Economy

LONDON (Reuters) – Euro zone bond yields rose on Wednesday, keeping multi-year highs in sight as inflation data from Germany and Spain kept alive expectations that the European Central Bank may have to hike rates sooner rather than later to curb price pressures.A day after rising above 0% for the first time since 2014, Germany’s two-year bond yield was up six basis points at 0.01% — keeping the previous day’s highs in sight. Across the single currency bloc, benchmark 10-year bond yields too were 5-6 bps higher on the day, as inflation numbers raised rate-hike prospects.Spanish consumer prices rose 9.8% year-on-year in March, their fastest pace since May 1985, while regional data from five states suggested German inflation is likely running above 7% in March.”We have huge numbers for inflation from Spain and parts of Germany, which is not something people would have forecast two or three months ago,” said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel. “It’s hard to forecast things in the short-term and that’s why we have a panic in yields and it’s hard to say where yields are going and when they will stop.”Bond markets across major economies have had their worst sell off in years. Two-year German bond yields are up 53 bps in March and set for this biggest monthly jump since 2008. And while ECB chief Christine Lagarde on Wednesday said food and energy prices in the bloc should stop rising, others pushed the case for higher rates. ECB policymaker Peter Kazimir said the first ECB rate hike could come this year, while it would be possible under the ECB’s forward guidance for it to raise rates in September and December as long as it stops its bond purchases before then, fellow policymaker Robert Holzmann said.Euro zone money markets price in almost 70 basis points of ECB tightening this year.Chris Scicluna, head of research at Daiwa Capital Markets, said the ECB was likely to hike in 25 bps instead of 10 bps increments as it has done in the past.”We don’t see the need to move in smaller increments this time around,” he said, adding: “I think there’s a desire to get at least up to a zero deposit rate.”The ECB’s depo rate is at -0.5%, the ECB last hiked rates in 2011.Germany’s 10-year Bund yield was 5 bps higher on the day at 0.68%, near four-year highs hit on Tuesday.U.S. bond markets were also in focus a day after the closely watched U.S. 2-year/10-year Treasury yield curve briefly inverted for the first time since September 2019 in a sign that recession risks are rising. That spread was last at around 8 bps. More

