iftttwall

Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

“Massive Deterioration” – Worse Than 2008

The Dow is down by almost 9% since the start of the year.

“These developments, if they prove persistent, could weigh on the outlook for economic activity…” proffered a nervous-looking Janet Yellen in her testimony on Capitol Hill. She was signaling to investors.

Smoke signals…

“Don’t worry about us,” she may as well have said. “If we can get away with a big U-turn, we’re not going to raise rates anymore.”

On Tuesday, Maersk Group, the world’s largest container shipping company, said it was suffering a “massive deterioration” in its business.

“It is worse than 2008,” its CEO, Nils Andersen, told the Financial Times. But this is not even near the bottom for the world economy. Hedge fund manager Kyle Bass warns that the other shoe is a big one… and it hasn’t dropped yet.

 

A Maersk container ship…the line is feeling the pinch – the Baltic Dry Index has collapsed to just 291 points (from approx. 11,800 at the 2008 peak) and container shipping rates have declined sharply as well.

 

China’s economy is heavily dependent on capital investment. It puts its money into building factories, highways, offices, apartment blocks, railroads, ports, and airports. What do all these projects require? Rebar!

Concrete is reinforced with steel bars. As the pace of building slows, the price of rebar goes down. In 2008, a ton of rebar cost about 5,500 renminbi ($836). Now, it costs barely 2,000 renminbi ($304) – the lowest price in at least 15 years.

 

Shanghai steel rebar futures, weekly in RMB – click to enlarge.

 

Compared to the size of its economy, China has two to three times the debt the U.S. had in 2008 – a total of $34 trillion, said Bass. As the Chinese economy slows, more steel mills, real estate developers, and manufacturers can’t pay their debts.

Total losses from debt defaults could be four times U.S. losses in the 2008 crisis. And that is just the beginning. Next week, we’ll explain why… and why Trump and Sanders are getting so much of the millennial vote. In the meantime, here’s an essay from the archives…

 

Convenient Beliefs

[Ed. note: Originally published August 2, 2005]

People come to believe whatever they need to believe when they need to believe it. Recent studies of voting patterns confirm the obvious. Zombies vote for higher taxes. Cronies vote for lower taxes. All believe they are voting for matters of principle.

Alan Greenspan believed strongly in gold – until he became a central banker.  Then he believed he could do a better job than gold. Or at least he pretended to.  It was a job requirement.  A priest who didn’t believe in the resurrection would be useless. So would a plumber who didn’t believe in using a wrench.

 

Things Alan Greenspan said before he became master of the fiat mint…

 

$19 Trillion and Counting…

In public life, people generally believe the dominant myth of the system in which they live. We are all democrats in the U.S. We believe in electing our leaders.  But there is no particular reason why this method should be superior to choosing our leaders by lottery or hand-to-hand combat.

Throughout most of history, people believed in other systems.  If we lived in a kingdom, we would probably believe strongly in monarchy. If we had a dictator, we’d probably have his name on our bumpers. And if we lived in a theocracy, we would kneel for prayer at the appointed hour.

 

As libertarian philosopher Stefan Molineux argues, there has always been only one purpose to having rulers, whether they are elected or not: the (tax)-farming of other humans.

 

Are we so much smarter now?  Maybe not.  Circumstances change. Ideas change with them.  The U.S. became an empire without anyone noticing. But now, Americans believe in empire… So much so that they are willing to spend trillions of dollars to maintain it.

The national debt of the U.S. is $19 trillion. At least $5 trillion of that can be traced to the costs of empire.  We have military bases all over the world. We believe we must meet challenges in Iraq, Syria, North Korea – all around the periphery of the empire.

We may just as well leave the poor Iraqis, Syrians, and North Koreans to take care of their own problems… But the thought wouldn’t be compatible with the imperial purple.  An empire acts like an empire.

 

Parasites of the Affluent Class

 And a rich person acts like a rich person. He cannot get richer and richer forever. So he must find ways to get rid of his money. Trees do not grow to the sky. There is no yin without a yang… no day without night… no boom without bust.

