Tag: news

One week before the Trump-Xi summit, we explained how Trump – in his pursuit of a lower US dollar, lower interest rates and higher stocks, had managed to outplay Powell.

As we said at the time, having considered firing or demoting Powell at the start of the year, Trump realized he can’t do so directly, so instead he decided to pressure Powell to do his bidding in response to Trump’s actions

To be sure, by now Trump has certainly figured out that his strongest leverage over the Fed is by escalating the uncertainty in the trade and political arena, forcing the Fed to tip its cards and unveil its open-ended dovish policy which the market now expects will result in as many as 4 rate cuts in the next 12 months, setting up Trump nicely for the election, with the S&P at or near all time highs, even if the overall economy continues to deteriorate (it is, however, unclear how much longer markets will ignore the growing risk of a recession just because the Fed has promised to cut rates further).

As such, if Trump feels the need to extract more concession from Powell, all he needs to do is to make good in part or in whole on his $300BN in new Chinese tariffs, which will force the Fed to take on an even more dominant role to preserve the economic cycle by doing the only thing it knows how to do: push assets to new all time highs with even more dovish policies.

Which, we concluded is the reason behind the perverse outcome that the White House is now confident that the more it pushes China – in word or in deed – toward a full blown trade war, the more Powell will be forced to concede to Trump in the simmering feud between the executive and the money printing branches of US government.

One week later, none other than Bank of America has picked up on this argument, describing this relationship between Trump’s trade policies and the Fed’s monetary policy as a “perverse feedback loop”, which would leave the stock market “in a range-bound “collar” trade, with its upside and downside capped by the trade war and the Fed, respectively.”

But first, let’s back up.

In a summary of this weekend’s events, an unimpressed Bank of America writes that the G-20 summit in Osaka proceeded largely as expected, and notes that “additional tariffs were delayed indefinitely, but there was no rollback of earlier measures. The two sides agreed to restart negotiations, and China pledged to buy more agricultural products from the US. There was one positive surprise: US companies will be allowed to sell products to Huawei. Although Huawei is still blacklisted from US markets, the move eases the pressure on Huawei and its US suppliers.”

In its take on the market’s reaction, BofA said that traders are likely to view the summit as a modest positive in the short run, even though the bank saw several reasons for concern.

• First, there are still 25% tariffs in place on $250bn of Chinese exports to the US, and (on average) almost 20% tariffs on $110bn of US exports to China. Here, BofA’s Aditya Bhave writes that “tariff termites have been eating away at growth in China and its trading partners in Europe and Asia-Pacific, some of whom have very little room for policy easing. In the US, the manufacturing sector has started to weaken.”
• Second, the US still has a long to-do list on trade. And while BofA expects a deal with China later this summer, it could take a large market correction to get there. The risk of another round of tit-for-tat tariffs remains elevated. BofA also expect tariffs on a growing list of products and countries in the coming quarters. In addition, if the dollar remains strong despite Fed cuts, and an FX intervention by the US to weaken the dollar is not to be ruled out.

Where this goes back to what we said ten days ago, however, is that as Bank of America notes, the components of the current equilibrium point to “a worrying feedback loop between the Fed and trade policy.” And here is Bank of America saying exactly what we said one ahead of the G-20 meeting:

The Fed is determined to raise inflation by sustaining above-trend growth. To this end it seems willing to offset the negative impact of the trade war on the economy. But the risk is that the “Fed put” could encourage an even tougher stance on trade, which would trigger even more Fed accommodation, and so on (Chart 1). The end result would be a loss of Fed policy ammunition, with an economy that is still soft.

This is what the perverse feedback loop looks like:

Bank of America then continues, with an explanation why the biggest risk going forward is this “perverse feedblack loop between the Fed’s attempts to support the economy and President Trump’s incentives to re-escalate various trade conflicts”, to wit:

suppose (1) the Fed is following a “risk management” approach, in which it tries to raise inflation by sustaining above-trend growth, and avoids disappointing the stock and bond markets, and (2) the Trump Administration only stops escalating the trade war if there are notable signs of pain in the economy or markets.

