Dollar bulls face perilous start to second half of 2017


Losing streak: The greenback finished the first half of 2017 on a four-month losing streak – the longest such stretch since 2011. – AFP

https://www.bloomberg.com/api/embed/iframe?id=386fc1f7-12e9-49ed-b7d6-f4a868fc9d5c

After the worst start to a year for the greenback since 2006, the end of the first half couldn’t come quick enough for the dwindling ranks of dollar bulls. Yet if history is any guide, it could soon get even worse.

A week that’s certain to get off to a slow start with U.S. markets closed Tuesday will culminate with Friday’s jobs report. The release hasn’t been kind to those wagering on greenback strength. The Bloomberg Dollar Spot Index has slumped in the aftermath of nine of the past ten, despite above consensus reports as recently as February, March and May.

“The dollar has not been responding to positive data surprises, but continues to weaken substantially on negative news,” said Michael Cahill, a strategist at Goldman Sachs. “As long as that persists, the risks are skewed to the downside going into every data release.”

The greenback finished the first half on a four month losing streak — the longest such stretch since 2011 — wiping out its post-election gain. The currency’s 6.6 percent decline in the six months through June were the worst half for the dollar since the back end of 2010. Unraveling optimism around the Trump administration’s ability to boost fiscal growth has outweighed Fed policy or positive data, according to Alvise Marino, a strategist at Credit Suisse.

“What’s happening on the monetary policy front is not as important,” said Marino. “It’s more about the dollar remaining weighed down by the unwinding of financial expectations.”

The sudden hawkish tilt by global central banks hasn’t helped. The dollar weakened more than 2 percent against the euro, pound and Canadian loonie last week as officials signaled a bias toward tightening monetary policy.

Yet there are reasons for optimism, according to JPMorgan Chase analysts led by John Normand, who recommended staying long the greenback in a June 23 note. A cheap valuation relative to global interest rates, the market underpricing the likelihood of another Fed hike this year, and a still positive growth outlook make for a favorable backdrop to motivate dollar longs in an “overstretched” unwind, the analysts wrote.

Hedge funds and other speculators disagree. They turned bearish on the dollar for the first time since May 2016 last week. Wagers the greenback will decline outnumber bets it’ll strengthen by 30,037 contracts, Commodity Futures Trading Commission data released Friday show.

Source: Bloomberg

Related Links

Ringgit is Asia’s strongest currency

 

China and Germany Step Up to Fill U.S. Leadership Void

North Korea Claims Its First Successful Launch of an ICBM 
Related posts:

The government is moving ahead to investigate whether there were
any wrongdoings in the massive foreign exchange losses suffered by Ba…
https://youtu.be/eocI_JZK5_g East Asian Economies Remain Diverse It is useful to reflect on whether lessons have been learnt and i…
Advertisements

Bitcoin is not money, judges rules in victory for backers


 

Ruling means no specific licence needed to buy or to sell crypto-currency

Bitcoin, a Florida judge says, is not real money. Ironically, that could provide a boost to use of the crypto-currency which has remained in the shadows of the financial system.

The July 22 ruling by Miami-Dade Circuit Judge Teresa Pooler means that no specific license is needed to buy and sell bitcoins.

The judge dismissed a case against Michel Espinoza, who had faced money laundering and other criminal charges for attempting to sell $1,500 worth of bitcoins to an undercover agent who told the defendant he was going to use the virtual money to buy stolen credit card numbers.

Espinoza’s lawyer Rene Palomino said the judge acknowledged that it was not illegal to sell one’s property and ruled that this did not constitute running an unauthorized financial service.

“He was selling his own personal bitcoins,” Palomino said. “This decision clears the way for you to do that in the state of the Florida without a money transmitting license.”

In her ruling, Pooler said, “this court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”

She added that “this court is not an expert in economics,” but that bitcoin “has a long way to go before it is the equivalent of money.”

Bitcoin, whose origins remain a mystery, is a virtual currency that is created from computer code and is not backed by any government. Advocates say this makes it an efficient alternative to traditional currencies because it is not subject to the whims of a state that may devalue its money to cut its debt, for example.

Bitcoins can be exchanged for goods and services, provided another party is willing to accept them, but until now they been used mostly for shady transactions or to buy illegal goods and services on the “dark” web.

Bitcoin was launched in 2009 as a bit of software written under the Japanese-sounding name Satoshi Nakamoto. This year Australian programmer Craig Wright claimed to be the author but failed to convince the broader bitcoin community.

In some areas of the United States bitcoin is accepted in stores, restaurants and online transactions, but it is illegal in some countries, notably France and China.

It is gaining ground in countries with high inflation such as Argentina and Venezuela.

But bitcoin values can be volatile. Over the past week its value slumped 20 percent in a day, then recouped most losses, after news that a Hong Kong bitcoin exchange had been hacked with some $65 million missing.