LONDON/ZURICH/NEW YORK (Reuters) – Yevgeny Chichvarkin, a telecoms tycoon who fled Russia in 2008 and became a high-profile London restaurateur, has long been a vocal supporter of Ukraine.Together with wife Tatiana Fokina, the multimillionaire says he has sent four truckloads of medical and protective equipment to Poland to help Ukrainians since the Russian invasion on Feb. 24. Chichvarkin, a burly man with a waxed moustache, said he drove the first load himself.But the 48-year-old entrepreneur, a long-time critic of Russian President Vladimir Putin, said he has just unexpectedly had one of his Swiss bank accounts frozen. He declined to say by which bank.Chichvarkin is one of a growing number of Russians living abroad who are finding issues accessing their money, even when they are not the direct targets of Western sanctions.Reuters interviews with nine Russians living overseas – as well as their wealth managers, lawyers, tax advisers, real estate and art brokers – suggest that Western sanctions meant to punish Putin’s inner circle are also broadly ensnaring Russian passport holders.Four Russians living overseas with dual citizenship described banks freezing their accounts or payments in London, Zurich and Paris. One wealthy émigré in London said he had switched to cash to make purchases and was keeping a low profile. Two wealth advisors and a lawyer described applications for bank accounts by Russian clients being rejected. Banks said they were taking extra precautions with Russian money. And three brokers said some real estate and art deals had stalled. A Canadian-American lawyer said his Russian clients were afraid to take international trips for fear of being stopped at customs as Western banks cast a wide blanket of suspicion on Russian money – even donations to charities. Dual passports no longer provide escape routes as they once did. “I am dealing with Russians who can’t get out of hotels, students who have no money because credit cards are valueless,” said Bob Amsterdam, a founding partner of Washington- and London-based law firm Amsterdam & Partners. “Banks … are refusing Russians bank accounts: they are closing their doors to Russians on nationality,” said Amsterdam, who is based in London. “Leading law firms in the City have closed their doors to Russians in terms of nationality.” ‘YOU NEED TO BE VERY QUIET’Several lawyers representing wealthy Russians in Europe spoke about a pervasive climate of distrust. One tax and wealth planning expert, who asked not to be named due to a climate that she said penalized association with Russia, said that Russians were being scrutinized regardless of their place of residence or wealth. “Currently, everything that is Russian is toxic, which means that everyone is trying to be extremely, extremely careful in terms of what to do with Russian clients,” said the lawyer, a dual Russian and British citizen, who runs a law firm in Zurich. Journalist Elena Servettaz, a dual citizen who has lived in France since 2005, said French bank Crédit Mutuel rejected a transfer of less than 1,000 euros to her account — money sent to her from London to support Ukrainian refugee aid efforts. When Servettaz called the bank, she was told the transaction had been flagged due to her Russian nationality. Servettaz received the money more than a week later.”It’s so unfair when you are part of the Russian opposition, you’re helping Ukrainian refugees, and they’re saying you’re Russian so you can’t have your money,” Servettaz said. Crédit Mutuel said that European banks were obliged to apply “the greatest prudence” in scrutinising transactions that could be affected by E.U. sanctions, and that additional checks required to ensure compliance could lead to delays, though it was doing its best to limit the effects on customers.A Crédit Mutuel spokesperson said in an emailed statement that the situation relating to Servetta “was quickly resolved once the customer sent us the requested information.” Reuters reported this month that European Union regulators have told some banks to scrutinise transactions by all Russian and Belarusian clients, including EU residents.Some wealth managers in Europe have sought to distance themselves from economic and political fallout. Switzerland’s Julius Baer this month began blocking new business with Russian clients, two sources familiar with the operations said. UBS CEO Ralph Hamers said all Russian passport holders have effectively become semi-sanctioned.Julius Baer said it was not accepting new Russian clients with a Russian domicile but continued to serve existing Russian clients “in compliance with all applicable laws, regulations or sanctions.”Russian writer Grigory Chkhartishvili, who lives in London and whose last name is Georgian, successfully transferred a sum of money through British bank Barclays (LON:BARC) to support his Ukrainian refugee assistance charity, True Russia. But his wife, whose last name is Russian, was blocked by Barclays when attempting to send money to the same charity, he said. The bank requested a face-to-face interview with her. “My sum was ten times bigger, but it was no problem,” Chkhartishvili said. “It shows the atmosphere.”Chkhartishvili said his wife, who declined to be interviewed by Reuters and asked for her name not to be made public, had told him she was able to transfer the money the next day after she called the bank and explained that she was helping Ukrainian refugees. Barclays did not respond to a request for comment.A wealthy Russian oil and banking magnate, who asked not to be identified so he could speak freely about his financial situation, said he felt he had become “collateral damage” from Russia’s invasion – which Moscow calls a “special operation”. Based in London for three decades, he said he still had businesses in Russia and was anxious about greater financial restrictions, despite not being on a sanctions list.”I have some savings,” he said, adding he was considering selling European assets. “You need to live out of cash … You need to be very quiet.”‘RUSSOPHOBIA’ In the basement of one of his newest ventures, The White Horse pub in London’s upmarket Mayfair district, Chichvarkin says he is confident his lawyers will be able to unfreeze his Swiss bank account. It is the only account of his that has been frozen, he said. He believes that is because it is the only one he opened with a Russian passport. At the same time, Chichvarkin believes his and his wife’s opposition to Putin and the war, as well as their vocal support for Ukraine, has helped protect their businesses from anti-Russian hostility by customers and the public, stirred by what Fokina calls “Putin’s war”.Still, their Michelin-starred restaurant Hide – which they own alongside wine boutique Hedonism Wines, where a bottle can cost 124,000 pounds ($163,500) – received a one-star Google (NASDAQ:GOOGL) review about two weeks into the war, Fokina’s assistant said.The rare poor review, among 1,767 others that give the restaurant an average 4.5-star rating, said simply: “Russian owned”. It has since been removed.”You read about people cancelling Tchaikovsky concerts, people vandalising Russian food shops,” said Fokina. “This is London 2022. How did we get here so quickly?” More