If this “Powell Put” and “Trump Call” are strong enough, Bhave warns that they could create an ever-escalating trade war matched by an ever-lower funds rate. The stock market would be left in a range-bound “collar” trade, with its upside and downside capped by the trade war and the Fed, respectively.

So what breaks this nefarious feedback loop?

• First, it is BofA’s view that the Fed will not be able to fully offset an escalating trade war: as the uncertainty shock worsens, rate cuts will become increasingly less effective in countering the shock. Even lowering borrowing costs by 2% cannot make up for the risk of a 25% tariff.
• Second, the economy and markets are not the only motivators in the trade war-political costs matter as well. If the trade war expands it will hit more consumer products. But unlike “stable inflation” which can’t be extrapolated into inflation expectations, “the public will view explicit tax increases on consumer items very differently from the subtle price pressures that come from raising input and capital costs.”
• Third, and most insidious, the Trump administration might ingeniously take the opportunity to make a deal with China after the Fed has cut rates, in order to try to “supercharge” the economy and markets going into next year’s elections.

As a reminder, #3 is precisely the scenario that David Rosenberg’s stumbled upon one month ago, when he asked “what if he finally gets the steep Fed rate cuts he has been demanding? After that, he ends the trade wars, tariffs go to zero, and the stock market surges to new highs – just in time for the 2020 election!” However, to BofA even this outcome would be costly, as facing an economy that is even more likely to overheat, the Fed might have to quickly reverse course and start hiking, at the risk of damaging its credibility, which in turn is also why three weeks ago, another BofA strategist, Michael Hartnett said that the biggest risk is if the Fed cuts rates now, a process which would culminate with another asset bubble and the loss of what little credibility the Fed has left.

via ZeroHedge News https://ift.tt/2xqEM5r Tyler Durden

Hunter Biden’s shady business dealings in Ukraine and China, as well as his equally questionable romance with his dead brother’s widow, are rivaling his father’s ‘racist’ comments among the most embarrassing gaffes or scandals of the election cycle thus far.

The latest installment comes courtesy of the New Yorker, which on Monday published an interview with Hunter Biden. The title of the piece is pretty telling: “Will Hunter Biden Jeopardize His Father’s Campaign?” Judging by the interview’s contents, it seems at times like he is doing this deliberately.

During the interview, Biden revealed that he started dating his brother’s widow while recovering from a week spent buying crack from a homeless encampment in LA.

The story begins in early 2016, around the time that Hunter separated from his wife. He moved out of the house he shared with his estranged wife, Kathleen, as his drug abuse worsened. Around this time, he became close with Hallie – his dead brother Beau’s widow – after a 2016 trip with her to the Hamptons. He soon began spending more nights at her place, where the two addressed a “very specific” grief.

Hallie & Hunter Biden

Soon after, Biden decided he needed help. He planned to check himself in to a detox center in Arizona. But he got “sidetracked” during a stop in LA, where he approached a homeless man and asked him where he could buy some crack.

The man reportedly took Hunter to a homeless camp in downtown LA, where he returned several times over the course of a week to buy more drugs, despite having a gun pulled on him. After Hunter got into a fight outside a Hollywood Boulevard club, a man “took pity” on him and brought him to a Hertz car-rental office, where he rented the above-mentioned car and drove it to his detox in Arizona.

Hunter eventually spent a week at Grace Grove Lifestyle Center, a “detox, rejuvenation and healing retreat”.  But he soon left and checked himself into a resort spa. It was there that Hallie flew out to meet him. After their amorous reunion, the two decided to become a couple.

For what it’s worth, Biden’s story appears to corroborate an earlier embarrassing report about him leaving a crack pipe, credit cards and multiple forms of identification in a rental car (despite investigations, prosecutors declined to bring a case against Biden citing a ‘lack of evidence’ that he actually used the pipe).