Impact across US, world

Arthur Long, a lawyer specializing in the sector with the New York firm Gibson Dunn, said the July court ruling is a small victory for the virtual currency but that it’s not clear if the interpretation will be the same in other US states or at the federal level.

“It may have an effect as some states are trying to use existing money transmitting statutes to regulate certain transactions in bitcoin,” Long told AFP.

Charles Evans, professor of finance at Barry University, said the ruling “absolutely is going to provide some guidance in other courts” and could potentially be used as a precedent in other countries to avoid the stigma associated with bitcoin use.

Bitcoins can store value and hedge against inflation, without being considered a monetary unit, according to Evans, who testified as an expert witness in the Florida trial.

“It can be used as an exchange,” he said, and may be considered a commodity which can be used for bartering like fish or tobacco, for example.

Evans noted that “those who are not yet in the bitcoin community will be put on notice: as long as they organize their business in a particular way they can avoid the law.”

But he added that “people who are engaged in illegal activities will continue to do what they are going to do because they are criminals.- AFP”

Related posts:

 Bitcoin falls after exchange is hacked, US$72 mil stolen from Bitfinex exchange in HK 

Aug 25, 2015 Tokyo (AFP) – The arrest of MtGox boss Mark Karpeles has begun to shed light
on the defunct Bitcoin exchange after hundreds of millions of …

Jun 27, 2016 Despite the increase in the price of bitcoin amid the UK’s recent EU referendum,
a new research note from Needham & Company asserts it …
Mar 30, 2014 It seemed ludicrous that the man credited with inventing Bitcoin – the world’s most
wildly successful digital currency, with transactions of nearly …

 Apr 14, 2014 The Internet has spawned a new form of currency that’s purely digital called Bitcoin. Picture this — a

Bitcoin falls after exchange is hacked, US$72 mil stolen from Bitfinex exchange in HK


Securing the bitcoin trading platform has proved elusive.

The price of bitcoin fell sharply today exacerbating an already ongoing decline as global market participants reacted to news that one of the largest digital currency exchanges had been hacked. Bitcoin Drops Nearly 20% as Exchange Hack Amplifies Price Decline

The price of the virtual currency bitcoin fell sharply after Hong Kong-based digital-currency exchange Bitfinex said it was hacked, resulting in the possible theft of about $65 million worth of bitcoin.

News of the Bitfinex hack hit the price of bitcoin hard in heavy trading on Tuesday. It fell to $540 by late in the day, down about 12% from its level near $613 early Tuesday, according to CoinDesk. At one point, it traded as low as $480, down about 22%, though it recovered to about $548 by late morning in New York on Wednesday.

The hack marks one of the largest thefts in bitcoin’s short history and follows a separate alleged theft of an estimated $60 million worth of ethereum, a rival virtual currency, in June. In 2014, investor confidence in bitcoin also was dented by another larger cybersecurity breach, at the Japanese exchange Mt. Gox.

Hacking and thefts of investor property stand as two of the biggest issues that may prevent the fast-growing digital currency from gaining more widespread use. Bitcoin trades on an open ledger known as the blockchain that has excited technologists for its ability to cut out expensive layers of bureaucracy in various areas of commerce.

But securing the bitcoin trading platform has proved elusive. Tuesday, Bitfinex acknowledged the latest theft in a statement on its website and said it was halting all trading on Bitfinex as well as the deposits and withdrawals of digital tokens.

“The theft is being reported to—and we are co-operating with—law enforcement,” the statement said. “We are deeply concerned about this issue and we are committing every resource to try to resolve it.”

Zane Tackett, Bitfinex’s director of community and product development, confirmed that 119,756 bitcoins were stolen and said the company knows “exactly how relevant systems were compromised.” At Tuesday’s value, the amount of bitcoin stolen was worth about $65 million. Mr. Tackett said the company is working with law enforcement and analytics companies to try to track down the stolen coins and is working to get its platform back up so customers can check their accounts.

It wasn’t clear what percentage of Bitfinex’s overall assets were stolen or whether or not the company had adequate insurance to cover the theft.

“We are investigating the breach to determine what happened, but we know that some of our users have had their bitcoins stolen,” the statement added. “We are undertaking a review to determine which users have been affected by the breach. While we conduct this initial investigation and secure our environment, bitfinex.com will be taken down and the maintenance page will be left up.”

In 2014, the Tokyo-based exchange Mt. Gox collapsed after a yearslong series of attacks resulted in the theft of about 850,000 bitcoins, at the time worth about $450 million. About 200,000 were later recovered. In June, Mt. Gox Chief Executive Mark Karpales was released from a Japanese prison on bail, after serving 10 months. The company’s liquidation is ongoing.

Bitcoin rallied earlier this year but had been selling off lately after an anticipated event known as a “halving” in early July lowered the subsidy paid to bitcoin miners supporting the network.

