend will begin to outweigh its benefits.

With almost $17tn of negative-yielding debt already out there, I fear we have already hit the reversal rate — the point at which accommodative monetary policy “reverses” its intended effect and becomes contractionary for the economy.

Conventional macroeconomic models typically take banks and other intermediaries for granted. As a result, the overall benefits of cutting rates below zero may have been exaggerated.

Like steroids, unconventional policy can be highly effective in short dosages, but just as long-term usage of steroids weakens bones, so below-zero rates can weaken the financial system.

Negative rates erode banks’ margins and distort their incentives. They encourage lenders to seek out opportunities overseas rather than in their home markets. They also risk disrupting bank funding.

All these effects run counter to the central banks’ desire to ease credit conditions and support financial stability. How policymakers assess where and when the reversal rate kicks in will be pivotal to how investors should weigh up different policy packages from the European Central Bank and others.

Japanese banks, and more recently their European counterparts, have illustrated some of the problems caused by cutting rates. Japan’s regional banks have among the lowest returns on assets of any around the world.

Larger banks have fared somewhat better, in part by lending more overseas. Japanese banks bought about a third of the higher-rated tranches of US collateralised loan obligations — investment vehicles that buy leveraged loans — in the past few years.

Quantitative easing programmes have helped the global economy and enabled banks to repair their balance sheets. Low rates have improved the affordability of their loans, reduced bad debts and lifted the value of assets.

Japanese banks have relied upon capital gains from owning government bonds to offset pressures on profitability. But increased ownership of bonds can become a dangerous dynamic, a phenomenon known as a “doom loop”, magnifying the effects of swings in prices.

Lower profitability also reduces the ability of banks to upgrade their technology and enhance cyber defences, storing up future risks to financial stability.

Suppressing bad debts in the eurozone via QE has been useful for the banks, but this has largely come from indirect benefits, such as by reducing the difference in yield between German and, for example, Italian bonds. If central bankers really want to help increase the flow of credit, then buying the banks’ own debt as part of QE, which is still a taboo for the ECB, may be a better option than cutting rates further.

One counterargument is that the impact of negative rates appears to have been fairly benign in Sweden, Denmark and Switzerland, through the tiering of rates, where only part of banks’ reserves at the central bank are penalised. While these measures help, they are no panacea.

Banks have sought to offset negative rates by charging higher fees, repricing mortgage spreads and, in some cases, lending more aggressively. The longer the experiment lasts, the more Danish and Swiss banks are having to pass on negative rates to clients.

These tiering schemes were explicitly designed as foreign exchange policies, to deter inflows and protect banks. The spillover effects via the currency need to be weighed carefully. Should the ECB follow the Danish model, it may inadvertently exacerbate investors’ trade war concerns.

Pension funds’ asset allocations are increasingly being distorted by negative rates, too. One of the most striking consequences has been to encourage investors out of Japanese and more recently European markets and into US credit and equities instead. The thirst for yield has led to a self-reinforcing bid for longer-dated bonds.

As most savers target a particular level of retirement income, the lower rates go the more they will need to save to hit their targets, reducing their ability to spend today.

Investors are no longer sure how low rates might go in a range of countries. As long as this uncertainty remains, it is hard for banks to know whether the loans they are making are economically sensible or for investors to price the securities of financial institutions with confidence.

The assumption of a world without financial friction has been a fundamental weakness in much macroeconomic analysis. Where the reversal rate may be, and how long companies can endure these conditions, should be central to the policy debate. Otherwise, central bankers could end up doing more harm than good.

via ZeroHedge News https://ift.tt/2NP6532 Tyler Durden

The UK’s Labour government would consider a controversial “right-to-buy” scheme to allow millions of renters in the UK to buy their rented homes for a “reasonable” price (aka way below market), according to The Independent, citing the shadow chancellor. 

John McDonnell said he wanted to tackle the “burgeoning buy-to-let market” and problem landlords who do not maintain their properties.

The scheme, which could bring a day of reckoning for many of Britain’s 2.6 million landlords, is a twist on Margaret Thatcher’s policy of allowing council tenants to buy their homes in the 1980s – a move critics say helped cause the current housing crisis by drastically reducing the number of local authority properties. –The Independent

The idea, first brought up by Jeremy Corbyn during his 2015 bid for party leadership, would force landlords to sell their homes below market prices according to McDonnell. 