Hunter and Hallie broke up not long after, but not before the news of their coupling was broken to Joe Biden by a Page Six reporter, who called him for comment on a story about the relationship.

Biden described this period in 2016 to the New Yorker as a troubling time that was “really hard” for him.

“All we got was s–t from everybody, all the time…It was really hard. And I realized that I’m not helping anybody by sticking around.”

Fortunately for Hunter, things have since turned around. Though he has emerged as a potential liability for his father’s presidential campaign, the 49-year-old also recently celebrated his marriage to a South African model. Though scandal continues to dog him: An Arkansas woman recently sued Hunter alleging that he is the father of her child.

Before the campaign ends, we imagine this won’t be the last story about Biden the younger’s crack-inspired antics.

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

Submitted by Ted Dabrowski and John Klingner of Wirepoints

It didn’t take long for new Chicago Mayor Lori Lightfoot to propose a plan that would wash her hands of Chicago’s pension crisis altogether. According to a recent report in Crain’s, Lightfoot wants the state to take over Chicago’s pension debts and merge them with the other pension plans throughout the state. The move would make all state taxpayers responsible for paying down the city’s debts. 

The plan to shift city debts to the state would bail out the mayor from having to raise about $1 billion in additional taxes to pay for increasing pension costs by 2023. A massive tax hike is something she’s desperate to avoid.

But while Lightfoot may think the cost-shift is a solution, it will only make things worse for Illinois. She should expect significant pushback from many sides.

Start with downstate and suburban residents. Sure, their public safety pension funds would get consolidated under the state, too, but it’s the Chicago funds that are some of the biggest and worst-funded in the state. The four city-run funds are collectively funded at just 27 percent and face an official shortfall of $28 billion. 

In contrast, the 650 downstate pension plans are 58 percent funded and have a shortfall of nearly $10 billion. The end result of any statewide pooling of pension funds will be a net bailout for Chicago.

Non-Chicagoans aren’t going to just accept yet another bailout of the city. Downstaters’ most recent bailout of Chicago came when the state’s new education funding formula locked in special subsidies for Chicago Public Schools. That included hundreds of millions in hold-harmless funding as well as $200 million-plus annually to pay for the district’s pension costs. 

The mayor can expect pushback from the rating agencies, too. Illinois already has what Moody’s Investors Service calculates as a $234 billion state pension shortfall, while the state’s retiree health insurance fund has another gaping $73 billion hole. 

Adding $42 billion more – what Moody’s reports as Chicago’s true pension debt – may push the state’s credit rating into junk category. That’s significant since no state in modern times has been rated junk.

Lightfoot’s pension proposal might come as a surprise to some given her comments last week to the Chicago Sun-Times. According to the paper, “Mayor Lori Lightfoot said Friday she’s willing to tackle Chicago’s ‘mounting, looming, all-consuming’ pension debt once and for all, even if it means risking her political future.”

“We cannot keep asking taxpayers to give us more revenue without the structural reforms that are fundamentally necessary to make our city and our state run better. Now is the time to act,” she said.

Lightfoot has obviously given up on structural reforms. Her proposal does nothing to actually reduce the overwhelming debts of the city’s pension funds. Instead, it appears her only goal is to socialize the costs across all state residents.

That’s not “risking her political future.” Making everyone else pay for the city’s debts, if she can make it happen, is the easy way out.

Few options

Lightfoot the candidate knew what a mess the city’s finances were in. The city was already rated junk by Moody’s when she took over, while CPS was five notches deep into junk – worse than even Detroit.

But Lightfoot never signaled a plan for pension reform during her campaign. Her only commitment was that she would protect pensions: ”First, we must start from the firm position that pensions are a promise – and that protecting the retirement security of our public employees is imperative to maintaining a stable middle class and, thereby, our local economy.” 

Now she’s found that, in the absence of reforms, the city is running out of options.