Everything regresses to the mean – including the wealth of an individual or a group. Even our own lives regress. No one was ever born who was not destined to die. The mean is the grave – for which we are all bound.

When a man gets a certain amount of money, he takes up the beliefs of a man who needs to spend it. He believes he needs a bigger house. He believes that more expensive wine is better than the cheap stuff. He may even take a course on wine… and bore his friends and neighbors with his sophisticated palette.

 

From “tastes like vinegar past its due date”: beverages designed to liberate the wealthy of some of their loot.

 

He believes a Mercedes-Maybach is superior to a Chevy. He believes he needs a mistress. Or a yacht. Wealth brings duties, as well as advantages. When a man makes some money, he finds himself the subject of attention of what Gloom, Boom & Doom Report publisher Marc Faber calls “the immediate parasites of the affluent class.”

As Faber puts it, these are the “real estate agents, stockbrokers, financial planners, investment bankers, fund managers… economists, derivative traders, salesmen of high-end cars, pleasure boats, and private jets, art dealers, diamond merchants, mistresses, second, third and fourth trophy wives, spoiled children, estate and tax planners, and lawyers.”

Then there are the “secondary parasites.”  Faber again… “They include life coaches, cosmetic surgeons, personal trainers, dog walkers and pet sitters, personal assistants, beauty consultants, massage therapists, and wedding planners.”

 

Too Many Zombies

A rich man’s duty is to believe these people give him some advantage. But all these things come at a price. They are handicaps.  When he is engaged in a quarrelsome divorce, a rich man has less time to devote to his business.

He forgets to study his sales figures when he is at wine school. And much of his fortune could be easily separated from him by clever financial planners. He gives himself these handicaps until he is able to get his wealth down to more reasonable levels – closer to the mean, that is.

If he dies before his work is done – while he still has some change in his pockets – he can be sure that the next generation will finish what he began. In a few years, the family will have average wealth rather than extraordinary wealth.

So, too, does a rich society need to give itself handicaps – so that its wealth and power can come back to a meaner level.  The U.S. surpassed Britain as the world’s leading economy in the 1890s when Queen Victoria was on the throne and Benjamin Harrison was American president.

 

Billy’s offers a theory of government

 

America’s lead gained over the next five decades – greatly aided by two devastating European wars… one of which it helped prolong and make far more disastrous for Europe than it otherwise would have been.

But along with its wealth, America’s handicaps increased. It now spends about as much on its military as the rest of the world combined.  After 9/11, it might have put a few more cops on the case… instead, it launched a “War on Terror” – another costly, distracting handicap.

Over the years, the U.S. has also increased its expensive social welfare programs, and the economic freedom that made its economy the leader of the world has given way to a rigged and heavily regulated economy.

GM – once the largest and most profitable business in the world – now has the handicap of having to spend thousands of dollars in health and retirement costs for every car it builds. Its competitors in China have almost none. Eventually, convenient beliefs become inconvenient. Handicaps take too much time and too much money.

Too many zombies. Too many cronies. Too many pointless wars and futile government spending programs. Too many hobbies. Too many trophy wives. Then the rich man, GM, and the empire – all take up more modest roles and more modest beliefs.

via Zero Hedge http://ift.tt/1TlrZHJ Tyler Durden

EURUSD is down over 120 pips this morning and accelerating as Mario Draghi drops all kinds of tapebombs in his Q&A with his Brussels overlords. Most crucially, slamming EURUSD 70 pips and breaking Wednesday lows, was his admission that while The ECB would “not buy” non-performing Italian bank loans, it would (confirmed by Italy’s Treasury) allow the busted deals as repo collateral (how close to par?) allowing Italian banks to kick the can just a little further.

 

 

Is EURUSD tumbling from this apparent “easing” or from the incredulity of Draghi’s hubris in destroying any semblance of ECB balance sheet strength? Or both?