“You’d want to establish what is a reasonable price, you can establish that and then that becomes the right to buy,” he told the Financial Times, adding “You [the government] set the criteria. I don’t think it’s complicated.”

According to McDonnell, the plan would eliminate the problem of landlords who refuse to invest in their properties in order to make a “fast buck,” while their tenants suffer in squalor. 

“We’ve got a large number of landlords who are not maintaining these properties and are causing overcrowding and [other] problems,” he said. 

The National Landlords Association, meanwhile, has accused Labour of threatening to “punish” every single landlord “for the sins of the few.” 

Chris Norris, the organisation’s director of policy and practice, said: “To suggest that private landlords should be selling their properties to their tenants at a below market rate arbitrarily set by politicians is ludicrous. Landlords had to pay market rates themselves. It’s only right that, if and when they decide to sell it, they can do so at market rates. –The Independent

“If Labour does indeed wish to fix the housing crisis, they should focus on encouraging the government to build more social housing, which is what the housing sector is lacking,” said Norris. 

Another idea of McDonnell’s, according to The Independent, would be plans for “inclusive ownership funds,” by which corporations employing over 250 people would be required to give all employees 10% of their shares. The Financial Times and law firm Clifford Chance say that the scheme would result in the forced distribution of “£300bn worth of shares in 7,000 large companies” to workers in what would be one of the largest wealth transfers in the history of Western democracy. 

via ZeroHedge News https://ift.tt/2PHUeq1 Tyler Durden

Authored by Patrick Buchanan via Buchanan.org,

Given the cause for which their country went to war, British actions during the war seem inexplicable.

Last Sunday, the 80th anniversary of the Nazi invasion of Poland, Vice President Mike Pence spoke in Warsaw’s Pilsudski Square of “five decades of untold suffering and death that followed” the invasion. Five decades!

What Pence was saying was that, for Poland, World War II did not end in victory but defeat and occupation by an evil empire ruled by one of the greatest mass murderers of the 20th century, Josef Stalin.

The “Liberation of Europe,” the 75th anniversary of which we celebrated at Omaha Beach on June 6, was a liberation that extended only to the Elbe River in the heart of Germany.

Beyond the Elbe, the Nazis were annihilated, but victory belonged to an equally evil ideology, for the “liberators” of Auschwitz had for decades run an archipelago of concentration camps as large as Himmler’s.

So, who really won, and who lost, the war?

Winston Churchill wanted to fight for Czechoslovakia at Munich in 1938, and Britain went to war for Poland in 1939. Yet if both nations ended up under Bolshevik rule for half a century, did Britain win their freedom? And if this was the predictable result of a war in a part of Europe where Nazis confronted Bolsheviks, why did Britain even go to war?

Why did Britain declare war for a cause and country it could not defend? Why did Britain turn a German-Polish war into a world war that would surely bankrupt her and bring down her empire, while she could not achieve her declared war goal — a liberated and independent Poland?

What vital British interest was imperiled by Hitler’s retrieval of a port city, Danzig, that had been severed from Germany against the will of its 300,000 people and handed to Poland at Versailles in 1919?

Danzigers never wanted to leave Germany, and 90% wanted to return. Even the British Cabinet thought Germany had a case and Danzig should be returned.

Why then did Britain declare war?

Because Prime Minister Neville Chamberlain had insanely given the Poles a blank check, a war guarantee on March 31, 1939: If Germany uses force to retrieve Danzig, and you resist, we will fight at your side.

Britain’s war guarantee guaranteed the war.

Given the cause for which their country went to war, British actions during the war seem inexplicable.

When Stalin’s army invaded Poland, Sept. 17, 1939, two weeks after Hitler, Britain did not declare war on the Soviet Union.

The Polish officer corps were executed on Moscow’s orders in 1940. When the bodies were unearthed in Katyn in 1943, Churchill, now an ally of Stalin, responded to the Free Poles’ request to investigate the atrocity: “There is no use prowling round the three year old graves of Smolensk.”

Rather than attack Hitler after he invaded Poland, Britain and France remained behind the Maginot Line and waited until Hitler’s armies stormed west on May 10, 1940, the day Churchill took power.

In three weeks, the British army had been defeated and thrown off the continent. In six weeks, France had surrendered.

After Dunkirk and the Battle of Britain in 1940, Britain refused all of Hitler’s offers to end the war, holding on till June 1941, when Hitler turned on his partner Stalin and invaded the Soviet Union.

Churchill is the “man of the century” for persuading Britain to stand alone against Nazi Germany in 1940, Britain’s “finest hour.”