Reamortizations – kicking debt payments further into the future – are getting pushback from both rating agencies and public sector unions alike.

Pension obligation bonds, another kind of can kick that Rahm Emanuel pursued, have also run into opposition. Rating agencies, pension funds and actuarial associations are calling POBs what they really are: a gamble with taxpayer dollars.

City tax hikes aren’t a solution either. Chicagoans are tapped out. City residents have been hit by an avalanche of state and local tax increases over the past several years, including the state’s 2017 income tax increase and the biggest property tax hike in the city’s history. Increasing taxes yet again to get the $1 billion needed for pensions could result in severe backlash against the mayor.

Fixing things

Lightfoot’s words to the Sun-Times are all the more disappointing considering the reforms she could have called for: a constitutional amendment to the pension protection clause, changes to how the city doles out retirement benefits going forward, and tough cuts in upcoming contract negotiations with CPS and other labor unions. 

Instead, her desperate plan abrogates any responsibility for the city’s largely self-inflicted retirement crisis. And more importantly, it leaves nobody better off. Despite all the tricks, Illinoisans, including Chicagoans, would still be under the same mountain of debt. 

Reforms, not can kicks, are the solution to the state’s pension woes. If not, expect more and more Illinoisans to cut their share of retirement debt down to zero by leaving.

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

Left-wing website ThinkProgress, which has never been profitable, has been put up for sale by the John Podesta-founded Center for American Progress (CAP), which had been keeping the site afloat. 

According to the Daily Beast, staff were notified on Monday afternoon that the site was for sale after coming under severe financial strains during the Trump administration. 

“Unfortunately, like so many other news outlets that have relied on advertising to fund its work, ThinkProgress has seen a significant drop in revenue in recent years, along with other financial strains. In addition, events over the last few years have underscored the divergent missions of American Progress and ThinkProgress,” said CAP executive director Navin Nayak. 

“For all of these reasons, we announced to the ThinkProgress staff today that we are searching for a new publisher for the news site. This is a tough decision since ThinkProgress has been a part of CAP Action almost since its founding. While ThinkProgress’ financial challenges are unsustainable for an organization like CAP Action, we are hopeful that there are publishers who would be better able to support ThinkProgress’ mission and better positioned to maximize the significant value ThinkProgress has built up.” 

Launched 14 years ago during the height of the Bush administration, ThinkProgress made a name for itself over time as an unapologetically progressive source of news and a launching pad for several major progressive luminaries. But the site, which is editorially independent from CAP, has struggled in recent years as advertising revenues have dried up and traffic has dipped. According to internal documents previously reviewed by The Daily Beast, the site was facing a $3 million gulf between revenues and expenses in 2019, with $350,000 of it made up by a shortfall in ad revenue and nearly $180,000 of it coming from a drop in expected online contributions. –Daily Beast

The site had previously reduced headcount from 40 to 35 to no avail. 

It is unknown how much CAP is asking for ThinkProgress, or whether the site would be shut down if a suitor isn’t found. 

“We will only entertain serious proposals from publishers and organizations who are genuinely interested in investing in ThinkProgress and supporting its mission,” said Nayak. “Our ideal outcome is for ThinkProgress to continue the important work done by its journalists under the auspices of a new entity.” 

 

via ZeroHedge News https://ift.tt/2J4MKbb Tyler Durden

Authored by Irina Slav via OilPrice.com,

The United Arab Emirates have launched the largest single solar power farm in the world, the 1.18-GW Noor Abu Dhabi, Endgadget reports citing a tweet by the Abu Dhabi government.

The world’s largest single solar plant, Noor Abu Dhabi, with a production capacity of nearly 1,177 MW commences commercial operation – a major milestone for the future of #sustainablenergy pic.twitter.com/HHVMyaMXYY

— المكتب الإعلامي لحكومة أبوظبي (@admediaoffice) June 29, 2019

The facility, which dwarfs the largest solar farm in the United States – the 569-MW Solar Star – is only comparable to solar parks, which combine several separate solar farms. It can supply electricity to 90,000 people, according to official information, from as many as 3.2 million solar panels. As a result, it would offset emissions amounting to 1 million metric tons, which is the equivalent of removing 200,000 cars from the road.