• *DRAGHI SAYS QE IS FLEXIBLE ENOUGH TO ADAPT TO MARKET CHANGES

In other words, we will buy whatever is falling?

via Zero Hedge http://ift.tt/1QgXNx1 Tyler Durden

Volatility, loss of confidence and central bank impotence stalk the capital markets. Gold pulls back in an expected retrenchment. Equity markets are still digesting what the world looks like. Absence of a strong Chinese domestic economy. A developing economy losing its easy credit. Oil prices adjusting to demand levels indicative of economic activity and, most tragically, the continuing proxy wars fought in the middle east as warmongers continue to slaughter innocent civilians.

 

Monetarily speaking the markets are just not playing to the script. It must be infuriating for the unelected officials at our all-powerful central banks to have to take steps to remind or tell, nay, instruct the markets what is correct and what is not. By enforcing interest rates on the market, the Fed, and by extension every other central bank, has denied the market its internal risk rebalancing mechanism. They have manhandled the markets into short term submission, created unintended bubbles which inconveniently burst and exposed the sheer madness and short-sightedness of the modern Keynesian-based monetary model.

When the markets do not buy the message, central banks summon their proxies to bid up or smack down the markets for debt, equities and commodities. They write the script, provide insiders sight of their plans and coordinate market manipulation to give the script meaning and the impression of their competence and foresight.

In my view these bad actors are not necessarily evil people in the sense that they wish to harm you or I — no, they are far more dangerous than that. They are well-intentioned economic zealots, entrusted with enormous power and an impossible mandate: to deliver stability and growth steadily now and forevermore. This is where the true absurdity at the heart of the matter lies. Economies and markets are naturally cyclical. Blow-offs followed by busts are as sure as day follows night. This cycle is critical as it allows for trial and error, the creation of anti-fragile networks and system resilience — it is the very reason mankind got this far. Unfortunately, it cannot be modelled in a spreadsheet and thus cannot fit in a box. The markets need space to breathe, contract and grow.

Officialdom has sought to smother this natural process and now they will pay a terrible price — the loss of confidence in the monetary system. This will lead to even more desperate measures as governments turn on each other and competitively devalue their currencies in a vain attempt to placate national interests. Sheer madness.

In my view the most misguided central bank is the Federal Reserve. They have set the tone of this coming collapse since the 1990’s when micro rate management came into vogue under Greenspan. Since then bubbles have been pushed from one place to another and re-inflated time and time again. They have treated the market with a degree of contempt that fails to recognise the human cost of their actions.

The Bank of Japan is in a world of its own. They have systematically eroded their monetary system to a degree no one could have imagined — they are now cancelling bond auctions for lack of interest. They have vastly expanded their monetary base in a futile effort to manufacture a fiscal reality that only Mugabe could aspire too.

By far the title for the most malevolent and anti-democratic institution of them all must be reserved for the ECB. Their policies towards peripheral European countries, in the matter of bond holders and bailouts, has been astonishing. (Review our guide on bail-ins today). They are a transnational organisation with little regard to the social principles that the European Union was established on. They are utterly captive by the economic and industrial interest of central Europe and have been the most divisive entity contributing to the erosion of European integration.

via Zero Hedge http://ift.tt/1ogLjJb GoldCore

Volatility, loss of confidence and central bank impotence stalk the capital markets. Gold pulls back in an expected retrenchment. Equity markets are still digesting what the world looks like. Absence of a strong Chinese domestic economy. A developing economy losing its easy credit. Oil prices adjusting to demand levels indicative of economic activity and, most tragically, the continuing proxy wars fought in the middle east as warmongers continue to slaughter innocent civilians.

 

Monetarily speaking the markets are just not playing to the script. It must be infuriating for the unelected officials at our all-powerful central banks to have to take steps to remind or tell, nay, instruct the markets what is correct and what is not. By enforcing interest rates on the market, the Fed, and by extension every other central bank, has denied the market its internal risk rebalancing mechanism. They have manhandled the markets into short term submission, created unintended bubbles which inconveniently burst and exposed the sheer madness and short-sightedness of the modern Keynesian-based monetary model.