In 2015, Bitfinex switched to a system protected by what is known as “multiple signature” security, a feature that requires multiple “keys” to access bitcoin in a virtual wallet, and keeps the customers’ money in separate accounts, rather than pooling them into one larger account.

The exchange was fined $75,000 by the U.S. Commodity Futures Trading Commission in June for offering illegal off-exchange commodity transactions financed in bitcoin and other cryptocurrencies and for failing to register as a futures commission merchant. The CFTC said at the time that Bitfinex cooperated with its investigation and voluntarily made changes to its business practices to comply with regulations.

– The Wall Street Journal BY PAUL VIGNA AND GREGOR STUART HUNTER

Bitcoin worth US$72 mil stolen from Bitfinex exchange in Hong Kong


A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015.
Reuters/Benoit Tessier/File Photo

HONG KONG (Aug 3): Nearly 120,000 units of digital currency bitcoin worth about US$72 million was stolen from the exchange platform Bitfinex in Hong Kong, rattling the global bitcoin community in the second-biggest security breach ever of such an exchange.

Bitfinex is the world’s largest dollar-based exchange for bitcoin, and is known in the digital currency community for having deep liquidity in the US dollar/bitcoin currency pair.

Zane Tackett, Director of Community & Product Development for Bitfinex, told Reuters on Wednesday that 119,756 bitcoin had been stolen from users’ accounts and that the exchange had not yet decided how to address customer losses.

“The bitcoin was stolen from users’ segregated wallets,” he said.

The company said it had reported the theft to law enforcement and was cooperating with top blockchain analytic companies to track the stolen coins.

Last year, Bitfinex announced a tie-up with Palo Alto-based BitGo, which uses multiple-signature security to store user deposits online, allowing for faster withdrawals.

“Our investigation has found no evidence of a breach to any BitGo servers,” BitGo said in a Tweet.

“With users’ funds secured using multi-signature technology in partnership with BitGo, a lot more is at stake for the backbone of the bitcoin industry, with its stalwarts and prided tech under fire,” said Charles Hayter, chief executive and founder of digital currency website CryptoCompare.

The security breach comes two months after Bitfinex was ordered to pay a US$75,000 fine by the US Commodity and Futures Trading Commission in part for offering illegal off-exchange financed commodity transactions in bitcoin and other digital currencies.

BITCOIN SLUMP

Tuesday’s breach triggered a slump in bitcoin prices and was reminiscent of events that led to the 2014 collapse of Tokyo-based exchange Mt Gox, which said it had lost about US$500 million worth of customers’ Bitcoins in a hacking attack.

Bitcoin plunged just over 23% on Tuesday after the news broke. On Wednesday it was up 1% at US$545.20 on the BitStamp platform.

Tackett added that the breach did not “expose any weaknesses in the security of a blockchain”, the technology that generates and processes bitcoin, a web-based “cryptocurrency” that can move across the globe anonymously without the need for a central authority.

A bitcoin expert said the scandal highlighted the risks of companies using cryptography for their ledgers.

“The more you rely on its benefits, the greater the potential for damage when keys are stolen. We still have some way to go to create highly secure but convenient systems,” said Singapore-based Antony Lewis.

The volume of bitcoin stolen amounts to about 0.75% of all bitcoin in circulation.

It is not yet clear whether the theft was an inside job or whether hackers were able to gain access to the system externally. On an online forum, Bitfinex’s Tackett said he was “nearly 100% certain” it was no one in the company.

Bitfinex suspended trading on Tuesday after it discovered the breach. It said on its website that it was investigating and cooperating with the authorities.

The security breach is the latest scandal to hit Hong Kong’s bitcoin market after MyCoin became embroiled in a scam last year that media estimated could have duped investors of up to US$387 million. The bitcoin trading company closed after the scandal.

The president of the Hong Kong Bitcoin Association said the only way to protect information is to disperse it in so many small pieces that the reward for hacking is too small.

“For an attacker, the cost-benefit strategy is quite easy: How much is in the pot and how likely is it that I’m getting the pot?” said Leonhard Weese.

The attack on Bitfinex was reminiscent of a similar breach at Mt. Gox, a
Tokyo-based bitcoin exchange forced to file for bankruptcy in early
2014 after hackers stole an estimated $650 million worth of customer
bitcoins.  – Reuters

Related posts:

Bitcoin CEO arrest leaves long trail of unanswered …

 Aug 25, 2015 Tokyo (AFP) – The arrest of MtGox boss Mark Karpeles has begun to shed light
on the defunct Bitcoin exchange after hundreds of millions of …

 Jun 27, 2016 Despite the increase in the price of bitcoin amid the UK’s recent EU referendum,
a new research note from Needham & Company asserts it …
Mar 30, 2014 It seemed ludicrous that the man credited with inventing Bitcoin – the world’s most
wildly successful digital currency, with transactions of nearly …

Bitcoin: cryptocurrency rising, money talks, mining boom …

 Apr 14, 2014 The Internet has spawned a new form of currency that’s purely digital called
Bitcoin. Picture this — a high speed car chase with a slew of …

The global mahjong winner’s curse


There is grave concern that the world economy is slipping into what Harvard professor and former US Treasury Secretary Larry Summers calls the global secular deflation. In simple terms, growth has slowed without inflation, despite exceptionally stimulative monetary policy. Larry’s view is that the advanced countries can use fiscal policy to stimulate growth, using massive investments in infrastructure. If needs be, this can be financed by central banks.

