Aurelia Butler

The writer is the author of ‘The Price of Time: The Real Story of Interest’A great experiment in monetary policy is drawing to a close. Last week, the European Central Bank announced its largest rate hike in two decades, taking its benchmark rate back to just zero per cent. Never before, over the course of some 5,000 years of lending, have interest rates sunk so low. Those who rue the consequences of easy money are quick to blame central bankers. But the problem originates with the strict inflation mandates they are required to follow.In 1990, the Reserve Bank of New Zealand became the first central bank to adopt a formal target. In 1997 a newly independent Bank of England was also given a target, as was the ECB when it opened for business a year later. After the global financial crisis, both the Federal Reserve and Bank of Japan jumped on board. What BOJ governor Haruhiko Kuroda called the “global standard” — an inflation target in the range of 2 per cent — performed several functions: providing central banks with a clearly defined benchmark, anchoring inflation expectations and relieving politicians of responsibility for monetary policy.The trouble is that whenever an institution is guided by a specific target, critical judgment tends to be suspended. As the late political scientist Donald Campbell wrote, “the more any quantitative social indicator is used for social decision-making”, the higher the risk it will distort and corrupt the processes involved. This problem is well known in monetary policymaking circles. In the 1970s Charles Goodhart of the London School of Economics noted that whenever the BoE targeted a specific measure of the money supply, this measure’s earlier relationship to inflation broke down. Goodhart’s Law states that any measure used for control is unreliable.Inflation-targeting runs true to form. Thanks in large measure to globalisation and technological advances, inflationary pressures abated in the 1990s, allowing central bankers to lower interest rates. After the dotcom bust at the turn of the century, fears of deflation induced the Federal Reserve to set its Fed funds rate at a postwar low of 1 per cent. A global credit boom followed. The ensuing bust unleashed even stronger deflationary pressures. The Fed proceeded to cut its policy rate to zero. In Europe and Japan, rates turned negative for the first time in history.Throughout the following decade, central bankers justified their actions by reference to their inflation targets. Yet these targets produced a number of corruptions and distortions. Ultra-low interest rates pushed the US stock market to near record valuations and provided the impetus for the “everything bubble” in a wide variety of assets ranging from cryptocurrencies to vintage cars. Forced to “chase yield”, investors assumed more risk. The fall in long-term rates hurt savings and triggered a massive increase in pension deficits. Easy money kept zombie businesses afloat and swamped Silicon Valley with blind capital. Companies and governments availed themselves of cheap credit to take on more debt.Most economists assume that interest rates simply reflect what’s going on in what they call the “real economy”. But, as Claudio Borio at the Bank for International Settlements argues, the cost of borrowing both reflects and, in turn, influences economic activity. In Borio’s view, the era of ultra-low interest rates pushed the global economy far from equilibrium. As he puts it, low rates begot even lower rates.During the pandemic central bankers were still striving to meet their inflation targets when they lowered interest rates and printed trillions of dollars, much of which was used by their governments to meet the extraordinary costs of lockdowns. Now, inflation is back and central banks are scrambling to regain control without crashing the economy or inducing yet another financial crisis. The fact that policy rates trail far below inflation, on both sides of the Atlantic, suggests that monetary policymakers are no longer blindly following their inflation targets to the exclusion of all other considerations.This is welcome. But elected politicians cannot continue to shirk responsibility. They need to reconsider central banks’ mandates, taking into account the impact of monetary policy not just on near-term inflation, but on asset valuations (especially real estate), leverage, financial stability and investment. The experiment with zero and negative rates has done considerable harm. It must never be repeated. As Mervyn King, the former BoE governor, says: “We have not targeted those things which we ought to have targeted and we have targeted those things which we ought not to have targeted, and there is no health in the economy.” More

KYIV (Reuters) -Ukraine said on Monday it hoped a U.N.-brokered deal aimed at easing global food shortages by resuming grain exports from the Black Sea region would start being implemented this week.Senior government officials told a news conference in Kyiv that they hoped the first grain shipment under the deal would be from the port of Chornomorsk this week, and that shipments could be made from all ports included under the deal within two weeks.Infrastructure Minister Oleksandr Kubrakov said there were no limits on how much grain could be exported under the agreement signed on Friday in Istanbul, which also allows for fertiliser imports and exports.”We believe that over the next 24 hours we will be ready to work to resume exports from our ports. We are talking about the port of Chornomorsk, it will be the first, then there will be Odesa, then the port of Pivdeny,” said deputy infrastructure minister Yuriy Vaskov.Friday’s agreement aims to allow safe passage in and out of Ukrainian ports, blocked by Russia’s Black Sea fleet since Moscow’s Feb. 24 invasion. The deal was hailed as a diplomatic breakthrough that would help curb soaring global food prices by restoring Ukrainian grain shipments to pre-war levels of 5 million tonnes a month.’QUESTION OF SURVIVAL’Kubrakov told the news conference that opening up the Black Sea ports for exports would bring Ukraine at least $1 billion a month.”It is very important that our farmers receive funding this year and have the opportunity to carry out the sowing campaign for the next season, because without this we will lose the entire agricultural cycle and the entire industry,” he said.”It’s a question of the survival of our entire agricultural industry”Ukraine is pressing on with efforts to implement the deal despite a Russian missile strike on Odesa on Saturday. Russia said on Sunday its forces had hit a Ukrainian warship and a weapons store in Odesa with its high-precision missiles.”We all saw perfectly on Saturday that it is not a problem for them to shell the port infrastructure. This is the main risk (to the deal) and we understand that it can scare the market,” Kubrakov said. More