When the markets do not buy the message, central banks summon their proxies to bid up or smack down the markets for debt, equities and commodities. They write the script, provide insiders sight of their plans and coordinate market manipulation to give the script meaning and the impression of their competence and foresight.

In my view these bad actors are not necessarily evil people in the sense that they wish to harm you or I — no, they are far more dangerous than that. They are well-intentioned economic zealots, entrusted with enormous power and an impossible mandate: to deliver stability and growth steadily now and forevermore. This is where the true absurdity at the heart of the matter lies. Economies and markets are naturally cyclical. Blow-offs followed by busts are as sure as day follows night. This cycle is critical as it allows for trial and error, the creation of anti-fragile networks and system resilience — it is the very reason mankind got this far. Unfortunately, it cannot be modelled in a spreadsheet and thus cannot fit in a box. The markets need space to breathe, contract and grow.

Officialdom has sought to smother this natural process and now they will pay a terrible price — the loss of confidence in the monetary system. This will lead to even more desperate measures as governments turn on each other and competitively devalue their currencies in a vain attempt to placate national interests. Sheer madness.

In my view the most misguided central bank is the Federal Reserve. They have set the tone of this coming collapse since the 1990’s when micro rate management came into vogue under Greenspan. Since then bubbles have been pushed from one place to another and re-inflated time and time again. They have treated the market with a degree of contempt that fails to recognise the human cost of their actions.

The Bank of Japan is in a world of its own. They have systematically eroded their monetary system to a degree no one could have imagined — they are now cancelling bond auctions for lack of interest. They have vastly expanded their monetary base in a futile effort to manufacture a fiscal reality that only Mugabe could aspire too.

By far the title for the most malevolent and anti-democratic institution of them all must be reserved for the ECB. Their policies towards peripheral European countries, in the matter of bond holders and bailouts, has been astonishing. (Review our guide on bail-ins today). They are a transnational organisation with little regard to the social principles that the European Union was established on. They are utterly captive by the economic and industrial interest of central Europe and have been the most divisive entity contributing to the erosion of European integration.

via Zero Hedge http://ift.tt/1QgXNwZ GoldCore

Moments ago, during his testimony before the European Parliament Mario Draghi made two very bold statements:

• DRAGHI SAYS HALF OF EURO-AREA RECOVERY DUE TO ECB POLICY
• DRAGHI: QE IS WORKING

Well, until recently Draghi could point to the DAX or the Stoxx 600 and make that allegation; however following the recently collapse in European stocks he no longer can. So he is forced to revert to the one chart that actually does show whether the ECB’s QE is boosting the all important lending channel.

The chart below has the answer to a question which translates to “has QE worked“?

Meanwhile, central bankers around the globe keep treating everyone as if they are idiots, and wonder why the market now reacts as if these same central planners have no credibility left.

h/t @insidegame

via Zero Hedge http://ift.tt/1ogLlAH Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Not only is the political slant of the Justices irrelevant, so is the entire Court and the central state it represents.

With the passing of Justice Scalia, the media has embarked on a frenzy of speculation about the political battles that are part and parcel of the President nominating a replacement Supreme Court justice.

While the political chum makes for good copy, the bigger question is rarely (if ever) asked: is the Supreme Court even relevant to the truly significant issues facing the nation?

The conventional view is that the Supreme Court of the United States (SCOTUS) is always relevant, for the obvious reason that it provides the ultimate interpretation of the law of the land.

But this simplistic view overlooks long periods in the nation's history when the Supreme Court was largely irrelevant to the pressing issues of the era. In some periods, the Court rubberstamped a Status Quo in desperate need of profound political reform.

For example, the current court's ruling in Citizens United vs. FEC allows unlimited election spending by individuals and corporations–effectively distorting (or in an unvarnished word, destroying) democracy as a functioning institution.

In other eras, the key issues were not decidable by court cases or jurisprudence.

Consider the current era. the conventional view holds that social rights and prohibitions (the legalization of marijuana, transgender rights, etc.) are the key issues of the day.