Central bank financing fiscal deficits is technically called “helicopter money”, named by the late monetarist economist Milton Friedman as the central bank pushing money out of the helicopter. Strict monetarism thinks that this would cause inflation.

The simple reason why the world is moving into secular deflation is that the largest economies are all slowing for a variety of reasons. Unconventional monetary policy applied since the 2007 crisis has brought central bank interest rates to zero or negative terms in economies accounting for 60% of world GDP.

Most economists blame current slow growth to “lack of aggregate demand” or “excess of aggregate production”. The rich countries are mostly aging and already heavily burdened with debt, so they cannot consume more. After the 2007 global financial crisis, the emerging market economies have slowed down, as demand for their exports have slowed. We are in a vicious circle where global trade growth is now slower than GDP growth, because the US economy is no longer the consumption engine of last resort. China, which has been a huge consumer of commodities, has slowed. Japanese growth has been flat due to an aging population. European growth has not recovered, partly because the leading economy, Germany, calls for austerity by its southern partners.

The Brexit shock threatens to weaken global confidence and send growth down another notch.

Former Bank of England Governor Lord Mervyn King famously called the global monetary order a game of sodoku, in which national current accounts in the balance of payments add up to a zero sum game. This is because in the global trade game, one country’s current account deficit is another country’s surplus. In the past, if the US runs larger and larger current account deficits, world growth is stimulated because everyone wants to hold dollars and has been willing to supply the US with all manners of consumer goods. This has been called an “exorbitant privilege” for the dollar.

The present global monetary order or non-order is a result of the 1971 US dollar de-link from gold, which gave rise to a phase of floating exchange rates and rising capital flows, which some people call Bretton Woods II. The old order, set at the Bretton Wood Conference of 1944, centered around a system of global fixed exchange rates, based on the US dollar link with gold price at US$35 to one ounce of gold.

But flexible exchange rates has resulted in a system where everyone seems to be devaluing their way out of trouble. Has the global secular deflation something to do with Bretton Woods II?

My answer must be yes. The reason lies in what I call, instead of sodoku, the mahjong winner’s curse. The Chinese game of mahjong has four players with a limited number of chips. If one player is the persistent winner, he or she ends up with all the chips and the game stops. Since the global game of trade cannot stop, the winner has both an exorbitant privilege (of being funded by the others) and an exorbitant curse (of bearing the loss if the others won’t or refuse to pay). To keep the game going, the winner has to give or lend the chips back to the other players, who play with the hope of winning the next round.

Indeed, if the winner is generous, the game can be made bigger, because the winner can issue more chips (defined as a reserve currency), which the others are more than willing to borrow and play.

The current world situation is that the Winners are the four reserve currency countries, the dollar, euro, yen and sterling, all of which have interest rates near zero or even negative. Until recently, the Winners blame China and the oil producing countries as having too high current account surpluses. But recently, after the huge European cutback in expenditure, Europe as a whole is the world’s largest current account surplus group of nearly 5% of GDP.

Herein lies the winner’s curse. The emerging markets should be able to stimulate global growth, but are unwilling to run larger current account deficits because they cannot get financing. The richer economies can stimulate global growth, but they are unwilling to do so, because they either feel that they already have too much debt or because they worry that stimulus would lead to inflation.

However, reserve currency countries have an advantage. As long as they are willing to run current account deficits, there will be little inflation because the world economy has huge excess capacity and surplus savings. If emerging markets run higher current account deficits, they will have to depreciate, which is exactly what Brazil, South Africa and others have done.

The winner’s curse is that if Europe is now unwilling to reflate and spend, the world will continue to slow. Indeed, in a world of greater geo-political risks, money is fleeing to the US dollar and the yen, causing both to appreciate.

What these capital flows into the reserve currencies when their interest rate is zero and they are unable to reflate imply is that the dollar and yen play the deflationary role of gold in the 1930s. As more and more mahjong players hold gold and don’t spend, the world global trade and growth game slows further. The mahjong winner’s curse requires the winners to stimulate and spend, bearing higher credit risks. That’s the privilege and responsibility of winners in the global game. If not, look out for more global secular deflation.

By Tan Sri Andrew Sheng who writes on global issues from an Asian perspective.

