financial news

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Central Banks Started Buying Gold Again

Gold is like a mini skirt, periodically returns to fashion and again becomes a hit, although numerous economists have written it several times as a “relic of barbarism”, which has neither the purpose nor the future in the modern world of finance. But faced with an uncertain future, central bankers in gold still see a sort of “insurance policy”. The new golden fever is led by Russia and China to reduce US dollar participation in its foreign exchange reserves, while in Italy, which is ranked third in the world’s gold reserves, the current government is trying to formally transfer ownership of gold reserves from the central bank to the government.

Last year, at the global level, the central bank bought 651 tonnes of gold, a record amount in recent years, and the new golden fever is led by Russia and China whose central banks buy gold with full steam while at the same time reducing US dollar participation in their foreign exchange reserves.
In the case of Russia, this is not too surprising as it faces US sanctions, de-dollarization is the official policy, in order to reduce the overall dependence of the Russian economy on the dollar and the international financial system, which is practically under the effective control of the United States.

The trend is changing, because at the end of the nineties, the belief that gold days were counted, and the central bank of Great Britain, Canada and a number of other countries, sold their gold reserves, only to be solved. An extreme example is Canada, which has sold its entire gold reserves over the past ten years, while Britain has reduced its reserves to 310 tons in 2008 from 588 tonnes in 2000, and remained at that level to date.

Russia quadrupled gold reserves

With massive gold buying, Russia began ten years ago, following the global financial crisis of 2008, when Russian gold reserves amounted to a relatively modest 519 tons of gold. At the end of last year, these reserves rose to an impressive 2.113 tonnes. Russia practically quadrupled its gold reserves over the last 10 years, with only 275 tonnes of gold alone last year. In all likelihood, the Central Bank of Russia will continue to accelerate the purchase of gold, while reducing the share of dollars in its foreign exchange reserves.

The situation is similar to China, which in 2008 had 600 tons of gold in foreign exchange reserves so that at the end of last year this amount rose to 1.852 tons. In the case of China, the motives are slightly different than in Russia. China is under the political and economic pressure of the United States, but it is far from sanctions imposed on Russia, and it is unlikely that China will be in such a position, as it would effectively lead to the collapse of the global economy, bearing in mind that most global companies have long moved production in China.

But China has a dollar problem as there are too many of them, as a result of a trade surplus with the United States and the rest of the world. For China, this is a problem because unlimited printing of the dollar, from a million called “quantitative easing,” sooner or later leads to a fall in real value, which is bad news if you have thousands of billions of dollars in exchange for completely tangible products. Long-term Chinese ambitions are that the yuan be accepted as a global currency, in the same ranges as the dollar and the euro, which implies stability and confidence, and regardless of the fact that the golden currency coverage has long been rejected, in the moments of the crisis, gold is still what counts.

Financial Markets: Over the Edge

The atmosphere in the financial markets is exactly the same as it was before Lehman brothers did not fulfill its obligations. I remember being almost lonely in thinking that Liman would sink, and the market and the Federal Reserve sought salvage solutions at the last minute. The choice is now similar. Lehman was then perceived as too “difficult” to rescue; In fact, very few people wanted to help them, and do not forget: Lehman paid a significant premium to finance +100/200 bps in one week of deposit much before 2008, according to his latest analytical text on the occasion current situation in Greece chief economist Sakso Bank Steen Jakobsen (Steen Jakobsen).

Lehman was in charge of 30 / 35x in his final account, and the Greek debt was/is similar. The risk is also similar and comes from a thinking system that always tries to buy a little more time, and it never yields results, says Jakobsen.

The US Federal Reserve Plan for Liman brothers was: buy A more time under A, and plan B was a “stick and carrot”. When it all collapsed, Plan C was a panic and a lack of a plan. Liman had no plans, like Greece, says Jakobsen and adds: “The plan can not have a plan, as we can see now.

Now there are difficulties with non-linear movements in the market, so it remains to be hoped and trusted. But the expert of Sakso Bank points out that the greatest risk is inflated value risk and adds that it will cause unwanted consequences, as it had already happened with Bulgarian and Romanian bonds yesterday, and Puerto Rico is unlikely to pay its arrivals as well as higher euro values.

The market is looking for “good risk protection”, which does not actually exist, says Jakobsen and states that during his career while running a risky business, he realized on a number of occasions that there is not enough good risk protection – but that there is only a situation Do not get in the wrong position.

The inability to reach an agreement at the last minute could cause a drop in the Dax Index by an additional 3-5% and a risk explosion in the new member states of the Eurozone such as Hungary, Croatia, Bulgaria, and Romania. Even Poland could feel the consequences, analysts quoted chief economist Sakso Bank as saying.

Stating that investors might have been a good holiday for some six months now, Jakobsen says the Shanghai market, where it is currently located, looks nervous on the eve of the opening, as indices fell by 22% from this year! In the meantime, as illustrated in this article by the Bloomberg Network, he concludes that Siriza continues to play games, even in a situation where we are on the brink of civil unrest and shortages of fuel, the euro, and food.

Central Banks Under Big Pressure: Is This End of Their Independence

When the times change, the customs also change. In the time that we are witnessing, it is difficult to give up the impression that we are crossing the border of a world we have known so far and embarking on in a new era, with customs and norms whose “contents only come to light and, according to recent experience, shape themselves.” Many things change, so the institutions are at least prone to change. About central banks is also their independence. Still, who would say that this will happen so fast !?

The independence of central banks is a relatively new phenomenon. They struggled for that precious status during the period called “Great Moderation”, during which significant volatility of the economic cycles was significantly reduced, as well as a pronounced fall in global inflation, which, among other things, was due to the adequate monetary policies authorities. This, on the other hand, allowed central banks to focus on price stability as their primary goal. In this way, a policy of targeted inflation was put in the main plan, which further enabled even greater operational autonomy of central banks.

However, as always, there is a dark side of the story: the consequence of this policy is that the monetary authorities generally ignored the formation of large bubbles in stock markets and other financial assets, which further led to the growth of risk and instability in the banking sector. The current crisis, initiated by the fall of Leman, is the most obvious example where the cracking of such bubbles can lead. Although with fewer wanderings, central banks responded quickly to the current crisis, they were forced to abandon the targeted inflation target policy and venture into the unexplored space of unconventional measures, increasing the uncertainty surrounding the exit strategy.

Today, central banks are asked to stimulate economic growth, support the stability of the financial system, and reduce the costs of state funding, and sometimes ensure its solvency, in the context of the crisis and rising demand for energy and raw materials by high-growth countries, which increases the risk of new price increases. As a result, central banks are facing an almost indolent dilemma, which requires a fundamental redefinition of their goals and roles. The independence of these institutions seems to be the first victim to be brought in this new time, because, as it stands out, support for growth in GDP, employment and financial stability requires primarily the decisions of those who, unlike the bankers, have, at least, formal, political legitimacy. This is especially evident in the context of a highly aggressive monetary policy, which will have significant consequences for both countries as a whole and for each individual within them. This, as well as other aspects of the inevitable redefinition of the concept of independence of central banks, was made by former central bank governor Mario Bleher in an excellent text on the prospects for the independence of these institutions.

The Risk of Poverty Pervades Every Fourth Citizen of the EU

Almost 25% of the European Union’s population or 122.6 million people were at risk of poverty or social exclusion in 2013, according to Eurostat data. The risk of poverty is most threatened to the citizens of Bulgaria and Romania, and least to those in the Czech Republic and the Netherlands. At the same time, every tenth citizen of the EU lives in scarcity and does not have enough money to pay bills or extraordinary expenses, no cars, a TV or a telephone. The same percentage lives in households where adult members are mostly unemployed.

The share of the population affected by poverty or social exclusion in the total of 24.5% in 2013 was slightly lower than in 2012 (24.8%) but also higher than in 2008 (23.8%).

In 2013, in five EU Member States, more than a third of citizens were at risk of poverty or social exclusion – Bulgaria (48%), Romania (40.4%), Greece (35.7%), Latvia (35.1% ) and Hungary (33.5%).

The smallest share of citizens who are at risk of poverty or social exclusion in the total population is registered in the Czech Republic (14.6%), the Netherlands (15.9%), Finland (16%) and Sweden (16.4%).

Between 2008 and 2013, only 7 EU Member States registered a decrease in the number of people at risk of poverty or social exclusion – Poland (from 30.5% of the total population to 25.8%), Romania (from 44.25 to 40, 4%), Austria (from 20.6% to 18.8%), Finland (from 17.4% to 16%), Slovakia (from 20.6% to 19.8%), Czech Republic (from 15.3 % to 14.6%) and France (from 18.5% to 18.1%), while in Belgium their share stagnated.

Every tenth is deprived of a lot of things

For 9.6% of the EU population, they are considered to live in a difficult financial situation, which means they barely pay bills, rarely eat meat and can not spend a week off resting. In 2012, in a very difficult financial situation, 9.9% of EU citizens were present, but in 2008 they were less – 8.5%.

The percentage of people in material poverty differs from country to country and goes from 43% in Bulgaria, 28.5% in Romania and 26.8% in Hungary to less than 2% in Sweden (1.4%) and Luxembourg (1, 8%).

Compared to 2008, the share of people suffering severe material deficiencies increased in 15 EU member states, in Slovenia and Sweden it was stable and in nine countries it was reduced.

When it comes to work intensity, in the EU, 10.7% of people aged 59 and over live in households where adults work less than 20% of the time they can work for over a year. The share of these has been growing since 2008.

The largest share of those living in homeless households was Greece (18.2%), Croatia (15.9%), Spain (15.7%), Belgium (14%) and Great Britain 13.2%) and the smallest in Romania (6.4%), Luxembourg (6.6%), the Czech Republic (6.9%), Sweden (7.1%) and Poland (7.2%).

Compared to 2008, the proportion of people living in low-intensity households increased in almost all EU member states, except in Romania, where it fell from 8.3% to 6.4%, Germany (from 11.7% to 9 , 9%), France (from 8.8% to 7.9%), Poland (from 8% to 7.2%) and Czech Republic (from 7.2% to 6.9%).

The European Statistical Service has set the poverty risk threshold or the relative poverty line to 60% of the middle income (50% of the population is 50% less than the average income).

USA: Back on the World’s Leading Positions in Financial World

A small number of people could have expected such a rapid recovery of the United States financial system and the return of its banks to the world’s leading positions. According to information from the New York Stock Exchange, on July 12, 2013, Wells Fargo Bank (estimated market value of $ 236 billion) surpassed, according to the market capitalization criterion, leading the Industrial and Commercial Bank of China (ISBC) to become the world leader. In addition, other financial institutions from the United States, such as Bank of America, Goldman Sachs, AIG and others, record fantastic results. It is particularly interesting that these banks only a few years ago were part of the government’s aid program and received a huge amount of funds (Wells Fargo 25 billion, Bank of America 45 billion, Goldman Sachs 10 billion and AIG 40 billion dollars).

In the past period, the stock indices indubitably spoke in favor of the thesis that the financial crisis in the United States has, in fact, been overcome. The shares of the aforementioned companies made steady growth and reached record levels for a period of five years, that is, from the beginning of the crisis. Given that this is a low base that compares today’s value of shares of these companies, it should be cautious when making conclusions about the final outbreak of the crisis. In addition, it should also be noted that most of these banks have survived because a huge amount of liquid assets has been pumped up through the Trouble Asset Relief Program (TARP) program to enable their smooth functioning. Out of the initial $ 750 billion, as originally planned, a $ 450-billion-dollar program has been put into the financial system through various programs. This move by the government came to the justified disapproval of taxpayers whose money was used to cover the losses of financial institutions incurred as a result of gambling operations in the mortgage and market derivatives.

Financial derivatives or as Voren Buffett calls them “Weapons of Massive Financial Destruction” were a real attraction in the pre-crisis period. One of the main reasons for this is the complete lack of regulation. The debate on the regulation of this market was initiated in 1998 when an independent commission for the control of the derivatives market noticed the first irregularities and wrote a detailed report to Congress. However, the main apologists for the liberal market, the then director of the Fed, Alan Grinspen and the Secretary of the Ministry of Finance, Robert Rubin, managed to lobby Congress in setting a moratorium on the introduction of regulations to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In order to overcome the consequences of the crisis more quickly and painlessly, but also eliminate the possibility of re-emergence, the aforementioned TARP stabilization program had to be accompanied by a new, tougher and better regulation of the financial market. As early as July 21, 2010, President Barack Obama signed a proposal sent by Chris Doda and Barney Frank, thereby giving legal force to the new regulations. The main motive, as it is said, is to provide financial stability through improving the accountability and transparency of the financial system. as well as to break off with “too big to fail” practice. By achieving this objective, taxpayers, and on the other hand, investors and other participants in the financial market, would be protected from the irrational behavior of financial institutions. The new regulation consisted of sixteen points, each of which individually processes a certain financial sector and controls the work of supervisory authorities. Dodd-Frank Akt has come across various criticisms in the process of adoption and entry into force. Interestingly, criticism is often diametrically opposed, from being too strict and impractical to those that are loose and that it does not bring about any major change in the system. In addition, the proposal for the return of the Glas-Stigl Act, introduced in 1933 after the Great Depression, can be heard more and more often, which would completely separate the affairs of commercial and investment banks. The main purpose is to limit commercial banks ‘commercial activities to less risky transactions, making citizens’ deposits more secure. Given that this is the worst recession since the thirties of the last century, such proposals are completely justified because extreme situations require radical systemic and institutional changes.

An extremely important link in the chain that contributed to the collapse of the US financial system was the rating of the agency. This conclusion can only come intuitively, but every dilemma is eliminated by getting acquainted with the procedure for ranking securities. Namely, prior to the ranking of a certain HOV, the financial company issuing a rating refers to the agency with a request for giving it a monetary compensation. Since it is in the interest of the issuer to keep the paper as well as possible because it’s market value will be higher, it can indirectly exert pressure on the rating agency to achieve this. It is very easy to conclude that as a product of this relationship on the basis of the issuer-rating agency, we get a huge number of high-quality securities with low risk and high yield.

That this is an extremely important problem and a significant factor of the emergence of the crisis can be concluded from the views of members of the Financial Crisis Inquiry Commission (FCIC). The unanimous conclusion of the commission is that the rating agency disastrously performed its basic task, timely and accurate informing the investor about the quality of certain HOVs. As the main critic of the commission, the unrealistically high ranking of financial derivatives emitted in 2007 based on mortgage loans, which since the beginning of 2006 showed significant instability. In addition, the entire chapter of the aforementioned regulations (Dod-Frenk Act) deals exclusively with rating agencies. Protecting investors through more stringent and quicker control of their business is one of the pillars on which the prevention of the emergence of a new crisis is based. Within the same point, the Investor Protection Bureau was established to monitor market developments and control the quality of HOVs that are the subject of trading.