True to its reputation as being a large spender on various cutting-edge projects, the UAE is not stopping at Noor Abu Dhabi. Earlier this year, the Abu Dhabi Minister of Climate Change and Environment announced another, bigger, solar project. It would have a capacity of 2 GW, the official said without going into any further detail. The only project that would be bigger than this one, is Saudi Arabia’s 2.6-GW planned facility in Mecca.

While the Middle East is hardly the first location that springs to mind when one thinks about solar power and other renewable energy sources, the region has been changing, slowly but surely. The International Renewable Energy Agency released a report in February saying the members of the Gulf Cooperation Council alone had plans to install as much as 7 GW in renewable power generation capacity by the early 2020s.

An earlier report from IRENA said GCC could save some 354 million barrels of oil equivalent by switching to renewables for domestic consumption by 2030. That would constitute a 23-percent decline in domestic oil and gas consumption with more of the commodities going for exports: Saudi Arabia is pursuing this strategy of reducing domestic consumption of fossil fuels with a view to boosting exports.

Among the members of the GCC, the UAE is by far the best performer: it is home to almost 79 percent of the total installed solar capacity in the group. It even boasts renewable energy projects that do not require subsidies to be competitive.

via ZeroHedge News https://ift.tt/2KS9ugS Tyler Durden

Even as he repeatedly insisted that Deutsche Bank’s US investment-banking business is a critical part of the bank’s identity and its long-term strategy for offering a European alternative to JP Morgan, Christian Sewing probably knew, on some level, that he wouldn’t be able to survive as CEO if he didn’t agree to some serious cutbacks.

For their sake, let’s hope most of the bank’s front-office employees, the traders and salespeople who have powered DB’s troubled US equities and rates-trading businesses, have been able to read the writing on the wall as well. According to a story published by Bloomberg on Monday, it looks like they have. Because the mood inside 60 Wall can best be described as resigned indifference.

As reports of steep job cuts (as many as 20,000 personnel including hundreds of traders) swirl, the scene inside DB’s main office in the US (it also has a large back-office presence in Jacksonville) has devolved into a tableau familiar to those who survived the financial crisis: Empty desks, boxes piled up in corner offices, traders and other more junior employees leaving for long, boozy lunches at 1 pm – and sometimes never returning for the day.

Junior employees spend part of their days sending out resumes – and their bosses either don’t care, or are actively encouraging them. Everybody – even the executives and managers – seems to be waiting for the next shoe to drop in Frankfurt (the German city where DB’s global headquarters is located), according to Bloomberg.

Begin on the 46th floor, overlooking the East River: brown boxes have been stacked in the offices of the senior-most executive in the Americas. More than 40 flights down, on the trading floor, seats sit empty at mid-morning. Computer screens are black. Some who remain are openly hunting for jobs at rival banks. Their bosses know, and don’t mind.

On a recent weekday, an executive spied junior traders enjoying beers at the nearby Full Shilling pub. It was just past 1 p.m. Older traders could be found at Cipriani on Wall Street, where the famous bellini cocktails are served in wood-paneled rooms or on a terrace between stone ionic columns.

So it goes nowadays at Deutsche Bank in New York, where everybody, from the executives down, seems to sense that more bad news is coming from Frankfurt.

Several senior executives from the US business have either already left, or are planning on making their exit soon. These include Peter Selman, the executive who came out of retirement in 2017 to try and turn around DB’s flagging US equities business. One top executive “hasn’t been seen at work in weeks.”

Executives in New York have for more than a year worked under the cloud of whether the US operation would be sold, gutted or spun off.

Typical internal battles over who bore certain expenses took on more weight when every unit was under a microscope. Peter Selman, who came out of retirement in 2017 to revive the equities business, unsuccessfully lobbied Treasurer Dixit Joshi last year to move as much as 300 million euros of costs allocated to his unprofitable unit to the fixed-income business, people briefed on the talks said.

For his part, Sewing has said consistently – and publicly – that he was committed to the U.S. investment bank since taking over as CEO last year. But the new chief has been struggling to restore confidence among investors and regulators amid the bank’s moribund profitability. After a failed attempt to merge with Commerzbank AG that was encouraged by Germany’s own finance minister, shareholders are pushing for a turnaround plan. Many executives aren’t waiting for that.

Selman is now among dozens already on their way out, the people said. Zia Huque, the CEO of Deutsche Bank’s securities division in the U.S., hasn’t been seen at workin weeks. Tom Patrick, the head of the Americas who joined the bank a decade ago and oversees the relationship with the Federal Reserve, seems to be packing up his office, and Deutsche Bank is considering his replacement.

Several senior traders have also decided to call it a day.

Longtime traders like Brad Kurtzman, Craig Bench and Powell Fraser have also left the bank, followed by dozens of second- and third-tier executives – many of whom can’t find jobs elsewhere. Some US managers said that for years they advised cutting some smaller pieces of the trading business to improve profitability. As they exit, they lament that senior executives didn’t heed their counsel and now need the heavy ax.

That’s left Ashley Wilson, the co-head of equities trading in the Americas, as the most senior executive now effectively charged with reorganizing the unit. Though we imagine that terrible responsibility might prompt her to start updating her resume, if she hasn’t already.

In one respect, the situation at DB’s American unit mirrors what’s happening in Puerto Rico two years after Hurricane Maria. At this point, anybody with the means to leave, has already left. And though DB managed to pass the Fed’s stress test this year, that doesn’t change the fact that, now that the Commerzbank merger has fallen apart, Sewing has run out of excuses to try and protect his bank’s unprofitable i-banking franchise.

Now, all that’s left is to see whether the group will be culled, sold, or shut down in its entirety.

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

As one US trade war – that with China – enters a fragile truce, another trade war is about to make a dramatic return.

A little under three months after the US announced in early April that it would seek tariffs on roughly $21 billion of European goods over EU subsidies to Airbus aircraft, and which in turn was followed almost immediately by European threats of $12 billion in retaliatory tariffs on US products such as Ketchup, Orange Juice and Tobacco, moments ago the US trade representative proposed a supplemental list of products that could potentially be subject to additional duties in order to enforce U.S. rights in the WTO dispute against the European subsidies airplane

This supplemental list adds 89 “tariff subheadings” with a trade value of $4 billion to the initial list published on April 12, which had an approximate trade value of $21 billion. USTR is adding to the initial list with the supplemental list in response to public comments and additional analysis.

In the event the Arbitrator issues its decision prior to completion of the public comment process on the supplemental list, the USTR may immediately impose increased duties on the products included in the initial list, and take further possible actions with respect to products on the supplemental list.

The supplemental list, as well as the schedule for a public hearing and written comments, are set out in a notice that will be published shortly in the Federal Register.

And now we wait as Europe counters with its own expanded list of tariffs on US imports, sending the market surging on “hopes of an imminent trade war deal/ceasefire” between the US and Europe.

 

 

via ZeroHedge News https://ift.tt/2XmbT9S Tyler Durden

Authored by Frances Coppola via Forbes.com,

Facebook’s Libra cryptocurrency is generating an immense amount of hype. Some hail it as the beginning of the end of sovereign fiat currencies. Others believe it will draw people into the cryptocurrency world, leading them inexorably to place their faith in the One True Cryptocurrency, Bitcoin. And others worry about the effect on central bank monetary policy and the possibility that a run on Libra could trigger another financial crisis.

I think this is all massively overblown. But there is one aspect that should worry everyone – and almost nobody is talking about.

Firstly, let’s look at the claim that Libra could replace sovereign currencies. This is fundamentally nonsense. Sovereign currencies are the vehicle in which governments accept taxes. Unless foolhardy governments accept Libra as an alternative to their own currencies (believe me, this is not a good idea), people will always need sovereign currency. And no, governments are not about to disappear and taxes come to an end. Dream on, crypto-libertarians.

What about Libra replacing sovereign currencies for day-to-day transactions? Facebook says:

In time, we hope to offer additional services for people and businesses, like paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.

“In time?” Dear oh dear. I can pay bills with a few keystrokes on my smartphone, buy a coffee by scanning a contactless card or QR code on my phone, and touch in and out with a contactless card on London’s Tube. I can transact using contactless cards or a smartphone all over Europe and in many countries outside Europe too. The Americans who wrote the whitepaper really should get out more.

More importantly, these are not the sort of payments that really matter to people. They are “discretionary spending” – what people do with the money they have left over after they have paid taxes, rent and essential bills. Until landlords, utility companies and grocery stores accept Libra, Libra has no chance whatsoever of replacing sovereign currencies.

To be fair, replacing sovereign currencies is not in Facebook’s interests. It is relying on them to maintain Libra’s value. Libra will be pegged to a basket of major sovereign currencies. If there were a run on one or more of those currencies, Libra would become unstable. So the last thing Facebook wants is people to abandon the sovereign currencies that back Libra. Killing off the dollar and the euro is not on its agenda.

Libra won’t pay interest on its tokens, and they won’t be backed by deposit insurance. So it is difficult to see why anyone would want to hold significant quantities of Libra for transaction purposes. And it’s also uninteresting as an investment. Since Libra will be pegged to a basket of currencies and backed 100% by assets denominated in those currencies, investors would effectively be buying shares in an index tracker fund. Like we’ve never seen those before.

Perhaps the idea is that Facebook (and WhatsApp and Instagram) users would hold small quantities of Libra so they can buy the odd coffee or pay for cinema tickets. But buying Libra exposes them to FX risk. If the values of the currencies in the basket changed, so would the value of their Libra in their own currency. Surely it is much better to keep their money in an insured bank deposit account with a contactless card and a mobile payments facility?

Of course, there are people who don’t have access to banks. Facebook’s marketing documentation makes much of the “unbanked:”

For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account and those numbers are worse in developing countries and even worse for women. 

In developed countries, people who don’t have access to banks are typically people with very bad credit histories, people who don’t have permanent addresses, people who don’t have identification (e.g. illegal immigrants), people with criminal records. They are unable to meet banks’ “know your customer” requirements,  which are intended to prevent fraud and money laundering. Some of these people already use pre-paid cards as an alternative to bank accounts. They load the cards with cash at ATMs, then gradually spend the balance down. This is safer and less cumbersome than carrying cash.

In theory, Libra could be an alternative to a pre-paid card. But Facebook says Libra will comply with KYC/AML requirements. If it does, then it can’t be an alternative to cash or pre-paid cards for people who fail KYC checks. If it doesn’t, it will get shut down. Either way, it can’t help the unbanked in developed countries.

However, in developing countries where banks are few and far between, but everyone has a smartphone, Libra could be a safer alternative to cash – though even in developing countries, the need to comply with KYC/AML regulations could rain on Libra’s parade. But since the poor don’t have much in the way of discretionary spending power, and generally aren’t interested in making international payments, Libra would need to be very widely adopted to be of much use to them. In effect it would need to replace the sovereign currency for transactions. M-Pesa has achieved this in Kenya – but not elsewhere. Has Facebook considered that the governments of developing countries might put up barriers to adoption of private sector currencies created by rich white men in Silicon Valley?

Libra would, however, make it much quicker and cheaper to exchange emerging-market currencies for dollars. This is not a bad thing, but unless exchanges are efficient, honest (a rarity in crypto markets) and widely available, people could find their money becoming trapped on the Libra platform. And this brings me to a third problem with Libra.