Related posts

Mar 5, 2016 Modern finance and money being managed like a Ponzi scheme! Economic
Collapse soon? Ponzi schemes and modern finance. Andrew …

Dealing with the new abnormal negative interest rate …

 Jun 15, 2016 Modern finance and money being managed like a Ponzi scheme! Economic
Collapse soon? Ponzi schemes and modern finance. Andrew.

Beware when elephants Trump-et! Trump victory a major …

 Mar 19, 2016 In other words, growth accelerates exponentially until the economy reaches
maturity and slows down, and if there is no longer … Modern finance and money
being managed like a Ponzi scheme! Economic Collapse soon?

The alchemy of money

 May 14, 2016 Finance is a derivative of the real economy, which can be leveraged or multiplied
as … value of the underlying asset – which were triggers of the global crash of 2007, … all lending) can only be implemented after the next and coming crisis. …Modern finance and money being managed like a Ponzi scheme !

 

Brexit boosts bitcoin price, Is bitcoin a safe haven?


‘Brexit’ Boosts Bitcoin Price, But Too Early to Call it a Safe Haven

Despite the increase in the price of bitcoin amid the UK’s recent EU referendum, a new research note from Needham & Company asserts it might be too early to call the digital currency a “safe haven” asset.

Global bitcoin prices have risen nearly 6% over the day’s trading to reach a high of $680, a figure up more than $100 from a low of $561.46 on 23rd June. Market observers were quick to assert the increase, which occurred as sentiment in the ‘Brexit’ vote shifted, was a sign this uncertainty had encouraged new investment in the digital currency markets.

However, Needham said its researchers are “hesitant” to call bitcoin a safe haven alongside gold, US Treasurys, yen and USD.

The note reads:

“For one, calling it such obfuscates the fact that bitcoin is a high-risk and volatile investment and, second, bitcoin’s correlation to other traditional safe-haven assets has fluctuated significantly.”

Still, Needham called the ‘Brexit’ a positive for the digital currency market, as it shows that bitcoin has the potential to rally around marcoeconomic uncertainty and on developments within its own technical ecosystem.

“On the one hand, bitcoin is performing like a safe-haven asset but, on the other hand, its newness and dynamism do not resemble US Treasurys or gold,” the note reads.

Ultimately, the note concludes bitcoin might not fit into any existing asset definitions, concluding:

“We believe that bitcoin is something entirely different that does not fit into the normal buckets that investments are typically bracketed into.” – http://www.coindesk.com

Is bitcoin a safe haven against mainstream money mayhem?

We unlock the mystery of the digital currency with a cult following

bitcoin/ n. A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

Eh? No wonder so many people are confused about bitcoin. What you see above is the Oxford Online Dictionary definition of what is probably the most fashionable currency in the world. I realise that’s not saying much: currencies don’t usually have cult followings. But if the euro is the nerd no one wants to be seen with, bitcoin is the coolest kid in the class.

Perhaps part of the attraction of bitcoin for techie types is the very fact that it’s such a mystery to everyone else, accustomed as we are to traditional currencies. That makes the bitcoin club very exclusive.

So what is a ‘digital currency’ anyway? How can any kind of real money exist only in a digital form? Well, the two things that enable it to work are a) the fact that there are a finite number of bitcoins in existence, and b) the clever bit of technology that underpins it: the blockchain.

The blockchain is, in a way, the best thing about bitcoin. Safe to say that whatever may happen to bitcoin in the ephemeral world of digital fads, blockchains have a serious future in the technology of payments and money transmission: central banks are already working on what that future might be. Essentially, a blockchain is a record of digital events: in the case of bitcoin, any change in ownership of any one ‘coin’. This record is impossible to change, so it can’t be edited after it has been confirmed. The only way of altering the blockchain is by adding to it, rather than erasing previous entries. And the record is not stored in just one place, but shared across hundreds or thousands of networked computers, making it harder to hack.

The other interesting thing is that the system is anonymous. Unlike a bank or Paypal, which request all sorts of personal details from you, bitcoin doesn’t care who you are. That makes it popular with people who don’t want their financial activities traced, whether because they are extreme libertarians or because they have something to hide. Many users feel a political affinity with the bitcoin concept of a currency that functions independently of any bank, government or institution full of men in suits. As one user told me: ‘Bitcoin doesn’t have a CEO; it has no ability to care either way about who uses it or why.’

But beyond those who want to hide, is bitcoin flourishing among everyday consumers? Well, it’s certainly a growth market. Plenty of people have given it a shot to see what the fuss is about, but it’s the drug-dealing and cybercrime fraternities that allegedly make up a large proportion of bitcoin turnover.

When, for example, the first Silk Road online market-place (a site which mostly sold drugs on the ‘dark web’, the part of the internet inaccessible through normal search engines) was shut down in 2013 by the FBI, the price of bitcoin saw a short-term crash because so many coins had been seized by the US authorities.