Social rights and prohibitions are entirely decided by laws passed and court rulings on the inevitable legal challenges.

But what if the truly key issues of the day are economic and financial? Precisely what leverage does the Supreme Court have over multi-causal, intertwined issues such as rising wealth inequality or rising economic insecurity?

These issues are not decidable by a Supreme Court ruling or by Congress passing another 1,000-page statute. Not only are the causes not resolvable by granting more rights–the issues cannot be resolved with top-down central state decisions.

As for everybody's favorite "fix" to rising inequality, taxing the rich: any tax code can be circumvented by lobbying and campaign contributions by those with sufficient wealth.

The larger question goes unasked because it doesn't have an easy answer: how can the central state (federal government) legislate wealth equality? What section of the Constitution empowers the State to gerrymander equality of wealth and income?

What if rising inequality is a consequence of bottom-up forces such as globalization and automation rather than a top-down issue that can be resolved with a new court ruling? Will the Supreme Court be able to "fix" issues as complex as globalization and automation? How?

By granting the central state the power to prohibit globalization and automation? Given the complexity and nearly infinite variety of these large-scale forces, is this even possible, even if it was supposedly legal?

The Supreme Court, and indeed, the entire top-down edifice of central bank/state power is increasingly irrelevant to the truly fundamental forces defining this era— forces of financialization, resource depletion, debt, globalization, automation and the power-law distribution of rewards for innovations in a knowledge-based economy.

The Court's supposed relevance is simply another illusion of a Status Quo that is itself increasingly irrelevant. Everyone looking for "solutions" from centralized state powers is looking in the wrong place. The state can issue another 100,000 pages of statutes and the Court can hand down a hundred more nuanced interpretations of the law, and nothing of any real importance will change.

Not only is the political slant of the Justices irrelevant, so is the entire Court and the central state it represents. Solutions will be bottom-up and distributed from now on, not centralized and top-down.

The Court is just another media circus of irrelevance, issuing rulings on social issues while the economic foundation of the nation and state are shifting in profound and largely uncontrollable ways.

via Zero Hedge http://ift.tt/1PztHBj Tyler Durden

OPEC rumors, crappy data, and no volume… the perfect recipe for USDJPY-driven hype-fueled stop-running in futures. The Dow just tagged last Wednesday’s highs, and stalled, after running 700 points while hardly taking a breath.

 

 

What happens next? Is there any more stops to run to take us higher?

via Zero Hedge http://ift.tt/1KRtIBS Tyler Durden

Mario Draghi is set to address the European Parliament’s Committee on Monetary and Economic affairs in Brussels on Monday. 

Draghi’s comments will of course be parsed for any hints as to what the ECB will do next month, when Draghi is expected to announce further easing, either in the form of another rate cut or an expansion/extension of PSPP.

The pressure is building on the ECB as eurozone inflation remains stuck in the doldrums and European banks look to be faltering as investors fret over bad loans and bet negative rates will continue to pressure bottom lines. With the Riksbank and the BoJ having just eased further, the ball is now back in Draghi’s court.

Here are the notable points from the speech:

• DRAGHI SAYS ECB WILL NOT HESITATE TO ACT IF NEEDED
• DRAGHI SAYS ECB MONITORING FOR IMPAIRED TRANSMISSION OF POLICY
• DRAGHI: ECB MONITORING FOR SECOND-ROUND EFFECTS OF OIL SLUMP
• DRAGHI: ECB WILL DO ITS PART TO BOLSTER EURO-AREA RESILIENCE
• DRAGHI SAYS EURO AREA IN ‘GOOD POSITION’ TO REDUCE BAD LOANS
• DRAGHI SAYS ECONOMIC HEADWINDS NEED CLOSE MONITORING
• ECB’S DRAGHI SEES INCREASING CONCERN OVER GLOBAL ECONOMY

Below find a link to the live feed and the full text of Draghi’s speech.

Full speech

Ladies and Gentlemen,

The first weeks of this year have shown that the euro area and the Union at large face significant challenges. A strong effort by all policy makers will be needed in the months ahead to overcome them. I am therefore grateful to be back before your committee to discuss these challenges and how the ECB can contribute to tackling them.

In my remarks today, I will address in turn the global economic context, recent financial developments and the state of the euro area recovery. I will conclude by briefly presenting our most recent decision to disclose the Agreement on Net Financial Assets – or ANFA – as I know this topic is of concern to some of you.

Let me start with the state of the global economy. In recent weeks, we have witnessed increasing concerns about the prospects for the global economy. Activity and trade data have been weaker than expected, turbulence in financial markets has intensified and commodity prices have declined further.

Slowing growth in emerging market economies is a focal point for this uncertainty. In the early years of this century, many emerging economies expanded at a rapid pace. They benefited from increasing integration with the global economy and the tailwinds of buoyant financial markets. As these factors diminish, many countries have to adjust to a new reality. In several economies the slowdown has revealed and exacerbated structural problems which are increasingly restraining growth. A continuation of the rebalancing process is needed to secure sustainable growth over the medium term. This could imply some headwinds in the short term, which will require close monitoring of the related risks.

One consequence of this adjustment is the divergence of economic cycles. While the recovery in advanced economies is gradually proceeding, the growth momentum in emerging market economies has weakened.

Weaker global demand has also contributed to the recent fall in the price of oil and other commodities, which in turn may have aggravated fiscal and financial fragilities in some commodity-exporting economies. Countries that have suffered worsening terms of trade have seen a sharp decline in activity, while investment in their energy sectors has contracted.

Since early December, a general deterioration in market sentiment has taken root and has gathered pace over the last week. This initially appeared closely linked to concerns regarding weakening economic activity around the globe – notably in emerging markets – and to potential adverse signals from falling commodity prices. Over time however, market sentiment has become more volatile and susceptible to rapid change. In this environment, stock prices significantly declined and bank equity prices were particularly hit, both globally and in Europe. The sharp fall in bank equity prices reflected the sector’s higher sensitivity to a weaker-than-expected economic outlook; it also reflected fears that some parts of the banking sector were exposed to the higher risks in commodity-producing sectors. The bulk of euro area listed banks, although they have relatively limited exposure to emerging markets and commodity producing countries, are currently trading well below their book values.

The fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growth/lower interest rate environment and to the strengthened international regulatory framework that has been put in place since the crisis. However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better-quality capital buffers, have reduced leverage and improved their funding profiles. Moreover, the Basel Committee on Banking Supervision noted that substantial progress has been made towards finalising post-crisis reforms and that the remaining elements of the regulatory reform agenda for global banks are being finalised. The clarification of these elements will provide regulatory certainty on the stability of the future framework. This will support the banking sector’s ability to make long term sustainable business plans into the future. In fact, central bank governors and heads of supervision indicated that they are committed to not significantly increase overall capital requirements across the banking sector.

In the euro area, the situation in the banking sector now is very different from what it was in 2012. Perhaps most importantly, euro area banks have significantly strengthened their capital positions over the past few years, notably as a consequence of the Comprehensive Assessment conducted in 2014. For significant institutions, the CET1 ratio has increased from around 9 to 13%, making them more resilient to adverse shocks. In addition, the quality of the banks’ capital has also been substantially improved.

With the 2015 Supervisory Review and Evaluation Process (SREP), the ECB has outlined the steady-state Pillar 2 supervisory capital requirements. This means that, all things equal, capital requirements will not be increased further. Hence, the banking sector can now conduct much better capital planning. Moreover, in 2015, the banks under ECB supervision further increased profits relative to 2014. This allows banks to have appropriate distribution policies while still meeting regulatory capital requirements and buffers, and to support lending to the economy. In addition, the ECB’s monetary policy actions continue to support banks’ financing conditions and, more broadly, economic activity.

Clearly, some parts of the banking sector in the euro area still face a number of challenges. These range from uncertainty about litigation and restructuring costs in a number of banks to working through a stock of legacy assets, particularly in the countries most affected by the financial crisis. There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a good position to bring down NPLs in an orderly manner over the next few years. For this purpose, the ECB’s supervisory arm is working closely with the relevant national authorities to ensure that our NPL policies are complemented by the necessary national measures.

Against the background of downward risks emanating from global economic and financial developments, let me now turn to the economic situation in the euro area. The recovery is progressing at a moderate pace, supported mainly by our monetary policy measures and their favourable impact on financial conditions as well as the low price of energy. Investment remains weak, as heightened uncertainties regarding the global economy and broader geopolitical risks are weighing on investor sentiment. Moreover, the construction sector has so far not recovered.

In order to make the euro area more resilient, contributions from all policy areas are needed. The ECB is ready to do its part. As we announced at the end of our last monetary policy meeting in January, the Governing Council will review and possibly reconsider the monetary policy stance in early March. The focus of our deliberations will be twofold. First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices. Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act.

In parallel, other policies should help to put the euro area economy on firmer grounds. It is becoming clearer and clearer that fiscal policies should support the economic recovery through public investment and lower taxation. In addition, the ongoing cyclical recovery should be supported by effective structural policies. In particular, actions to improve the business environment, including the provision of an adequate public infrastructure, are vital to increase productive investment, boost job creations and raise productivity. Compliance with the rules of the Stability and Growth Pact remains essential to maintain confidence in the fiscal framework.

Let me conclude by turning briefly to the recent decision to publish the Agreement of Net Financial Assets, also known as ANFA. This is another step to live up to our commitment to be accountable and transparent, both towards you as Parliament and towards the public at large.

The ANFA is an agreement between the ECB and the euro area National Central Banks – the NCBs. It ensures that monetary policy is unaffected by NCB operations related to their national, non-monetary policy tasks.

The right to perform such tasks dates back to the start of Economic and Monetary Union. At that time, the founding member states decided to centralise only central bank functions and tasks that are necessary to conduct a single monetary policy. All other tasks remained with the NCBs. Such national, non-monetary policy tasks include managing the NCBs’ remaining foreign reserves – including gold – after the transfer of foreign reserves to the ECB, managing some non-monetary policy portfolios including those related to pension funds for their employees, or providing payment services to national governments.

When the NCBs hold portfolios not related to monetary policy as part of their national tasks, these portfolios are financed either by central bank money provided by the NCBs or by non-monetary liabilities. This does not interfere with monetary policy as long as it is limited to less than the amount of banknotes needed by the public. This limit ensures that banks still have to borrow from the Eurosystem at the monetary policy rate set by the Governing Council.

Here is where the ANFA comes in. Its purpose is to limit the size of the NCBs’ non-monetary policy portfolios, net of the related liabilities, and thus to ensure that the Eurosystem can effectively implement the single monetary policy.

Of course, when performing national tasks, the NCBs must comply with the Treaty including the prohibition of monetary financing. Moreover, if these tasks were to interfere with monetary policy in any other way, they can be prohibited, limited or have conditions placed on them by the Governing Council.

The publication of the previously confidential ANFA text was a unanimous decision of the ECB and the NCBs in the Eurosystem to live up to our commitment to be transparent. This publication should resolve misunderstandings about ANFA. In particular, it clarifies that the sole purpose of ANFA is to set limits for non-monetary policy operations related to national tasks of the NCBs, which they are allowed to conduct according to the Treaty. Nothing more and nothing less. These limits ensure that the NCBs’ operations do not interfere with the objectives and tasks of the Eurosystem and, in particular, with the single monetary policy.

Finally, complementing the information on ANFA, the ECB also published data on the Eurosystem’s aggregate net financial assets. The NCBs will follow suit and disclose their respective net financial assets when publishing their annual financial accounts. These data provide factual information to the public as to which part of central bank money demand is provided by non-monetary policy operations.

Thank you for your attention, and I look forward to your questions.

via Zero Hedge http://ift.tt/1VgA2TS Tyler Durden