Dubbed the “Oak Fire,” the blaze began Friday and has closed parts of Highway 140 in Mariposa County, about 170 miles (274 kilometers) east of San Francisco. It has also forced the evacuation of residents in nearby areas, according to the California Department of Forestry and Fire Protection, commonly called Cal Fire.As of 9:17 p.m. local time Sunday, the fire was uncontained and had consumed 15,603 acres near the park. It threatened 3,271 structures. At least 10 buildings have been destroyed and five more damaged. So far this year, 4,409 fires have scorched 35,125 acres across California, which is well below the five-year average of 346,325 acres.Meanwhile, just a few miles to the east, fire fighters are still battling the Washburn Fire, which started on July 7. That blaze has charred 4,866 acres and is now 87% contained, according to InciWeb, a US fire tracking website.Read more: Forest Service moves to protect giant sequoias from wildfire©2022 Bloomberg L.P. More

LONDON(Reuters) – Barclays (LON:BARC) has published terms to buy back up to $17.6 billion of securities sold in breach of U.S. regulations, potentially offering investors a premium above face value, to resolve an error that has blighted its CEO’s first year in office.The lender said the so-called rescission offer will commence from Aug. 1 and will be open for a period of 30 U.S. business days.The bank did not immediately disclose how much the exercise would cost in total, instead setting out what the expected terms of the deal might be.The bank will compensate both current holders of the notes and past ones who since sold on the securities, it said, providing a list of the more than 3000 securities affected.Barclays is expected to set aside close to 1 billion pounds ($1.2 billion) in litigation and conduct charges in the second quarter, mainly to cover costs arising from the error, according to a consensus forecast of analyst estimates published by the bank ahead of its earnings statement on Thursday.Analysts expect the costs to be somewhat offset by a hedge placed by Barclays once it first identified the overissuance problem, with Credit Suisse banking analysts pencilling in a 720 million pound gain on this hedge in a note published earlier this month. The lender said on March 28 it had oversold a range of complex structured and exchange-traded notes, overshooting by about 75% a $20.8 billion limit agreed with United States regulators.Purchasers of the notes, considered “unregistered securities” under U.S. law, had the right to demand Barclays buy back the investments at the original price plus interest. Barclays has previously set aside 540 million pounds in provisions towards expected costs of the repurchase offer. Chief Executive C.S. Venkatakrishnan, who served as group chief risk officer during the period of the over-issuance when it began in February 2021, has also commissioned an external investigation to uncover the causes of the breach.In an earlier statement on May 23, Barclays said its ultimate liability would depend on a combination of factors “including but not limited to” market conditions and the number of noteholders taking up that offer.There is also little visibility on the size of fines U.S. and UK regulators may impose, or whether buyers of the cancelled notes bring civil claims against the bank in pursuit of additional compensation on top of the price paid for the securities, the bank has said.Venkat, who took the top job in November, has described the matter as “particularly upsetting”, given the time and money the bank had invested to tighten up risk controls since 2016.($1 = 0.8280 pounds) More

DETROIT (Reuters) – General Motors Co (NYSE:GM) and Ford Motor (NYSE:F) Co are about to replay a script they have played out many times before – trying to convince investors they can get through a recession without skidding into the red.Analysts have been cutting share price targets and profit estimates for the Detroit automakers over the past several weeks, in tandem with downbeat outlooks for the global economy. High energy prices, rising interest rates, inflation, snarled supply chains and stubborn persistence of the COVID virus all bode ill for automaker profits, analysts said.At the same time, some analysts say a recession could be mild, and demand for vehicles could recover more swiftly than in the past. One big difference from past slowdowns is that GM and Ford’s U.S. dealers are not sitting on big inventories of unsold vehicles that would have to be discounted to sell. “We believe the set-up over a multi-year horizon is skewing more positively,” Bank of America (NYSE:BAC) analyst John Murphy wrote in a note, citing lean inventories and pent-up demand from consumers who held off buying as vehicles became scarce and expensive.Both GM and Ford also have healthy balance sheets, certainly compared to the period leading up to the 2008-2009 financial market crisis that pushed GM into bankruptcy.GM, which reports results on Tuesday morning, has stuck to its full-year profit guidance, even after disclosing that it had 95,000 vehicles in stock that it could not ship during the second quarter because of missing parts. GM said earlier this month it expects second quarter net income of $1.6 billion to $1.9 billion, below analysts’ expectations of $2.56 billion, as per Refinitiv data.Ford also kept to its outlook for full-year operating profit of between $11.5 billion and $12.5 billion.However, Ford is still wrestling with high costs for recalls, and heavy investments to develop more electric vehicles. Bloomberg reported last week that Chief Executive Jim Farley could order that as many as 8,000 jobs be cut from the payroll, largely in operations that support combustion vehicles.Ford has not commented on the report. But Farley has said several times in recent months that Ford has too many people and is spending too much on quality problems. More