But one aficionado who has lived off bitcoin trading for the last two years told me: ‘It’s very convenient to paint the whole [bitcoin user] group as one homogenous entity. But I’ve met people from all sides of the political spectrum in bitcoin forums on the internet.’

What else is bitcoin good for? Charities are keen to use it, especially when transferring money to, say, Africa, because the transaction costs are much smaller than with services such as Western Union. A number of places and websites also accept bitcoin payment (full list at http://www.wheretospendbitcoins.co.uk), including the Pembury Tavern in Hackney, which was the first British pub to join this new marketplace.

But bitcoin, as with any other currency, is still at the mercy of exchange-rate fluctuations. Even the most dedicated bitcoin users agree on this point: it’s no more reliable than any other currency, and possibly less so. In the past, bitcoin prices against US dollars have fluctuated massively in short spaces of time — and with no central authority in control, its market is vulnerable to manipulation.

The same applies to bitcoin as an investment: will it stand the test of time? One benefit — so it is said — is that once 21 million bitcoins have been released, production will stop, meaning that your virtual cash could hold its value, on grounds of scarcity, more than a traditional currency. But some devotees have already raised the question of removing or raising that cap.

Meanwhile, Wall Street has also been showing more interest in the currency, with a bitcoin index introduced on the New York Stock Exchange last year. It also has been gaining traction in countries with unstable currencies or weak banking systems. If the mainstream financiers who brought the world to its knees in 2008 decide to embrace bitcoin, who knows what will happen to it.

So how about bitcoin as a hedge against the Brexit result, or a safe haven in the current round of financial turmoil? Whichever way the EU vote goes, it looks like sterling is in for a torrid time in the short to medium term, and shares have already gone into a bear market. So if you’re looking for somewhere safer to keep your cash, is bitcoin an option?

It’s certainly a volatile proposition: you might make money if your timing is exactly right but if there’s a sudden panic over bitcoin’s future, the bottom could fall out of this market very quickly indeed. There’s always a risk of cyberattack too, especially given that so many bitcoin users tend to be high-level techies.

It’s also worth bearing in mind that this is the first digital currency to go large — and just look at the fate of other web firsts. Few of the earliest social media networks are still going today; everyone in the digital arena is always looking for the new, new thing.

Bitcoin is an intriguing phenomenon, for sure, but its fate hangs in the balance. Would I risk putting my savings into such a mysterious thing? No, probably not. But a small punt? Well, in an uncertain world, it’s got to be worth a try.

Source: By Camilla Swift The Spectator

Related posts:

Britain steps backward as EU faces decline The UK voted to leave the EU, with the Leave supporters beating Remain by 51.9 perc…

 

PEDOPHILIA is not a new sex crime. What is new is the attention that it is getting in the public arena in Malaysia especially after the cas…

Who created Bitcoin? How? Why? The long search may …

 May 4, 2016 SAN FRANCISCO — Who is Satoshi Nakamoto? For many in the tech world, the
identity of bitcoin’s elusive creator has been a long-running …

 

Bitcoin CEO arrest leaves long trail of unanswered …

 Aug 25, 2015 Tokyo (AFP) – The arrest of MtGox boss Mark Karpeles has begun to shed light
on the defunct Bitcoin exchange after hundreds of millions of …

Mar 30, 2014 A check by Sunday Star shows that in Malaysia, there are at least 12 local Bitcoin
-related groups on Facebook, including Malaybtc Bitcoin, …

 

Dealing with the new abnormal negative interest rate policies with exceptional high debt


Negative rates: ECB president Mario Draghi at the Brussels Economic Forum on Thursday. The ECB and Bank of Japan are already experimenting with negative interest rate policies. – Reuters
HOW can this be normal?

Twenty-nine countries with roughly 60% of the world’s GDP have monetary policy rates of less than 1% per annum. The world is awash with debt, with sovereign, corporate and household debt of over US$230 trillion or roughly three times world GDP.

To finance their large debt and deal with deflation, both the European Central Bank (ECB) and Bank of Japan are already experimenting with negative interest rate policies (NIRP). If these do not work, look out for helicopter money, which means central bank funding of even larger fiscal deficits.

Either way, at near zero interest rates, the business model of banks, insurers and fund managers are broken. Deutschebank’s CEO has recently warned that European bank profits will struggle more as negative interest rates play into deposit rates. No wonder bank shares are trading below book value.

The problem with the current economic analysis is that no one can ascertain whether exceptionally low interest is a symptom or a cause of deep chronic malaise. Exceptionally high debt burden can only be financed by exceptionally low interest rates. The Fed now feels confident enough to raise interest rates, which means that the US asset bubbles will begin to deflate, spelling trouble to those who borrow too much in US dollars, which would include a number of emerging markets.