But at war’s end, what was the balance sheet of Churchill?

The Poland for which Britain had gone to war was lost to Stalinism and would remain so for the entire Cold War. Churchill would be forced to accede to Stalin’s annexation of half of Poland and its incorporation into the Soviet Bloc. To appease Stalin, Churchill declared war on Finland.

Britain would end the war bombed, bled and bankrupt, with her empire in Asia, India, the Mideast and Africa disintegrating. In two decades it would all be gone.

France would end the war after living under Nazi occupation and Vichy rule for five years, lose her African and Asian empire and then sustain defeats and humiliation in Indochina in 1954 and Algeria in 1962.

Who really won the war?

Certainly, the Soviets who, after losses in the millions from the Nazi invasion, ended up occupying Berlin, having annexed the Baltic states and turned Eastern Europe into a Soviet base camp, though Stalin is said to have remarked of a 19th-century czar, “Yes, but Alexander I made it to Paris!”

The Americans, who stayed out longest, ended the war with the least losses of any great power. Yet, America is a part of the West, and the West was the loser of the world wars of the last century.

Indeed, the two wars between 1914 and 1945 may be seen as the Great Civil War of the West, the Thirty Years War of Western Civilization that culminated in the loss of all the Western empires and the ultimate conquest of the West by the liberated peoples of their former colonies.

via ZeroHedge News https://ift.tt/2UvqjzV Tyler Durden

Early last week Turkey announced the start of a second round of S-400 component deliveries from Russia at a moment Turkish President Erdogan met with Putin in Moscow to hold talks on Syria developments. But it already appears the first batch — delivered in July at Mürted Air Base near Ankara — has gone operational, new satellite images reveal. 

Leading commercial satellite imaging site ImageSat International announced Tuesday that “for the first time observed, the recently arrived from Russia to Turkey S400 is in operational mode and deployed in Ankara.” 

ImageSat noted that according to the newly published images the system’s launchers are not yet loaded, yet “the radars are stationed and deployed”. 

“It is probably that some of the observed was arrived in Ankara by Russia in the second shipment, after the first shipment occurred on July 2019,” according to the analysis. 

#Turkey, #Ankara, Mürted Akinci #Airbase: Deployed #S400 launch components.#ISI #IMINT #VISINT #intelligence #Russia pic.twitter.com/96IwRNBT3x

— ImageSat Intl. (@ImageSatIntl) September 3, 2019

There’s a likelihood the current site observed is a “trial and test” deployment, but could also become the permanent operational site, according to ImageSat. 

#Turkey, #Ankara, Mürted Akinci #Airbase: Deployed #S400 #radars.#ISI #IMINT #VISINT #intelligence #Russia pic.twitter.com/WuEITwA74N

— ImageSat Intl. (@ImageSatIntl) September 3, 2019

Turkish media reports suggest the second batch of deliveries for the advanced Russian air defense system will be complete within several weeks; the S-400s are expected to be fully deployed and operational across Turkey by April 2020. 

Most importantly, what the now confirmed hasty deployment of the first S-400 system in Ankara confirms is that Erdogan has been completely unfazed by recent threatened US sanctions and the cancellation of Turkey’s participation in the US F-35 program.

With about 100 Lockheed F-35 jets hanging in the balance, which Washington could permanently block, it’s clear Turkey is not looking back. 

via ZeroHedge News https://ift.tt/2LltExq Tyler Durden

Authored by Barbara Boland via The American Conservative,

By unyoking London from Europe, a no deal Brexit would unleash a titanic shift in global alliances that could strengthen Washington’s hand and help it achieve its “maximum pressure” campaign against Iran.

That’s an ironic turn of events for populists in the United Kingdom, who support Brexit because it will allow the British people to determine their own fate.

But for some in Washington, Brexit represents a golden opportunity to negotiate with a United Kingdom unencumbered by Europe. Secretary of State Mike Pompeo admitted as much when he was asked whether our relationship with the UK will be strengthened by Brexit.

“I think it’s the case,” Pompeo said Thursday on the Hugh Hewitt Show.

“We’ll have a clear line with [the UK]. We won’t have the EU as a middleman that has put constraints on our capacity to do lots of good things across not only the economic sector but the security sector and the diplomatic sector as well.  … I’m confident that that very special relationship will continue to grow.”

Note that Pompeo specifically mentioned “the security sector” when listing how Brexit will help the U.S. That’s of particular importance now because the Trump administration has been pressuring European nations to back its withdrawal from the Iran deal and reimpose sanctions on Iran. So far, they have been reluctant to do so.

In recent months, the U.S. has claimed that Iran was responsible for attacks on oil tankers in the Gulf of Oman and the Strait of Hormuz and the downing of an American surveillance drone. At Washington’s urging, the British Royal Navy seized an Iranian oil tanker entering the Mediterranean. The U.S. then unsuccessfully maneuvered to prevent the UK from releasing the vessel.

After the government of then-prime minister Theresa May missed two deadlines to negotiate an exit deal with the EU, Prime Minister Boris Johnson was elected on a promise that he would finally deliver on the June 2016 referendum and withdraw the UK from the European Union, deal or no deal.

Johnson’s decision to suspend Parliament last Wednesday makes the current Brexit deadline of October 31 look inevitable, because he has effectively reduced his opponents’ ability to reverse the referendum via legislation by running out the clock.

Brexiteers have long argued that London will have far greater freedom to negotiate its own trade pacts after it leaves the 28-nation European Union. But they may be in for a surprise: if Britain leaves the EU without a deal, it will likely find itself more susceptible to American leverage.

That’s because, without an agreement, the UK will need to quickly secure a trade deal with the U.S. That deal is likely to come with strings attached—Washington may request that Britain take a harder line against Iran, or cooperates with efforts to squeeze Chinese telecom giant Huawei, which the U.S. deems a national security risk.

While it’s still unclear how Johnson will navigate foreign policy, there are early indications that London will toe Washington’s line.

In early August, Johnson’s government agreed to join the U.S. in Operation Sentinel, a mission that’s supposed to provide freedom of navigation for commercial shipping and “deter provocations” in the Strait of Hormuz, according to U.S. Secretary of Defense Mark Esper.

“The UK is determined to ensure her shipping is protected from unlawful threats and for that reason we have today joined the new maritime security mission in the Gulf,” British Defense Minister Ben Wallace told reporters.

“The mission will see the Royal Navy working alongside the U.S. Navy to accompany merchant vessels through the Strait of Hormuz,” the British government claimed in a statement, adding that British forces will play a “leading role” in the operation.

The UK also called for other governments to cooperate, labeling it a “truly international problem.” In a sign that may presage trouble, the mission is already being “rebranded” in the hopes of encouraging more participation. So far, only Australia and Bahrain have joined in support.

The possibility that Brexit will force London will give in to Washington on foreign policy is being seriously considered by multiple European diplomats, British politicians, and foreign policy experts at the core of Brexit and Iran policymaking.

Undoubtedly aware of how Brexit will increase Washington’s leverage, notorious Iran war hawk and Trump national security advisor John Bolton voiced the administration’s full-throated support of even a no-deal Brexit, adding that “we are prepared to proceed as rapidly as the Brits are.”

While Parliament is recessed, there is a small window wherein Johnson’s government could assist in deescalating tensions with Iran. The UK could attempt to convince the Islamic Republic not to drastically exceed their agreed-upon uranium enrichment levels. That’s what France and Germany are urging.

But if there’s an irreparable break in talks with the EU, it’s much more likely that Britain will find herself even more deeply wedded to the “special relationship” with the United States—with all that entails for foreign policy.

via ZeroHedge News https://ift.tt/2PIdlA7 Tyler Durden

Hong Kong has been embroiled in mass protests for weeks after the local government attempted to push through a bill allowing extradition to mainland China.

In the years since the handover, Beijing has been respectful of Hong Kong’s economic power and unique way of life – particularly freedom of expression and legal independence.

The demonstrators took the streets due to what they consider an attempt to undermine that way of life. And, as Statista’s Niall McCarthy notes, in the years after the handover, the share of people in Hong Kong identifying as Chinese increased, reaching 38.6 percent in 2008.

Dissatisfaction with Beijing’s policies towards Hong Kong has seen that share decline significantly in recent years and it stands at just 10.8 percent today, according to the most recent polling from Hong Kong University.

You will find more infographics at Statista

Meanwhile the share of people identifying as Hongkongers has increased dramatically over the last decade, hitting 53 percent in 2019.

via ZeroHedge News https://ift.tt/2PDiQ30 Tyler Durden

Authored by Ana Palacio via Project Syndicate,

We live in an era of hyperbole, in which gripping accounts of monumental triumphs and devastating disasters take precedence over realistic discussions of incremental progress and gradual erosion. But in international relations, as in anything, crises and breakthroughs are only part of the story; if we fail also to notice less sensational trends, we may well find ourselves in serious trouble – potentially after it is too late to escape.

The recent G7 Summit in Biarritz, France, is a case in point. Despite some positive developments – French President Emmanuel Macron, for example, was praised for keeping his American counterpart, Donald Trump, in check – little was achieved. And, beyond the question of substantive results, the summit’s structure portends a progressive erosion of international cooperation – a slow, steady chipping away at the global order.

It is somewhat ironic that the G7 presages the future, because it is in many ways a relic of the past. Formed in the 1970s, at the height of the Cold War, it was supposed to serve as a forum for the major developed economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

After the fall of the Soviet Union, the G7 continued to shape global governance on issues ranging from debt relief to peace operations and global health. In 1997, the G7 became the G8, with the addition of Russia. Still, the body epitomized an era of Western preeminence in an institutionalized liberal world order in full bloom.

That era is long gone. The 2008 financial crisis hobbled the body’s core members, which, together with the rise of the emerging economies, especially China, meant that the group no longer possessed the critical mass required to guide world affairs.

The larger and more diverse G20, formed in 1999, thus gradually overtook the G8, formally replacing the latter as the world’s permanent international economic forum a decade later. In an increasingly complex and divided global environment, the G20’s flexible policymaking style – including a preference for non-binding commitments – was regarded as more viable than the hard-law methods of older multilateral institutions.

The G8 drifted along as a mere caucus. When Russia’s G8 membership was suspended in 2014 – a response to its invasion of Ukraine and annexation of Crimea – it became even less weighty, though more cohesive, with its members sharing a more consistent worldview. (Some, including Trump, now call for Russia’s reintroduction to the group.)

But even that slight advantage was demolished with Trump’s election in 2016. His administration began attacking allies and rejecting shared rules, norms, and values. The situation reached a nadir at the 2018 G7 Summit in Quebec, where a petulant Trump criticized his host, Canadian Prime Minister Justin Trudeau, and publicly disavowed the summit’s final communiqué as soon as it was issued.

Against that backdrop, this year’s summit in Biarritz elicited great trepidation. With little hope for consensus on any consequential issue, the meeting’s French hosts focused on keeping up appearances, choosing expediency over impact. Goals were kept vague. In fact, Macron announced before the event that there would be no final statement, declaring that “nobody reads communiqués.”

But that decision represented a major loss. Final communiqués are policy documents, providing important signals about significant compromises to the international community. The 2018 declaration, which Trump rejected, was 4,000 words long, identifying a set of shared priorities and common approaches to addressing them.

The Biarritz summit, by contrast, ended with a 250-word statement that was so vague and anodyne as to be all but meaningless. On Iran, for example, G7 leaders could agree only that they “fully share two objectives: to ensure that Iran never acquires nuclear weapons and to foster peace and stability in the region.” On Hong Kong, they reaffirmed “the existence and importance of the Sino-British Joint Declaration of 1984 on Hong Kong” and called hollowly “for violence to be avoided.” On Ukraine, France and Germany promised to organize a summit “to achieve tangible results.”

To be sure, some positive steps were taken in Biarritz. Iranian Foreign Minister Mohammad Javad Zarif’s surprise appearance created a potential opening for future US-Iran talks. Pressure was placed on Brazil to respond to the fires that are decimating the Amazon. And the US and France broke an impasse over a French tax on tech giants. But any high-level international gathering produces these kinds of limited actions, merely by facilitating interaction among world leaders.

Many have recognized the shortcomings of the latest G7 summit. But, drawn to calamity as we so often are, assessments often center on the body’s possible collapse next year, when the G7 summit will be hosted in the US by Trump, who will go nowhere near the lengths to which Macron went to hold the last one together. (On the contrary, Trump’s interest in the summit seems to revolve around his desire to hold it at his struggling golf resort in Doral, Florida.)

But this perspective fails to recognize the full implications of the Biarritz summit: it signals a broader shift in international governance away from concrete policy cooperation toward vague statements and ad hoc solutions. To some extent, the G20 pioneered this approach, but at least it had vision and a set direction. That can no longer be expected.

Unless leaders take stock of the current trend, the conclusion of the Biarritz summit will be a marker of the world order’s future – ending not with a bang, but with a whimper.

via ZeroHedge News https://ift.tt/2MRY6lS Tyler Durden