The writer is the founder of Smithers & Co, an economics consultancyConventional macroeconomics is mistaken and its errors have profound and adverse consequences for economic policy. Many economists believe that central banks can stabilise economies by altering real interest rates, as the US Federal Reserve did earlier this month when it lifted its benchmark rate by a quarter of a percentage point amid concerns about rising inflation. Interest rates are thought to decide the cost of capital and levels of investment, which then change levels of economic activity. Unfortunately, these ideas suffer from a compelling disadvantage: the data show they are wrong.The conventional view of how economies work was arrived at before we possessed long-term data on the returns from different classes of capital. As the assumptions could not be tested against evidence, consensus theory fell on the wrong side of Karl Popper’s famous demarcation between science and non-science.Today, however, long-term data on returns are available. They exist for short-term interest rates, yields on long-dated bonds and the real return on equities. Accordingly, we can now test the consensus models, something that was previously impossible. If we do, we find that the basic assumptions of those models are wrong.If the returns from debt and equity varied and real interest rates determined the level of investment, consensus theory would be correct. We would only have to worry about keeping intentions to save balanced with those for investment in order to avoid high levels of unemployment or inflation and the woes of stagflation. But investment fluctuates with changes in nominal rather than real interest rates. What is more, the actual relationship between changes in short-term interest rates and share prices shows that the cost of capital varies with short-term interest rates only in the short term. Finally, since we can now calculate the costs of equity and business capital, we know that variations in the cost of capital do not drive investment. Economics started from our understanding of human psychology and its theories worked when applied to the day-to-day activities that constitute microeconomics. Problems arose when the same approach was applied to macroeconomics and finance. Purchases of goods are discouraged when prices rise but are stimulated for shares. In finance, intuitively reasonable ideas have regularly proved to be wrong, including the assumption that financial returns move together. This is a remnant of the “efficient markets hypothesis”, which economists have been reluctant to discard but must now be thrown out.The difference between the short-term and long-term effects of changes in short-term interest rates leads to disturbing consequences. It shows that there are at least two relationships whose stability must be maintained, if we are to prevent excessive levels of inflation or unemployment.One is the balance between savings and investment. The other is the link between actual and equilibrium prices of real assets. The tools of monetary policy currently used to stabilise aggregate demand in the short run may create dangerous imbalances in asset prices and debt ratios, thus destabilising the economy in the long run.We must stop using consensus theory both because it is wrong and because policies based on it regularly generate financial crises. Above all, we need to take seriously the data now available on returns for the different forms of financial capital. Many will wish to ignore this because it is incompatible with consensus theory. But it is vital for our future that such intellectual obscurantism does not prevail. Fundamental assumptions of economic theory must be debated and discarded when shown to be wrong. More

Inflation in Spain hit 9.8% this month and it expected to have run above 7% in the bloc’s largest economy Germany, setting up the euro zone for another record high when bloc-wide data is published on Friday.Lagarde said the inflation outlook was “fluid” as an ongoing war in Ukraine forced economists to constantly revise their economic forecasts.But she expected energy and food prices, which have scaled new highs since Russia’s invasion, to stabilise, albeit at high levels.”We know you will see higher inflation this year, there is no question about that,” Lagarde said. “But we are also seeing some of those factors that fuel inflation today, energy and food, that will stay high. But we don’t forecast them – not predict – to continue to move higher and higher.” She acknowledged the euro zone was facing slower growth and higher inflation but still thought it could avoid “stagflation”, which she defined as “a recession of the economy on a sustainable basis and inflation high and continuing to rise”.The ECB is winding back years of ultra-aggressive stimulus in the face of surprisingly high inflation but it has yet to raise interest rates – unlike many of its peers including the U.S. Federal Reserve and the Bank of England. The euro zone’s central bank said its bond-buying programme, designed to pump cash into the financial system, would end in the summer and would be followed by its first rate hike more than a decade some time after that. More

The German government has taken the first formal step towards gas rationing as it braces itself for a potential halt in deliveries from Russia due to a dispute over payments.Germany is one of the biggest purchases in Europe of Russian pipeline gas but is trying to drastically reduce the imports. Last week, the government in Berlin vowed to all but wean itself off Russia’s gas by mid-2024 and become “virtually independent” of its oil by the end of this year. The US president Joe Biden vowed to help Europe cut its dependence on Russian energy after a summit in Brussels last week by redirecting at least 15bn cubic metres of additional liquefied natural gas to the EU. The decision by Germany to prepare for gas rationing is the latest in a growing dispute that has raised the prospect of Russian gas supplies to Europe halting. Russian officials said yesterday they were not prepared to “supply gas for free” to Europe, a day after G7 countries unanimously rejected President Vladimir Putin’s directive requiring rouble payments.Volker Wieland, a professor of economics at Frankfurt University and a member of the German council of economic advisers, warned that a halt in Russian energy supplies would create a “substantial” risk of a recession and bring Europe’s largest economy “close to double-digit rates of inflation”. Europe’s wholesale gas price rose 8 per cent to €114.45 a megawatt hour today in early trading.More on the war in Ukraine:Peace talks: Russia’s announcement that it would scale back its military activities near Kyiv were met with scepticism by Volodymyr Zelensky and western leaders. Military: For almost three decades Russia’s military has supplied China with missiles, helicopters and advanced fighter jets. Russia’s recent request for military assistance from China suggests the tide is turning. Markets: What explains the calm in global stock markets despite the conflict? There are warnings of systemic risks still to be uncovered.Opinion: Is the west able to keep creditors from picking away at Moscow’s frozen money? Read Alphaville’s guide to seizing Russian assets.

Ukrainians fight back

Thanks to all our readers who participated in yesterday’s poll. Just over half agreed with Gideon that Nato should not directly intervene in the Ukraine war. Here’s the rest of today’s news — Gordon.Five more stories in the news1. US yield curve inverts in possible recession signal The yield on the two-year Treasury note yesterday rose above those of the 10-year US government bonds for the first time since August 2019. Inversions typically signal malaise about the economy’s long-term growth prospects and have preceded every US recession in the past 50 years.2. Ackman to abandon public activist battles Billionaire hedge fund manager Bill Ackman is abandoning his use of aggressive activist campaigns to publicly shame company boards and executives to bring about change and bolster share prices, he said in an annual report to investors.3. More than $600mn in crypto stolen from Ronin Network The programme that allows users to transfer assets in and out of the popular cryptocurrency game Axie Infinity said it had discovered a security breach that resulted in 173,600 ether and 25.5mn USD Coin being removed by unidentified hackers from the system on March 23. It marks one of the largest hacks of the booming digital assets sector.4. Democrats push for Supreme Court ethics code Senior Democratic lawmakers are increasing calls to create a code of ethical conduct for the US Supreme Court amid mounting scrutiny of associate justice Clarence Thomas and his wife, Virginia “Ginni” Thomas.5. Big Four under pressure over Chinese developer audits International auditors are resigning from China’s heavily indebted property developers as delayed financial results increase uncertainty over the full scale of the sector’s worst-ever crisis and raise concerns of hidden debts.The day aheadEconomic data The Commerce Department is scheduled to release the 2021 fourth quarter US gross domestic product data, which is likely to have increased at an annualised rate of 7.1 per cent, compared to an earlier gain of 7 per cent.Monetary policy Federal Reserve Bank of Richmond’s president Thomas Barkin gives opening remarks virtually to the hybrid format Investing in Rural America Conference. Federal Reserve Bank of Kansas City president Esther George speaks virtually on the economic and monetary policy outlook before the Economic Club of New York.Corporate earnings AerCap, the world’s largest airline leasing company, is to report full-year results; the sector was severely affected by the fallout from the Ukraine conflict. BioNTech reports fourth-quarter earnings.What else we’re reading and listening toA new world of currency disorder A global money, one that people rely upon in their cross-border transactions and investment decisions, is a public good. But the providers of that public good are governments of some countries that lack a true rule of law, writes Martin Wolf.‘We’re braced for the impact of Russian cyber attacks’ In the second of our new Tech Exchange series, Kevin Mandia, founder of cyber security company Mandiant, talks to tech correspondent Hannah Murphy. Mandia’s company has spent years tracking cyber campaigns orchestrated by state actors and was recently bought by Google.The Oscars slap masked a more significant event for cinema Apple’s Best Picture award for CODA, a film about the ambitions of the hearing child of deaf parents, stunned Hollywood, writes Los Angeles correspondent Christopher Grimes. It is a moment many in the movie industry had been dreading, he says.El Salvador courts crypto ‘whales’ The appetite of crypto enthusiasts and investors with large digital currency holdings is likely to be crucial to El Salvador’s plans for a $1bn bitcoin-backed bond after institutional investors shunned the fundraising.Should you bring your dog to the office? This week’s edition of the Working It podcast delves into perhaps the most divisive issue in the workplace. Presenter Isabel (a cat person) talks to Lindsay Bumps (a dog person) from ice cream maker Ben & Jerry’s that has allowed pooches at work since the 1970s.PropertySouthern charm, a growing tech scene and low taxes are drawing ‘transplants’ to the American country music capital of Nashville. Among the recent arrivals is ousted WeWork founder Adam Neumann, who has bought a 268-apartment block called Stacks on Main, with a dog park and saltwater pool.

The home of the Grand Ole Opry has been called a ‘supernova city’ that has ‘exploded in popularity’ © Shutterstock/Dee Browning More

The west’s financial warfare against Russia has been dramatic. Commodity markets are chaotic, stoking already uncomfortably high inflation, and global economic growth forecasts have been marked down as a result. Many businesses face big hits from their exits from Russia. Yet many investors and analysts have been surprised at the remarkably modest fallout for the global financial system, and the lack of broader, serious reverberations so far. After initially deepening the global stock market sell-off, the MSCI All-Country World Index has now jumped back above its prewar level, and the Vix volatility index — a proxy for how much fear there is in markets — has slipped below its long-term average, indicating a fall in anxiety. “I’m shocked at how resilient markets have been,” says Robert Michele, the chief investment officer of JPMorgan Asset Management, the US bank’s $3tn investment arm. “I’ve been doing this for over 40 years and I don’t ever remember a time when you’ve had a shock of this magnitude without creating systemic pressure somewhere.”Nonetheless, some experts fear that the crisis could yet produce some nasty surprises, with the financial ramifications still to be fully felt. Moreover, there are many other factors rattling the financial system at the moment: from soaring inflation, rising interest rates, under pressure technology stocks, debt problems in the developing world and the lingering coronavirus — all of which could interact with each other in dangerous and unpredictable ways to create unanticipated problems.

“It’s a little surprising that nothing has happened so far, but it’s early days,” says Richard Berner, the first director of the US Treasury’s Office of Financial Research, set up after the 2008 crisis to monitor the world for systemic risks. “There may still be vulnerabilities lurking that aren’t immediately evident, and we won’t know their nature until shocks expose them. Unfortunately, that’s sometimes how it works.”Indeed, Andrew Bailey, the Bank of England’s governor, highlighted in a speech this week how the nexus of commodity and financial market stresses could cause problems. “We and other central banks . . . are watching these areas very closely and very carefully,” he said. “The bottom line is we can’t take resilience in that part of the market for granted.”‘Premature to declare victory’ Financial markets are what scientists call a complex adaptive system, like our planet’s climate, an ant colony or the human body, where a multitude of independent components can interact in unexpected ways. That can lead to collective behaviour that is hard to predict from observing each factor individually.Complex adaptive systems are inherently hard to understand. They can also be both impressively resilient and cataclysmically fragile, often dynamically adapting to setbacks but occasionally succumbing to a toxic combination of seemingly minor independent failures. The vast 2003 North American energy blackout happened because of overgrown trees touching some power-lines in Ohio, which was then compounded by a software bug and human error. More tragically, the 2014 sinking of the South Korean ferry MV Sewol was caused by too little ballast water, too much cargo and a hard turn, and led to the deaths of 304 people. Despite the west’s financial warfare against Russia, many investors and analysts have been surprised at the modest fallout for the global financial system © Michael Nagle/BloombergThis is why Carmen Reinhart, the World Bank’s chief economist and a leading scholar on financial crises, warns that “contagion works in mysterious ways”. While the financial system has thus far only suffered minor “spillovers” rather than what she terms “fast and furious contagion”, Reinhart remains concerned that the ripple effects from Russia’s invasion of Ukraine could be huge. “Do not underestimate the cumulative toll of spillovers just because they don’t have headline drama,” she says. Two weeks ago Russia dodged a sovereign debt default, unexpectedly handing more than $117mn in interest payments to overseas creditors despite the draconian sanctions imposed on the country. Yet few expect Moscow to remain current on its liabilities for long. The next big test will come on April 4, when a $2bn bond — held both by domestic and international investors — comes due for repayment. Regardless, after May 25 the US sanctions regime tightens further, prohibiting any US entities from receiving or transferring any money to or from the Russian state, making a default much more likely. “Russia’s risk of default and potential for investor losses remains very high given the marked deterioration we have seen in the government’s ability and willingness to meet its debt obligations in recent weeks,” Moody’s, the rating agency, warned in a report last week. Russia’s last default in 1998 hammered many international banks, triggered the collapse of the mammoth hedge fund LTCM and led to a string of debacles that left the global financial system reeling. Might the world be facing a painful sequel? Perhaps, but it is unlikely to be triggered simply by Russia defaulting on its sovereign debt, analysts say. In relative terms the international exposure to Russia today is a fraction of what it was in 1998, when many hedge funds and banks had loaded up on Moscow’s bonds.

“For something to create problems for a complex system, it has to be integrated into it. Russia just isn’t that integrated into the global financial system,” says Richard Bookstaber, a veteran risk management expert who was Salomon Brothers’ chief risk officer back in 1998. “Yes, it’s one more stress to the system, but can it do something like LTCM today? I don’t think so.”Before the Ukraine invasion, foreign investors held roughly $20bn of Russia’s dollar-denominated debt, and rouble-denominated bonds worth $37bn, according to the country’s central bank. Sizeable, but not enough to constitute a major shock even if there is a default. Moreover, for investors trapped in Russian securities, such as BlackRock and Pimco, the damage has already been done. Western sanctions have blasted the country’s financial markets, which means many investors have essentially written off their holdings of Russian debt. No one will therefore be surprised if Moscow’s payments get snarled up by the draconian sanctions regime, even if Russia remains willing to service its debts.“Whatever happens, this is not where the action will be taking place,” says Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management. “This has been priced in already.” Nor do international banks look particularly vulnerable. The IMF’s managing director Kristalina Georgieva has estimated that the overall exposure of foreign lenders to Russia amounts to roughly $120bn, which, while not insignificant, was “not systemically relevant”, she told CBS in March.Michele at JPMorgan Asset Management agrees. “We spent that first weekend going through all the banks and trying to find where the accident would be. We just couldn’t find any, despite looking and looking and looking,” he says. “Because of the global financial crisis, and the regulatory framework that was put in place, banks are loaded with reserves, buffers and capital.”A repeat of the LTCM debacle is also improbable. Some hedge funds are undoubtedly nursing painful hits, but the level of debt and derivatives exposure that LTCM had used to magnify its bets is unheard of these days. The aggregate net leverage of hedge funds was 48 per cent at the start of 2022, and the gross market exposure was about 260 per cent, according to Goldman Sachs data. LTCM’s gross market exposure in 1998 was 25 times larger than its capital. “The degree of leverage is nowhere near where it was at the time of LTCM,” says Bookstaber, co-founder of Fabric, a risk management consultancy. “That’s not to say that there aren’t risks, but I don’t think Russia is enough” for a systemic crisis. Fears over another financial crisis have been a fixture ever since the last one. Every month for over a decade, Bank of America has surveyed investor clients on what they consider the biggest risk confronting markets. It tends to reflect whatever is hitting the headlines at the time, from the eurozone debt crisis to China’s slowing economy, central bank mistakes or US presidential elections, trade wars and pandemics.

Although many of these risks have manifested, it is remarkable how few caused any serious problems. The global stock market has returned 168 per cent since Bank of America’s first survey in July 2011, when worries over the eurozone’s solvency spooked markets. Nonetheless, some fret that a Russian default — if it does happen — could still prove destabilising, even if it is now widely anticipated. “The real pinch is what happens at default time, and that hasn’t kicked in yet. So it’s premature to declare victory,” Reinhart says. “The drama is not over. We went through the first act, but there are many more acts to come.”Risks inside the real economy Stresses in the commodities markets are illustrative of why many remain cautious. Russia may not be systemically important to the financial system, but it is arguably so for the world of natural resources.The prospect of reduced energy and commodity supplies has sent prices of oil, foodstuffs and metals soaring. That has hit big trading companies such as Glencore, Trafigura and Vitol, who help move the physical assets through the world’s terminals and storage facilities and rely on derivatives contracts to hedge themselves against prices moving unfavourably in between the time of purchase and delivery.To protect themselves from default, clearing houses and brokers that act as trading intermediaries have raised the amount of margin, or cash collateral, their customers need to supply to underpin these trades. The more volatility, the more margin traders have to post.Margin is returned to traders when the commodities are delivered, but trading companies have faced immediate demands to find billions of dollars, putting a severe strain on their liquidity. The bond prices of several of the industry’s biggest companies have come under pressure as creditors fear accidents may happen. The European industry’s trade body has even asked central banks for “time-limited emergency liquidity support” to help handle “intolerable cash-liquidity pressure”.This is another reminder that banks are not the only important corner of the financial system, says Berner. “We addressed a lot of the vulnerabilities in the banking sector after 2008, but we failed to deal within the non-bank financial sector, often called ‘shadow banking’,” he says. But the NYU finance professor is sceptical that central banks should ride to the rescue of any struggling commodity trading companies. “Expanding without limit the role of central banks is something we ought to look at very carefully,” Berner adds.There are many ways that tumultuous commodity markets could reverberate in dangerous ways, from triggering food crises that cause political upheaval in the developing world to putting pressure on central clearing houses, utility-like intermediaries for the derivatives trading system that were handed an enhanced role as risk buffers in the wake of the 2008 financial crisis. A bakery in Istanbul, Turkey. The war has now rattled supplies of staple resources such as wheat © Burak Kara/Getty ImagesHowever, the most likely way that Russia could spark a wider conflagration is simply the awkward timing of the crisis and the impact on central banks. Rather than the typical financial channels of a crisis, this contagion operates through the real economy. The price of everything from semiconductors and baby formula to grains and steel had already skyrocketed in the wake of the pandemic, forcing central banks to abruptly shift from trying to stimulate economic growth to fighting inflation. The war has now rattled supplies of staple resources such as potash, neon gas, nickel, maize and wheat from Russia and Ukraine, two of the world’s biggest producers of these commodities, worsening the inflation outlook.