As Nomura chief economist Richard Koo asserts, the world has followed Japan into a balance sheet recession, with the corporate sector refusing to invest and consumer/savers too worried about outcomes to spend. The solution to a balance sheet (imbalanced) story is to re-write the balance sheet, which most democratic government cannot do without a financial crisis. 

Like Japan, China’s dilemma is an internal debt issue of left hand owing the right hand, since both countries are net lenders to the world. This means that foreigners cannot trigger a crisis by withdrawing funds. The Chinese national balance sheet is also almost unique because the financial system is largely state-owned lending mostly (about two thirds) to state-owned enterprises or local governments. The Chinese household sector is also lowly geared, with most debt in residential mortgages and even these were bought (until recently) with relatively high equity cushions.

Unlike the US federal government which had a net liability of US$11 trillion or 67% of GDP at the end of 2013, the Chinese central government had net assets of US$4 trillion or 42% of GDP. Chinese local governments had net assets of a further US$11 trillion or 123% of GDP, compared to US local government net assets of 45% of GDP. Local governments hold more assets than central or federal government because most state land and buildings belong to provincial or local authorities.

Thus, unlike the US where households own 95% of net assets in the country, Chinese households own roughly half of national net assets, with the corporate sector (at least half of which is state-owned) owning roughly 30% and the state the balance. In total, the Chinese state owns roughly one-third of the net assets within the country, compared to net 4% for the US federal and state governments.

Sceptics would argue that Chinese statistics are overstated, but even if the Chinese state net assets are halved in value (because land valuation is complicated), there would be at least US$7.5 trillion of state net assets (net of liabilities) or 82% of GDP to deal with any contingencies.

Furthermore, unlike the Fed, ECB or Bank of Japan, the People’s Bank of China derives its monetary power mostly from very high levels of statutory reserves on the banking system, which is equivalent to forced savings to finance its foreign exchange reserves of US$3.2 trillion. Thus, the central bank has more room than other central banks to deal with domestic liquidity issues.

What can be done with this high level of state net assets, which is in essence public wealth? My crude estimate is that if the rate of return on such assets can be improved by 1% under professional management, GDP could be increased by at least 1.5 percentage points (1% on 165% of GDP of net state assets).

How can this re-writing of the balance sheet be achieved? There are two possibilities. One is to allow local governments to use their net assets to deleverage their own local government debt and their own state-owned enterprise debt. This could be achieved through professionally managed provincial level asset management/debt restructuring companies.

The second method is inject some of the state net assets into the national and provincial social security funds as a form of returning state assets to the public. People tend to forget that other than the painful restructuring of state-owned enterprises in the late 1990s, which led to the creation of China’s global supply chain, the single largest measure to create Chinese household wealth was the selling of residential property at below market prices to civil servants.

The size of the wealth transfer was never officially calculated, but it paved the way for boosting of domestic consumption by giving many households the beginnings of household security.

The injection of state assets into national and social security funds was not achieved in the 1990s, because the state of provincial social security fund accounting was not ready. But if China wants to boost domestic consumption and improve healthcare and social security, now is the time to use state assets to inject into such funds.

At the end of 2014, Chinese social security fund assets amounted to 4 trillion yuan, compared with central government net assets of 27 trillion yuan (Chinese Academy of Social Science data, 2015). Hence, the injection of state assets (including injection by provincial and local government) into social security funds as a form of stimulus to domestic consumption and more professional management of public wealth is clearly an affordable policy option.

In sum, at the individual borrower level, there is no doubt an ever increasing leverage ratio in China is not sustainable. But the big picture situation is manageable. If the policy objective is to improve overall productivity (and GDP growth) by improving the output of public assets, the timing is now.

By Tan Sri Andrew Sheng who is Distinguished Fellow, Asia Global Institute, University of Hong Kong.

 

Related posts:

 
Mar 5, 2016 Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon? Ponzi schemes and modern finance. Andrew…

Mar 19, 2016 When bull elephants like Trump trumpet their charge, beware of global consequences. By Andrew Sheng Tan Sri Andrew Sheng writes on…

Mar 29, 2016 While the Federal Reserve doesn’t break out hedgefund ownership, a group seen as a proxy increased its holdings to a record $1.27 trillion in…

Apr 16, 2016 That belongs to the realm of politics and education, which is another story. Andrew Sheng writes on global issues from an Asian perspective.

How do we get out of the debt trap without printing more money?


The policy options open to major economies, including China, to reduce debt, before another global crisis hits

ALL of us are worried about growing global debt as a precursor to another round of crises. After the last global financial crisis, 2007-2009, global debt rose to more than US$200 trillion or US$27,000 for each person in the world.

Since 2.8 billion or nearly 40% live on US$2 per day, there is no way that the debt can ever be repaid. The bulk of debt owed by governments, banks and companies will be repaid by creating more debt.

If we are happy to create money, we should be happy to create more debt. Right?