Libra is what we call a “closed-loop” system. You can only spend it on things available for sale through Facebook and its associated apps. If you want to buy something through another platform, you must convert your Libra back into another currency. If it were Amazon that had created this currency, we might not regard this as a major problem. But Facebook is not (yet) a sales platform on the scale of Amazon. Yes, it promotes ads, and businesses have marketing pages. But it has a long way to go to match Amazon or Alibaba for sheer ubiquity. Although Facebook seems to be hoping that lots of new entrants will use Libra’s scripting language to design smart contracts for goods and services to be sold through its platform, the fact that Facebook is so far behind Amazon and Alibaba as a sales platform seriously diminishes Libra’s usefulness.

Some people seem to think that it is not Alibaba that Facebook is trying to compete with, but WeChat. That’s possibly true, but if so, this is a fundamental mistake. The economic world does not run on people pinging money to each other through chat groups (though WeChat would like to think that it does), it runs on merchants selling goods and services, and people buying what those merchants have to offer.

What about the threat Libra could pose to financial stability, or monetary policy? There is a not insignificant risk that in the event of a run on Libra, it will prove not to have the 100% reserve backing that it claims. If that happened, then people would not be able to recover some or all of their money. But that wouldn’t necessarily mean central banks or governments would have to intervene. Those shouting about risks to financial stability seem to think that Libra would be so huge that central banks would be obliged to bail it out. The Eurodollar market on steroids.

The Eurodollar market’s collapse in 2008 nearly brought down the global financial system. But it was a wholesale financial market made up of giant banks and corporations moving trillions of dollars around. Libra would be a retail market consisting of people and merchants buying goods and services. Even if they are very large, retail markets don’t have the potential to wreck financial stability in the way that wholesale markets do. Regulators should take an interest, of course: financial crises always start in the unregulated sector, and Libra will be in effect a giant shadow bank. But if regulators are concerned about Libra’s effect on financial stability, they already have a solution. Force Facebook to become a regulated bank, subject to capital and liquidity requirements like all other banks. After all, Goldman Sachs had to become a regulated bank in order to gain legitimate access to Fed liquidity. Why should Facebook be different?

The underlying issue here is the unspoken assumption that Facebook is too big to regulate, too big to bail, and too big to fail. Why does everyone think governments will allow Facebook to rule the world?

And this brings me to my real concern about the Libra project. Facebook’s business model since its inception has been to harvest and monetize data. I see no reason to assume that this has changed. So when I find, buried in Libra’s whitepaper, two sentences that imply Facebook’s real aim in creating Libra is to set the standard for global digital identities, my hair stands on end. As Dave Birch, director of Consult Hyperion and an expert on digital identity, puts it:

There are no throwaway remarks in a Facebook white paper that has taken a year to put together. It’s in there for a reason.

[Facebook] are actually going to try and fix the identity problem.

Dave seems fairly sanguine about Facebook’s intention. But I am not. We now know just how damaging Facebook’s data harvesting can be. If Facebook became the standard setter for digital identities, it could gain access to all personal data. And that is what it wants. Not control of finance, control of data. And if you think your personal data would be digitally secure from harvesting simply because Facebook said so, you are the biggest sucker in the world.

From a financial perspective, Libra seems fairly harmless. Even if all 2bn of Facebook’s users adopted Libra for some transactions, and all 90m of its small businesses used Libra for purchases and sales, it is not going to pose a major threat to the financial system, let alone replace sovereign currencies. But Libra is in reality a vehicle for bringing about Facebook’s wider aim of becoming the standard setter for digital identity. And that is a much, much bigger issue. Facebook is the last organization on earth that should have anything to do with digital identity or standards setting. For that reason, Libra must be stopped.

via ZeroHedge News https://ift.tt/2xqt8Ys Tyler Durden