Reinhart points out that the share of advanced economies with inflation rates above 5 per cent or higher has climbed from zero a year ago to almost 60 per cent in February 2022, even before the Russia-Ukraine disruptions filter fully through. That could force central banks to raise interest rates far more aggressively than they would like, to avoid inflation expectations from becoming completely unanchored from central bank targets, she argues. “The pressure that the Ukraine-Russia crisis brings to bear at a time in which inflation was already concerning means that the uphill battle is even more uphill,” Reinhart says. “Relative to the standard of [central bank] accommodation we have seen since 2008, even tweaking is tightening. And we will need to more than tweak monetary policy.”In other words, Russia might turn out to be an inflationary snowball that causes an avalanche of aggressive interest rate rises, and in turn takes the financial system — complacent that monetary policy will remain easy forever — by surprise. Bookstaber is among those unnerved by the possibility. “Systemic risks are rarely something subtle, even if they are under-appreciated. It’s usually the stuff we know about, but ignored,” he says. “Everything we’ve observed in recent history is an easy monetary regime. People betting on that continuing may be in for a nasty surprise.” More

US president Joe Biden needs money. Naturally he is going after the deepest, if most tightly stitched pockets: those of the ultra wealthy. Biden’s $5.8tn government budget proposes a minimum 20 per cent annual tax rate for billionaires on all income, including unrealised gains from asset appreciation. This is a bold and unusual move. Typically, US taxes are levied against cash income: wages and profits crystallised by share or other sales. But times have changed. The decade or so to 2021 was a golden era for wealth creation — and tax avoidance. The S&P 500 was seven times higher at the end of 2021 compared to its March 2009 low. That explosion in stock market wealth led to an effective tax rate of just 8.2 per cent for America’s wealthiest families, according to White House economists. Central bankers helped stir the pot. Monetary stimulus inflated the bubble. Founders, tech entrepreneurs and other plutocrats were off the hook for big capital gains taxes since they could use their shares as collateral — borrowing at near-zero interest rates — rather than selling them.Biden’s budget, which will help finance ramped-up defence spending, is not set in concrete. It faces legislative and constitutional challenges. But its bid to marry up the ultra-wealthy with the fiscal realities of a world wracked by massive sovereign debt is bound to strike a chord. Biden is targeting households with net worth in excess of $100mn. But billionaires would shoulder the bulk of the $360bn to be raised in the next decade. Economist Gabe Zucman estimated that the top 10 billionaires including Elon Musk, Jeff Bezos and Bill Gates would collectively need to stump up $215bn.Critics of wealth taxes fret that they inhibit entrepreneurship and risk-taking. They are tough to implement effectively, as shown by their chequered history in Europe. Those are bad reasons to hold back. Academic research supports the grassroots belief that the ultra-rich are good at minimising tax payments to the societies where they make their money. A US wealth tax would represent a worthwhile work in progress towards a fairer split.The Lex team is interested in hearing more from readers. Please tell us what you think Biden’s proposed wealth tax in the comments section below. More

Your browser does not support playing this file but you can still download the MP3 file to play locally.Russia has decided to “dramatically” scale back its military activities in the Kyiv area, and Barclays faces a £450mn hit after the bank mistakenly issued $15bn-worth more of financial products in the US than it had permission to do so. Plus, the FT’s chief economics commentator, Martin Wolf, explains how the war in Ukraine is further disrupting the global economy. Mentioned in this podcast:Russia says it will ‘dramatically reduce’ military activity around KyivThe VXX plot thickens with Barclays’ £450m structured notes lossPutin’s war demands a concerted global economic responseLimited offer: 50 per cent off a digital subscription to FT.com The FT News Briefing is produced by Fiona Symon and Marc Filippino. The show’s editor is Jess Smith. Additional help by Peter Barber and Gavin Kallmann. The show’s theme song is by Metaphor Music. Topher Forhecz is the FT’s executive producer. The FT’s global head of audio is Cheryl Brumley. Read a transcript of this episode on FT.com See acast.com/privacy for privacy and opt-out information.Transcripts are not currently available for all podcasts, view our accessibility guide. More