Wrong. The right question is not the size of the debt or liability, but where is the net asset? Individually, we can always repay the debt if we spend less than what we earn, or invested in an asset that generates sufficient income to pay the interest.

Collectively, the government can always borrow to repay, because it can always tax to repay, if not principal, at least on the interest. Countries only get into trouble when they owe foreigners and cannot raise enough foreign exchange to repay their debt.

Charles Goodhart, Emeritus Professor at London School of Economics and one of the foremost thinkers on money and banking has written a series of important articles for Morgan Stanley, analysing the current debt crisis.


Emerging markets

The reason we ended up with more debt than ever is due to three factors since 1970 – the willingness of the financial sector to lend, the increase in global savings relative to investment and the demand for safe assets. Professor Goodhart attributed the structural increase in savings to favourable demographics in the last forty years – particularly as emerging markets like China increased their savings from growth in their labour force that engaged in international trade.

The increase in savings relative to investments created a global savings glut, which meant lower real interest rates.

The willingness of emerging markets to park their excess savings in advanced countries in the form of official reserves and the banks willing to extend credit at lower interest rates created the boom in financialisation. Lower interest rates encouraged speculative activity (funded by debt) rather than investments in long-term productive projects.

When the bust occurred, the advanced central banks wanted to avoid a debt implosion and added to the bubble by lowering interest rates and flooded the markets with short-term liquidity.

The quantitative easing (QE) stopped the widening of the crisis, but its initial success enabled politicians to avoid taking tough action in structural reforms. The result was further slower growth from declining productivity, even as companies and governments continued to borrow, affordable only at near zero interest rates. In short, we are in a debt trap – more debt, little growth.

 

 

Negative interest rates as a policy tool was invented by small countries like Sweden and Switzerland to discourage large capital inflows that created excessive currency appreciation.

But for the eurozone and Japan to try that would actually destroy their banks’ profitability, which is why bank shares dropped after these were introduced. If banks think they will lose money, they will cut back lending to the real sector further, negating the objective of QE to stimulate growth. Banks receiving QE funds faced the double prospect of being punished for taking credit risks and also the need to increase both capital and liquidity due to the tighter bank regulations.

Helicopter money

Helicopter money is not about central bankers jumping out of helicopters to atone for their mistakes, but about central bank financing a massive increase in fiscal expenditure – truly monetary creation on a large scale. If this happens, watch out for a rise in gold prices.

Prof Goodhart has carefully analysed the three options for deleverging or getting out of the debt trap. The first is to deleverge by swapping debt for equity, being tried by China.

This is feasible when the country is a net lender and both borrowers and lenders are state-owned entities. The second option is to use inflation to reduce the real value of debt. As the recent experience showed, getting inflation even up to target was tough to achieve.

The third option is to address collateral by inducing lenders and borrowers to renegotiate their debt or make the debt permanent. This is both painful and difficult and is unlikely to be adopted unless other options are tried.

China’s banking regulator moves to contain off-balance-sheet risk

In my view, the true result of the Bank of Japan’s negative interest rates is a tax on the older generation, because they are the ones not spending.

Japan tried Keynesian fiscal spending, which failed to sustain growth but created a huge debt overhang.

The Japanese older generation and the corporate sector keeps on saving because they are worried about the future, not surprising given an aging population and sluggish demand for exports.

So if you can’t increase the inflation tax, or corporate taxation to reduce the fiscal debt, use negative interest rates to reduce the value of savings of retirees and the corporate sector. Only Japanese savers would not revolt under such inequity.

For countries that have net savings and large public assets, like China, there is a fourth option to get out of the debt trap, and that is to re-write the national balance sheet. Most foreign analysts who worry about China’s debt overhang forget that after three decades of growth, the Chinese state has also accummulated net assets (net of all liabilities) equivalent to 166% of GDP.

That can be injected as equity into the overleveraged enterprises and banks if and only if the governance and return on assets can be improved under better management.

In the short-run, a clean-up of the over-leveraged enterprise sector and local government debt, embedded in the official and shadow banking system, will help sustain long-run stable growth. How to do this technically will be explained in the next article.

By Tan Sri Andrew Sheng who writes on global affairs from an Asian perspective.

Related posts:

Mar 19, 2016 Increasingly, they use quantitative easing (QE) or unconventional monetary policy to try and expand aggregate demand. The trouble is that QE …
Mar 5, 2016 Under globalisation, the smaller reserve-currency countries like the euro zone
and Japan can engage in quantitative easing, because instead…

To fellow US interest rate hike or to cut rates?

  Dec 19, 2015 The European Union and Japan are still engaged in quantitative easing and are keeping rates near zero or in the case of the EU, in negative .

 Jan 24, 2016 … the recovery has been driven by asset market bubbles, blown up by theinjection of cash into the financial market through quantitative
%d bloggers like this: