FED : The Theory and Practice of Central Banking

The best and only way to deal with a credit bubble is to prevent it from happening. Once they develop, there is no easy, painless way back. 

FED : The Theory and Practice of Central Banking*

a speech by Jim Grant to the New York Federal Reserve

In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body "to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes." By now can we identify the operative phrase? Of course: "for other purposes."

You are lucky, if I may say so, that I'm the one who's standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as the father of the Fed, would skewer you. He had an abhorrence of paper money and government debt. He didn't like Wall Street, either, and I'm going to guess that he wouldn't much care for the Fed raising up stock prices under the theory of the "portfolio balance channel."

It enflamed him that during congressional debate over the Federal Reserve Act, Elihu Root, Republican senator from New York, impugned the anticipated Federal Reserve notes as "fiat" currency. Fiat, indeed! Glass snorted. The nation was on the gold standard. It would remain on the gold standard, Glass had no reason to doubt. The projected notes of the Federal Reserve would—of course—be convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank and—a point to which I will return— by the so-called double liability of the issuing bank's stockholders.

If Glass had the stronger argument, Root had the clearer vision. One can think of the original Federal Reserve note as a kind of derivative. It derived its value chiefly from gold, into which it was lawfully exchangeable. Now that the Federal Reserve note is exchangeable into nothing except small change, it is a derivative without an underlier. Or, at a stretch, one might say it is a derivative that secures its value from the wisdom of Congress and the foresight and judgment of the monetary scholars at the Federal Reserve. Either way, we would seem to be in dangerous, uncharted waters.

As you prepare to mark the Fed's centenary, may I urge you to reflect on just how far you have wandered from the intentions of the founders? The institution they envisioned would operate passively, through the discount window. It would not create credit but rather liquefy the existing stock of credit by turning good-quality commercial bills into cash— temporarily. This it would do according to the demands of the seasons and the cycle. The Fed would respond to the community, not try to anticipate or lead it. It would not override the price mechanism— as today's Fed seems to do at every available opportunity—but yield to it.

My favorite exposition of the sound, original doctrines is a book entitled, "The Theory and Practice of Central Banking," by H. Parker Willis, first secretary of the Federal Reserve Board and Glass's right-hand man in the House of Representatives.

Writing in the mid-1930s, Willis pointed out that the Fed fell into sin almost immediately after it opened for business in 1914. In 1917, after the United States entered the Great War, the Fed set about monetizing the Treasury's debt and suppressing the Treasury's borrowing costs. In the 1920s, after the recovery from the short but ugly depression of 1920-21, the Fed started to implement open-market operations to sterilize gold flows and steer a desired macroeconomic course.

"Central banks," wrote Willis, glaring at the innovators, "...will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of vague 'stabilization' that will, in the long run, be for the greater good."

Willis, who died in 1937, perhaps of a broken heart, would be no happier with you today than Glass would be—or I am. The search for "some sort of vague stabilization" in the 1930s has become a Federal Reserve obsession at the millennium.

Price Stability

"Price stability" is a case in point. It is your mandate, or half of your mandate, I realize, but it does grievous harm, as defined. For reasons you never exactly spell out, you pledge to resist "deflation." You won't put up with it, you keep on saying—something about Japan's lost decade or the Great Depression. But you never say what deflation really is. Let me attempt a definition. Deflation is a derangement of debt, a symptom of which is falling prices. In a credit crisis, when inventories become unfinanceable, merchandise is thrown on the market and prices fall. That's deflation.

What deflation is not is a drop in prices caused by a technology-enhanced decline in the costs of production. That's called progress. Between 1875 and 1896, according to Milton Friedman and Anna Schwartz, the American price level subsided at the average rate of 1.7% a year. And why not? As technology was advancing, costs were tumbling. Long before Joseph Schumpeter coined the phrase "creative destruction," the American economist David A. Wells, writing in 1889, was explaining the consequences of disruptive innovation.

"In the last analysis," Wells proposes, "it will appear that there is no such thing as fixed capital; there is nothing useful that is very old except the precious metals, and life consists in the conversion of forces. The only capital which is of permanent value is immaterial—the experience of generations and the development of science."

Much the same sentiments, and much the same circumstances, apply today, but with a difference. Digital technology and a globalized labor force have brought down production costs. But, the central bankers declare, prices must not fall. On the contrary, they must rise by 2% a year. To engineer this up-creep, the Bernankes, the Kings, the Draghis—and yes, sadly, even the Dudleys—of the world monetize assets and push down interest rates. They do this to conquer deflation.

But note, please, that the suppression of interest rates and the conjuring of liquidity set in motion waves of speculative lending and borrowing. This artificially induced activity serves to lift the prices of a favored class of asset—houses, for instance, or Mitt Romney's portfolio of leveraged companies. And when the central bank-financed bubble bursts, credit contracts, leveraged businesses teeter, inventories are liquidated and prices weaken. In short, a process is set in motion resembling a real deflation, which then calls forth a new bout of monetary intervention. By trying to forestall an imagined deflation, the Federal Reserve comes perilously close to instigating the real thing.

The economist Hyman Minsky laid down the paradox that stability is itself destabilizing. I say that the pledge of a stable funds rate through the fourth quarter of 2014 is hugely destabilizing. Interest rates are prices. They convey information, or ought to. But the only information conveyed in a manipulated yield curve is what the Fed wants. Opportunists don't have to be told twice how to respond. They buy oil or gold or foreign exchange, not incidentally pushing the price of a gallon of gasoline at the pump to $4 and beyond. Another set of opportunists borrow short and lend long in the credit markets. Not especially caring about the risk of inflation over the long run, this speculative cohort will fund mortgages, junk bonds, Treasurys, what-have-you at zero percent in the short run. The opportunists, a.k.a. the 1 percent, will do fine. But what about the uncomprehending others?

I commend to the Federal Reserve Bank of New York Financial History Book Club (if it doesn't exist, please organize it at once) a volume by the British scholar and central banker, Charles Goodhart. Its title is "The New York Money Market and the Finance of Trade, 1900-1913." In the pre-Fed days with which the history deals, the call money rate dove and soared. There was no stability—and a good thing, Goodhart reasons. In a society predisposed to speculate, as America was and is, he writes, unpredictable spikes in borrowing rates kept the players more or less honest. "On the basis of its record," he writes of the Second Federal Reserve District before there was a Federal Reserve, "the financial system as constituted in the years 1900-1913 must be considered successful to an extent rarely equaled in the United States." And that not withstanding the Panic of 1907.

Legislate And Regulate and Intervene

We legislate and regulate and intervene, but still the patient languishes. It's a worldwide failure of the institutions of money and credit. I see in the papers that Banca Monte dei Paschi di Siena is in the toils of a debt crisis. For the first time in over 500 years, the foundation that controls this ancient Italian institution may be forced to sell shares. We've all heard of hundred-year floods. We seem to be in a kind of 500-year debt flood.

Many now call for more regulation—more such institutions as the Treasury's brand-new Office of Financial Research, for instance. In the March 8 Financial Times, the columnist Gillian Tett appealed for more resources for the overwhelmed regulators. Inundated with information, she lamented, they can't keep up with the institutions they are supposed to be safeguarding. To me, the trouble is not that the regulators are ignorant. It's rather that the owners and managers are unaccountable.

Once upon a time—specifically, between the National Banking Act of 1863 and the Banking Act of 1935—the impairment or bankruptcy of a nationally chartered bank triggered a capital call. Not on the taxpayers, but on the stockholders. It was their bank, after all. Individual accountability in banking was the rule in the advanced economies. Hartley Withers, the editor of The Economist in the early 20th century, shook his head at the micromanagement of American banks by the Office of the Comptroller of the Currency—25% of their deposits had to be kept in cash, i.e., gold or money lawfully convertible into gold. The rules held. Yet New York had panics, London had none. Adjured Withers: "Good banking is produced not by good laws but by good bankers."

Well said, Withers! And what makes a good banker is more than skill. It is also the fear of God, or, more specifically, accountability for the solvency of the institution that he or she owns or manages. To stay out of trouble, the general partners of Brown Brothers Harriman, Wall Street's oldest surviving general partnership, need no regulatory pep talk. Each partner is liable for the debts of the firm to the full extent of his or her net worth. My colleague Paul Isaac, who is with me today—he doubles as my food and beverage taster— has an intriguing suggestion for instilling the credit culture more deeply in our semi-socialized banking institutions.

We can't turn limited liability corporations into general partnerships. Nor could we easily reinstate the so-called double liability law on bank stockholders. But what we could and should do, Paul urges, is to claw back that portion of the compensation paid out by a failed bank in excess of 10 times the average wage in manufacturing for the seven full calendar years before the ruined bank hit the wall. Such a clawback would not be subject to averaging or offset one year to the next. And it would be payable in cash.

The idea, Paul explains, is twofold. First, to remove the government from the business of determining what is, or is not, risky—really, the government doesn't know. Second, to increase the personal risk of failure for senior management, but stopping short of the sword of Damocles of unlimited personal liability. If bankers are venal, why not harness that venality in the public interest? For the better part of 100 years, and especially in the past five, we have socialized the risks of high finance. All too often, the bankers who take risks don't themselves bear them. By all means, let the capitalists keep the upside. But let them bear their full share of the downside.

In March 2009, the Financial Times published a letter to the editor concerning the then novel subject of QE. "I can now understand the term 'quantitative easing,' wrote Gerald B. Hill of Stourbridge, West Midlands, "but . . . realize I can no longer understand the meaning of the word 'money.'"

Gold Standard

There isn't time, in these brief remarks, to persuade you of the necessity of a return to the classical gold standard. I would need another 10 minutes, at least. But I anticipate some skepticism. Very well then, consider this fact: On March 27, 1973, not quite 39 years ago, the forerunner to today's G-20 solemnly agreed that the special drawing right, a.k.a. SDR, "will become the principal reserve asset and the role of gold and reserve currencies will be reduced." That was the establishment— i.e., you—talking. If a worldwide accord on the efficacy of the SDR is possible, all things are possible, including a return to the least imperfect international monetary standard that has ever worked.

Notice, I do not say the perfect monetary system or best monetary system ever dreamt up by a theoretical economist. The classical gold standard, 1879-1914, "with all its anomalies and exceptions . . . 'worked.'" The quoted words I draw from a book entitled, "The Rules of the Game: Reform and Evolution in the International Monetary System," by Kenneth W. Dam, a law professor and former provost of the University of Chicago. Dam's was a grudging admiration, a little like that of the New York Fed's own Arthur Bloomfield, whose 1959 monograph, "Monetary Policy under the International Gold Standard," was published by yourselves. No, Bloomfield points out, as does Dam, the classical gold standard was not quite automatic. But it was synchronous, it was self-correcting and it did deliver both national solvency and, over the long run, uncanny price stability. The banks were solvent, too, even the central banks, which, as Bloomfield noted, monetized no government debt.

The visible hallmark of the classical gold standard was, of course, gold—to every currency holder was given the option of exchanging metal for paper, or paper for metal, at a fixed, statutory rate. Exchange rates were fixed, and I mean fixed. "It is quite remarkable," Dam writes, "that from 1879 to 1914, in a period considerably longer than from 1945 to the demise of Bretton Woods in 1971, there were no changes of parities between the United States, Britain, France, Germany—not to speak of a number of smaller European countries." The fruits of this fixedness were many and sweet. Among them, again to quote Dam, "a flow of private foreign investment on a scale the world had never seen, and, relative to other economic aggregates, was never to see again."

Incidentally, the source of my purchased copy of "Rules of the Game" was the library of the Federal Reserve Bank of Atlanta. Apparently, President Lockhart isn't preparing, as I am—as, may I suggest, as you should be—for the coming of classical gold standard, Part II. By way of preparation, I commend to you a new book by my friend Lew Lehrman, "The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies: How We Get from Here to There."

It's a little rich, my extolling gold to an institution that sits on 216 million troy ounces of the stuff. Valued at $42.222 per ounce, the hoard in your basement is worth $9.1 billion. Incidentally, the official price was quoted in SDRs, $35 to the ounce—now there's a quixotic choice for you. In 2008, when your in-house publication, "The Key to the Gold Vault," was published, the market value was $194 billion. Today, the market value is $359 billion, which is encouraging only if you personally happen to be long gold bullion. Otherwise, it strikes me as a pretty severe condemnation of modern central banking.

And what would I do if, following the inauguration of Ron Paul, I were sitting in the chairman's office? I would do what I could to begin the normalization of interest rates. I would invite the Wall Street Journal's Jon Hilsenrath to lunch to let him know that the Fed is now well over its deflation phobia and has put aside its Atlas complex. "It's capitalism for us, Jon," I would say. Next I would call President Dudley. "Bill," I would say, pleasantly, "we're not exactly leading from the front in the regulatory drive to reduce the ratio of assets to equity at the big American financial institutions. Do you have to be leveraged 89:1?" Finally, I would redirect the efforts of the brainiacs at the Federal Reserve Board research division. "Ladies and gentlemen," I would say, "enough with 'Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis.' How much better it would please me if you wrote to the subject, 'Command and Control No More: A Gold Standard for the 21st Century.'" Finally, my pièce de résistance, I would commission, staff and ceremonially open the Fed's first Office of Unintended Consequences.

Let me thank you once more for the honor that your invitation does me. Concerning little Grant's and the big Fed, I will quote in parting the opening sentences of an editorial that appeared in a provincial Irish newspaper in the fateful year 1914. It read: "We give this solemn warning to Kaiser Wilhelm: The Skibbereen Eagle has its eye on you."

*Thanks to John Maudlin, our good friend and sound advisor,  we are glad to give you copy of this presentation

Siberia, Land Of Opportunity

Siberia on its way to create its own Silicon Valley

One of Russia’s leading business monitors, RBC daily, pooled efforts earlier this month with the St. Petersburg Politics Foundation and the Russian Presidential Academy of National Economy in putting together a ranking of Russia’s regional innovation activity for the first two months of this year. The four leaders in this ranking are the Krasnoyarsk, Tomsk and Novosibirsk regions and the Republic of Tatarstan. 

The most current ranking clearly shows the importance of Siberia as a leader in Russia’s development as an innovation economy. Placing the Krasnoyarsk region ahead of Tomsk, last year’s indisputable number one, might be questioned, though, but the overall trend is clear.


Perhaps, psychologically this is because of the independence of much of the people in Siberia. I recall several years back meeting an economist on a flight from Moscow to Novosibirsk, and the economist was a woman my age. She had studied economics in the former Soviet Union in Novosibirsk at the same time that I had studied economics in the United States. And we compared notes.


I was shocked to understand that they were teaching almost exactly the same things in Novosibirsk at that time about realities of market economics and failures of the Soviet Union as I was learning in my own studies at Stetson University in the mid-1980s.


From this example I understood that the people in Siberia were very far away—not only geographically but perhaps also culturally—from Moscow and from Gosplan and other structures of the Soviet Union. And this independence was perhaps relegated to the far-away regions of Siberia during the time of the Soviet Union. With the crash of the USSR and the country’s opening, as the economy has become globally integrated, new technologies have allowed this to only strengthen.


That woman explained to me that the books that they read in Siberia in the 80s were open although they were on black lists in Moscow. In Moscow, the knowledge that they were learning openly in Siberia was not allowed to be taught.


For me it was shocking to see that. Today it’s not shocking to see that Siberia is becoming one of the leaders in Russia because the true innovation economy is a bottom-up driven economy. The regions that have allowed their young innovative entrepreneurs to thrive and to grow, and to develop themselves, are naturally going to become the leaders in any emerging innovation economy in Russia.


Any global economist can demonstrate the importance of top-down macroeconomic strategies on the part of the government to develop very large-scale government priority projects. This is clear and historically obvious; you can see the results in the space race to put the first man in orbit and then on the Moon, for example. These top-down programs significantly accelerated human development. But taken alone top-down economic initiatives and macroeconomic programs are not enough to create an innovation economy. They must be met by bottom-up initiatives of individual people proposing their own ideas, which can solve specific market related problems.


Therefore it seems to me absolutely non-surprising that three top regions in Russia, Krasnoyarsk, Tomsk and Novosibirsk, are all based in Siberia. And I believe they are going to create their own analog of our Silicon Valley, a very strong innovation clusters system. And perhaps what will emerge is a network of open collaboration between these different cities as exists in different parts of the United States, for example. Silicon Valley is a very long geographically spread out place with different base structures, which are interconnected by human capital and infrastructure and government programs and private programs. So I expect that to develop also in Siberia.


These macro top-down investments, including the development of the Alabuga SEZ, have been instrumental in attracting investors, and not only Western manufacturing investors but also financial investors. The emergence of Tatarstan’s Clean Tech Fund has been a very positive development showing Tatarstan as a region to be extremely proactive in attracting financial investments in clean tech and hi-tech industries.


This doesn’t mean that other potentially attractive innovation clusters in Russia, surrounding certain regions of Moscow and St. Petersburg and Nizhny Novgorod and Samara, aren’t also developing rapidly. I think they are, but they may be working ‘below the radar.’ I think what sets apart those regions in Siberia is firstly the very strong independent nature of the local people who are promoting themselves and their regions.

A Territory Flush With Natural Resources

Once a barren land marked only by political tensions, the endless, sparsely populated frontier between China and Russia is now crossed by goods and trade. The explanation is in the numbers: an area accounting for 60% of Russia’s land mass is inhabited by only 8% of the entire population, barely 12 million people. Out past Mongolia, however, the Siberian Far East is a territory flush with natural resources, and a relatively dense Chinese population just across the border. Rich, ambitious, and thirsty for energy, neighboring China is a natural partner for the development of Siberia, an easy conclusion that is gaining traction.  The alternative, linking Siberia to Moscow, has already proven to be too difficult and expensive in the past. The distances are immense, there is little infrastructure, and the costs of setting one up and maintaining it would be unbearable. The Sino-Russian relationship has rekindled, but with economic interests in place of the ideological synergies of the past.

China replaced Germany in 2011 as Russia’s largest trade partner. Russia has now become China’s 10th largest supplier, largely due to the export of raw materials, and Beijing often intervenes directly in the extraction and transfer. A pipeline terminating in the northeastern Chinese city of Harbin, 3,700 km from its origin in Russia, is now being complemented by the East Siberia Pacific Ocean (Espo) duct that, despite not yet being completed, already carries 600,000 barrels of crude to Russia’s pacific ports each day. Other projects are underway, ranging from hydroelectric energy transmission, to natural gas transportation and extraction of gold, silver, copper, and molybdenum from Siberian mines. The political framework supporting these initiatives is the “2009-2018 Cooperation program,” signed by Presidents Hu Jintao and Dmitri Medvedev, an agreement that envisions the realization of 205 projects in the border regions.

The new relationship is already changing Siberia’s landscape. The population is on the rise again, after a dramatic 22% drop following the collapse of the Soviet Union in 1990. Old mines, dating back to the Stalinist era, have been reopened and are now back in operation. Former Soviet engineers and technicians, who migrated to more prosperous regions after the collapse, are returning to their hometowns to take advantage of the current boom. Pressure is also being felt from the neighbors to the south. The new opportunities are a magnet for Chinese workers and entrepreneurs, attracted by the untouched resource-rich lands to the north. The Heilongjiang River (River Amur in Russian), where the two countries fought a war in 1969, is now bridged by the exchange of goods, capital, and ideas.

About half a million Chinese live in Russian Siberia, along with the tensions that are often felt following the opening of borders that have traditionally kept two countries separate.  Beijing and Moscow nevertheless see an opportunity for reciprocal benefit in this situation. Russia gains in development and demographics, and China is able to relieve some of its internal stress caused by overpopulation. Siberia attracts old Russians and new Chinese with the promise of a rich new land that would otherwise be nothing more than a windswept desert.

Offshore Wealth Adapting to New Complexities

The family office concept, once almost exclusively available to the wealthy families in Europe and the United States, is quickly migrating to new pockets of wealth in places like Brazil, Australia and Singapore. Only a few years ago, a wealthy family or ultra-high-net worth individual would be hard pressed to find a customized family office wealth management solution; now, there are hundreds family offices operating throughout the world and the number of single and multi-family offices is only expected to increase in the coming years. Here are some thoughts regarding the developing trend in this segment. 

At Investlogic we are able to help you find the optimum solution.

How families can solve the Gordian knot of wealth

Much ink has been spilled in the financial press recently over the bad finances of Europe’s periphery, and of Greece in particular. The country’s level of debt appears like an unsolvable problem. It resembles another apparently unsolvable issue, which is described in the country’s mythology.

The issue relates to a peasant farmer named Gordias, who became king of Phrygia after the event was predicted by an oracle. Gordias’ ox cart, on which he was travelling to Phrygia when the town’s population proclaimed him king, became a symbol. It was subsequently placed in the centre of the acropolis, yoked to a pole with a large knot, with no end to it: the Gordian knot. The tale says that whom ever managed to untie the knot would become king of Asia, which Alexander the Great did, by a straight and brutal sabre cut.

While too much indebtedness, such as Greece’s, may be considered as a Gordian knot, exceptional levels of wealth often become extremely difficult to manage in a way that satisfies all members of a family as well. Hence wealth sometimes becomes a Gordian knot too. For wealthy families, untying such a knot translates into matching financial objectives and creating an appropriate structure.

For most families, wealth was created from not much, by an entrepreneur. Over time, its value sometimes becomes significant. Financial affairs and commercial affairs represent two of the most important components making up the wealth of families. Whilst in most cases wealth creation initially originates from commercial assets, wealth preservation is generally granted through financial assets. Both types of assets behave differently though, and have their own characteristics. As a result, they should have different governance structures.

The Gordian knot story from Greek mythology provides a lesson about practical problem solving. In the family governance concept however, family councils and/or boards must be created, covering both aspects of corporate governance and financial governance. The former is often well put into practice, whilst the latter less so. In that regard, advisers often hear the following kind of observations: “My financial affairs are unattended. I have too many bankers and I have no time to assess nor answer the many investments solicitations I receive. Nor can I evaluate the true quality of my financial performance”. This comment is too often heard from the mouths of busy and successful entrepreneurs, still heavily involved in their business.

This illustrates that successful family businesses which create large amounts of cash find themselves with the new profession of wealth manager, but with limited time and sometime interest, to dedicate to it.

Some are inebriated by their business success and feel that the same rewards should flow naturally in the financial world. This is a common mistake and some have paid a costly price before understanding that public market investing is one of the most competitive business across all industries and that their one stock control it all approach is different to a multi stock portfolio.

The elaboration of a successful financial governance structure assumes that the family governance architecture is established and sound. Clearly setting a family strategy which defines values and objectives associated to a family business plan is important. It then provides the prerequisite information for the creation of an investment policy which should translate the family objectives into financial objectives. Family objectives depend on where the family stands in the wealth cycle, whether it is creating or preserving its wealth. One key advantage a wealthy family has is that its financial objectives can be set on several generations. That way, financial turmoil and periods of increased market volatility can then better be endured. This unique characteristic shapes choices of asset classes.

Performing such a process allows to create formal guidelines which will guide the investment committee. Furthermore, it offers the opportunity to truly understand the family’s culture and dynamics while providing time also for interaction amongst family members. More importantly, the platform should also unite the family around financial expectations and consequently should result in the most appropriate, long lasting tailored solution.

Families generally have more than one asset manager or private banker. The role of the investment committee varies from an institutional approach to a private banking approach. The former rests on a delegation principal which consequently requires a strong investment committee, whilst the latter offers more flexibility and customization, with a more controlling responsibility.

With an investment policy created and agreed upon, the implementation can begin, from the RFP (request for proposals) to beauty contests, right through to the elaboration of reporting tools. Once the investments have started, the monitoring of the various managers in terms of risk and investment guidelines, supervision and market reviews become the investment committees’ core activity.  A fine-tuned financial governance set up should manage it efficiently.

As the wealth cycle evolves, the importance of and the dependence to the financial wealth increases. Creating an adequate platform at the beginning is paramount to the success of both: meeting the financial objectives and insuring a smooth transition to the next generations. It prepares them for their future and increasing responsibilities in the world of financial asset management.  Additionally, it provides for a truly, long term fiduciary relation to develop with external advisors.

In the current financial turmoil many families would love to have their Alexander The Great in their entourage, helping them explore and conquer prosperous opportunities. Financial assets can be very complicated but sometimes made to look more complex than they really are. A golden rule is to keep it as simple as possible, which in some cases may require a straight and brutal sabre cut. Although debatable as to when and if it should be recognised as a Gordian knot or not, many have addressed the issue with diverse success. But one thing is certain: for some families, a proper financial governance may be the Alexander they are seeking, sometimes desperately, sometimes without being able to name it and sometimes even unknowingly.

The amount of off shore wealth—defined as assets booked in a country where the investor has no legal residence or tax domicile—increased to $7.8 trillionin 2010, up from $7.5 trillion in 2009.) The increase was driven by a combination of market performance and asset inflows, primarily from emerging markets. At the same time, however, the proportion of wealth held off shore slipped to 6.4 percent, down from 6.6 percent in 2009. 

The decline was the result of strong asset growth in countries where off shore wealth is less prominent, such as China, as well as of  stricter regulations in Europe and North America, which prompted clients to move their wealth back onshore, thus lowering the net increase in off shore assets. Off  shore private banking, in general, remains a tumultuous part of the business. The relative importance of off shore centers is changing rapidly. Some are benefiting from continued asset growth, while others are seeing large asset outflows, with wealth being repatriated to on-shore banks, transferred to other off shore centers, redirected into non financial investments, or simply spent at a faster rate.

Constraints on Growth and Profitability

There will always be clients wanting to putt heir money off shore. Tax considerations have certainly influenced the flow of off shore assets, particularly for clients fromNorth America and Western Europe. Most off shore clients, however, are less concerned with taxes and more concerned with safety and stability, often because their own countries have shaky political systems or badly regulated or poorly run financial sectors. In addition, some clients value the discretion, privacy, and secrecy ensured by off shore private banks, owing to a lack of trust in local banks or authorities or concerns about criminal threats in their home countries. More discerning clients rely on off shore centers for their unmatched expertise, specialized products, access to sophisticated investments, and integrated wealth services. 

A small minority of clients value off shore centers for the status and prestige they confer.Although most of the core drivers of demand remain relevant—as evidenced by the recent unrest in parts of Africa and the Middle East—other trends are undercutting the appeal of off shore banking. For example, there is a widely held but misguided presumption that all off  shore wealth is illicit, even though tax considerations—as de-scribed above—are far from the only reason why wealthy individuals hold their assets off shore. In most countries outside of Western Europe and the United States, taxes play a minor role in the decision to hold assets on off shore.

The de facto criminalization of offshore wealth has helped drive a concerted push for greater transparency.This effort, which is certain to cause at least some of the wealth held offshore to evaporate, is unfolding on several fronts. 

In March 2009, Austria, Belgium, Luxembourg, and Switzerland withdrew their reservations to Article 26 of the OECD Model Tax Convention on Income and on Capital, paving the way for the bilateral exchange of tax information. In the case of Switzerland, government authorities now provide information on individual clients and their holdings to foreign tax authorities, not only in cases of tax fraud (such as submitting false documents to avoid taxes) but also in cases of tax evasion (such as not declaring assets). But Swiss authorities have taken a stand against so-called fishing expeditions—they do not allow foreign tax authorities to have automatic access to account information or to conduct investigations at random, and will provide in-formation only if there is reasonable suspicion. The implementation of Article 26is now being codified in individual double taxation agreements between offshore centers and client-domicile countries that are seeking tax information from abroad.

In October 2010, Switzerland signed a declaration of intent with Germany and the United Kingdom to collect a flat-rate tax on earnings accruing to clients from these two countries. The tax revenues will be transferred to the respective country, although the clients will remain anonymous. Switzerland also agreed in principle to levy a one-time tax on any undeclared as-sets held in Switzerland by German and U.K. clients,thus rendering the assets tax-compliant. The modus operandi of this tax has yet to be defined.

Under the U.S. Foreign Account Tax Compliance Act (FATCA), which takes effect on January 1, 2013, all foreign financial institutions—including banks, tradition-al funds, hedge funds, and private-equity companies—will be required to disclose information about theirU.S.-taxable clients to the U.S. Treasury. This will affect clients who are from the United States, as well as an clients who hold U.S. assets in any form. If an institution is not willing to comply, its clients will be charged a tax of 30 percent on all “withholdable payments” in the United States, including investment returns, personal income, and gross proceeds from the sales of se-curities or property. To comply with FATCA, institutions will need to adopt a more intensive know-your-client process and will have to fulfill additional reporting requirements stipulated by theU.S. Internal Revenue Service

Seen from my marketscope :

Pouvoir et Richesse : l'éternité du métal

Le Pouvoir et les richesses, à l'échelle de l'histoire passent toujours de ceux qui y ont titre à ceux qui y ont droit et le droit c'est le droit du plus fort. Mais la valeur de l'or n'est pas liée a la tradition c'est plus fondamental que cela
L'or fait partie des archétypes qui constituent l'esprit humain au sens de Carl Jung et des alchimistes. 

L'or est un symbole ancré dans la mémoire collective

L'éternité du métal ne réside pas dans sa matière mais dans son caractère symbolique ancré dans l'âme humaine il est éternel et universel dans l'esprit humain. L'or , le soleil, l'arbre , l'eau etc sont non pas des réalités concrètes mais des réalites symboliques qui peuplent et constituent le fond de la psyché partout et de tous les temps ! 

Bernanke et Geithner veulent ce qu’ils appellent « un dollar fort ». Mais dans leur pensée et dans leur conception, un dollar fort ce n’est pas comme on le croit un dollar cher. C’est un dollar qui impose sa loi, c’est un dollar que l’on force à accepter, un dollar que l’on continue de stocker. Bref, un dollar qui, négativement, faute d’alternative et à la faveur de la puissance militaire, continue de bénéficier de son rôle de monnaie impériale, de safe-haven. Ils veulent un dollar à la fois faible en prix mais en même temps roi.

Les gens, y compris les économistes ont du mal à considérer et à comprendre que les états souverains sont des agents économiques comme les autres; soumis aux mêmes lois de la valeur , de la rareté et de la comptabilité; simplement ils sont plus gros que les autres et se sont octroyé le droit de tricher.

Dans les temps anciens, les Banquiers prêtaient aux Rois, aux Souverains. Incapables de se modérer, les Souverains se su rendettaient et se mettaient en situation de défaut de paiement. C’est alors que les Banquiers faisaient pression sur le Roi, lui dictait sa politique fiscale. Placés sous tutelle, les Souverains pressuraient le peuple pour honorer les créances des Banquiers. Les Banques Centrales ont été créées pour aider les Banquiers à faire le plein de leur créances en ajoutant à l’impôt visible , l’inflation tax invisible. Quand la Banque Centrale octroie de l’argent à un Banquier, elle dilue l’argent qui se trouve dans les mains des citoyens. L’histoire de la Great Experiment de John Law, n’est rien d’autres que celle là, poussée à sa plus extrême limite, c’est le modèle de la Great experiment de Greenspan, puis Bernanke; la bulle de la Compagnie du Mississipi est l’ancêtre de toutes les bulles car elle a été soufflée volontairement, cyniquement.

Quelques réflexions supplémentaires :

1. La monnaie n’est pas contrairement à ce que l’on veut nous faire croire a store of value, une réserve de valeur, c’est un tenant leurre de réserve de valeur, a proxy store of value ce qui est très différent et ……beaucoup moins sûr !

Il y a encore des épargnants et investisseurs qui doutent de la valeur pratique de notre distinction entre l’or papier et le métal jaune. Ils disent cela n’arrive qu’aux autres : mon certificat d’or sera honoré. Ils ne se doutent pas que peut être leur banque n’a jamais eu d’or physique en contrepartie, en couverture de leur certificat d’or. Ils ne se doutent pas que peut être leur banque a utilisé cet or comme collatéral pour couvrir et garantir ses refinancements sur la marché de gros.

Ils ne se doutent pas que même si leur or est identifié, en cas de déconfiture de leur intermédiaire, peut être ils ne retrouveront jamais leur bien.

Nous vous conseillons la lecture du Barron’s du 17, on y apprend que les propriétaires de métaux précieux chez MF Global verront leurs avoirs amputés de 28%, le liquidateur ayant décidé de mettre en pool les actifs et de les repartir au prorata. Comme il n’y en pas assez pour tout le monde, le pool n’honorera les droits qu’à hauteur de 72%. Même si la propriété est individualisée, affectée.

Certains nous disent, mais chez soi dans un coffre, il y a le risque de se faire dévaliser, c’est vrai mais qui a dit qu’épargner, posséder un patrimoine était facile et de tout repos? Défendre son patrimoine est un vrai travail, difficile.

Un patrimoine a toujours une composante sociale, il y a toujours des risques ; sauf sur une ile déserte, mais là, il ne sert a rien. Nous ne cessons de le répéter, quand le monde entier s’appauvrit, comme c’est le cas maintenant, il ne faut pas espérer s’enrichir. Essayer de protéger ce que l’on a est déjà bien difficile.

L’emprunte financière (à l'instard de l'empreinte carbone) donne une idée de la nocivité de l'activité de production.

Dans les temps anciens, les Banquiers prêtaient aux Rois, aux Souverains. Incapables de se modérer, les Souverains se su rendettaient et se mettaient en situation de défaut de paiement. C’est alors que les Banquiers faisaient pression sur le Roi, lui dictait sa politique fiscale. Placés sous tutelle, les Souverains pressuraient le peuple pour honorer les créances des Banquiers. Les Banques Centrales ont été créées pour aider les Banquiers à faire le plein de leur créances en ajoutant à l’impôt visible , l’inflation tax invisible. 

Quand la Banque Centrale octroie de l’argent à un Banquier, elle dilue l’argent qui se trouve dans les mains des citoyens. L’histoire de la Great Experiment de John Law, n’est rien d’autres que celle là, poussée à sa plus extrême limite, c’est le modèle de la Great experiment de Greenspan, puis Bernanke; la bulle de la Compagnie du Mississipi est l’ancêtre de toutes les bulles car elle a été soufflée volontairement, cyniquement.

Nous reprenons le superbe article de Bruno Bertez sur la dislocation en cours du système monétaire, qui a de moins en moins de collatéraux de qualité pour le soutenir. Un écroulement que les autorités ne peuvent que ralentir en créant de la monnaie. L’or physique a vraisemblablement de beaux jours devant lui …

Le papier en général, tout papier, ne vaut que parce qu’une Autorité, une force, impose l’équivalence entre ce papier et autre chose. Il faut, pour cela soit réalisé que cette autorité en ait évidemment le désir et surtout les moyens ; les moyens, c’est l’argent pour le faire, un marché liquide pour le faire, etc. Tout papier, toute valeur papier, repose sur cet espoir qu’il ne sera pas déçu ; cet espoir que quelqu’un assurera l’équivalence.

La mode est à considérer que la valeur d’une action est la somme actualisée à l’infini des cash flows de l’entreprise. Les cours de bourse, surtout les cours bullaires, disent à ce jour ce papier vaut tant, cela fait tant de fois les résultats, tant de fois l’EBITDA.

Est-ce que les participants des marchés se rendent compte que c’est un pari ?

Un pari sur le fait que quelqu’un de puissant croit à cette équivalence et a des poches profondément infinies pour la faire respecter, pour l’imposer. Est-ce que les marchés se rendent compte que, sur le fond, l’existence de ce quelqu’un pour imposer la règle du jeu boursier est la seule chose importante?

Nous avons connu un temps où les titres de capital en France ne valaient quasi rien, personne ne s’intéressait à la Bourse, la politique ne se fait pas à la corbeille, disait-on ; à cette époque, il n’y avait personne pour assurer l’équivalence entre le flux des cash flows infini et le cours de bourse du jour.

C’est quand le Crédit Lyonnais et la Banque de France et la Caisse des Dépôts sont rentrés dans le marché, plus tard que l’équivalence a commencé à se construire. Une société gagne beaucoup d’argent ? Oui, et après, qu’est-ce que cela peut vous faire si vous ne le touchez pas. Si les OPA n’existent pas, si le Private Equity n’existe pas, si les Buy Backs d’actions n’existent pas, si la Banque Centrale n’est pas laxiste au point de donner des crédits quasi gratuits pour financer le respect de l’équivalence, la spéculation sur l’équivalence, la loterie mise en place par la financiarisation sur l’équivalence.

Le monde financier vit dans une authentique névrose qui lui fait confondre l’ombre des choses, les papiers, avec la réalité des choses, les corps.

C’est le résultat d’un système de pouvoirs, de croyances, de formules magiques toutes aussi ridicules et stupides les unes que les autres, comme les PER, l’actualisation, les mesures du risque, les rating, etc. etc. ; une névrose gigantesque qui est en train de s’effondrer car les pouvoirs qui sont derrière pour l’entretenir et la valider sont eux mêmes en train de s’effondrer. Tout ce qu’ils savent et peuvent faire, c’est créer de la base-monnaie, faire intervenir la FED, la BOE, la BOJ et bientôt la BCE pour ralentir l’effondrement, repousser les échéances. Les peuples et les marchés se laissent prendre, ils confondent le pouvoir de retarder les échéances avec celui de résoudre les problèmes.

Autre remarque que nous livrons à votre réflexion. On a l’habitude, dans le monde névrotique de la finance, de rapporter la dette des gouvernements au PIB. Avez-vous essayé de soutenir le cours d’un emprunt avec un morceau de PIB ? Avez-vous essayé d’échanger les dettes de la Grèce contre un morceau de son PIB ? Non, évidemment, car le réel c’est ceci, on ne peut échanger la dette grecque sur un marché que contre une seule chose, du cash, de la base-monnaie. Et c’est cela le grand secret de la pression pour faire entrer en lice la BCE, la mise à disposition de base-monnaie pour honorer la quasi monnaie hyper, hyper pléthorique émise depuis plus de 20 ans. 

La crise est une crise du système, une crise des équivalents, une crise de fissure de la névrose instillée par la grande Experiment financière. Ce n’est pas une crise des choses en elles-mêmes. Et les gouvernements et banques centrales qui sont comme dans les asiles de fous, plus fous que les fous, ne savent rien faire d’autre face à cette délitation des équivalences que… créer de la monnaie !

Sur le marché de la dette des gouvernements, avant, dans le temps déjà ancien de 2010, on cotait un prix sur le marché. On disait le 10 ans italien vaut tant et quand on voulait vendre, quelqu’un en face assurait l’équivalence sur la base de cette valeur constatée sur le marché.

Le quelqu’un en face, c’était une banque, Unicredit, BNP, etc. A partir du moment où le système bancaire a été impaired, abîmé, dysfonctionnel, plus personne n’a assuré l’équivalence et le papier des gouvernements s’est traité à sa valeur, que j’appelle sa valeur sociale, financière, économique instantanée et non plus à sa valeur que j’appelle «d’autorité ».

La valeur d’autorité est celle qui résulte du bon fonctionnement du système, du bon respect des contrats etc. La valeur sociale est tout a fait différente, c’est la valeur qui s’établit, seule simplement par la confrontation de l’offre et de la demande de gens qui ne se connaissent pas, n’ont aucun autre intérêt que leur intérêt égoïste; Le prix constaté dans ce cas ne découle que d’un rapport direct, non médiatisé, c’est à dire sans intermédiaire entre les utilisateurs.

Il y a d’un côté des choses dont la valeur repose sur le bon fonctionnement d’un système complexe et, de l’autre, des choses dont la valeur ne dépend que d’elles-mêmes et des valeurs sociales que l’on y attache.

A votre avis, de quel côté doit-on ranger le métal jaune ?

Sa valeur dépend-t-elle du bon jeu des Pouvoirs ou au contraire du jeu des forces sociales individuelles, non biaisées, influencées seulement par leur égoïsme, leur recherche de liberté et de sécurité ?

Acheter de l’or métal, comme nous l’écrivons, c’est faire exactement le contraire de l’achat d’or papier, c’est anticiper, parier sur la dislocation, même pas complète, du système des équivalences. C’est anticiper le retour de l’usage de la force dans les relations internationales, la prise de conscience par les peuples du fait que la monnaie est non pas actuellement un instrument de liberté, mais un instrument d’exploitation, de spoliation aussi efficace que la fameuse exploitation de Marx. Dans nos systèmes, l’exploitation par la monnaie, le crédit, l’imposition et les trucages de fausses valeurs ont remplacé l’exploitation du travail par le capital. L’extraction de la plus-value, du surproduit par la finance et les gouvernements a remplacé l’exploitation marxiste.

C’est la même chose en matière financière. La dérégulation qui a permis la financiarisation, butait sur la possibilité face à l’excès de monnaie et de quasi monnaie de voter contre les papiers en achetant des vrais valeurs réelles, c’est-à-dire sur la possibilité de voter blanc, de ne choisir ni entre les actions les obligations, etc. C’est pour cela que les penseurs ont imaginé la création des assets réels, papiers, avec des commodities papiers, de l’or papier, du pétrole papier. 

Le trait de génie a été de créer ces papiers afin de maintenir l’argent dans le système et de pouvoir le bio-dégrader, le détruire, quand le besoin s’en faisait sentir. Ces génies n’avaient pas prévu que le système bancaire et son shadow tomberaient dans le piège et mettraient les doigts dans la confiture, c’est à dire qu’au lieu de ne jamais stocker de papier, au lieu de le disséminer, il s’exposerait lui aussi à sa dépréciation/dévalorisation !

Buy The Dips, Sell The Rips : 

This Will Be The Most Volatile Year For Gold

Beware of those who, like Dennis Gartman, are nervous nellies and bend in the wind, month by month, depending upon the fashion of the moment. The long term trend of upwards movement in the gold price is intact, reflecting ever cheapening currencies, loss of purchasing power, out of control government deficits. Those who trade in and out of the precious metals arena have to have impeccable timing to be successful, I am a believer in the long term trend.

The gold bull market will end when politicians adopt fiscal responsibility and the Fed stops printing money…. which means never! In the past we have had economic cycles in commodities related to the value of the dollar. Unfortunately for us, the game is serious now as money printing may not be an option now, but an ongoing requirement. How will US pay debt service on $16 trillion of debt when interest rates are 12%? By printing more money! Believing in the dollar will only see you lose much of your accumulated wealth through inflation. One would be wise to put one’s wealth into something of value now, before our inflationary episode takes off!

Although the yellow metal has been on a spectacular 11-year bull run, recent strength in the economy–or at least the rising likelihood that the Fed will not be as loose in its creation of liquidity–has some investors thinking gold’s heyday is over. Throughout gold’s decade-long rise, price action over the short-term has gone both ways. 

Gold's Decade-Long Bull Run Is Still Alive ! 

Over the last couple of years, gold’s precipitous, and continued, rise fueled causal theories, with some investors attributing it to U.S. dollar weakness, others to a safe haven trade in the face of widespread market turmoil, an inflation hedge, or whatever they could correlate a chart with.  The yellow metal, though, appears as a Humean experiment in causality, marrying no single trend.

Gold has fallen nearly 9% since late February, trading at $1,628.5 an ounce on Thursday in New York.  Gold went on a rollercoaster ride over the last 12 months, rising to an all-time high above $1,900 last spring, then tanking about 18% to December, then rising a further 15.5% to this February.

According to Gartman, gold’s latest price action confirms the trend line has clearly been broken, indicating we’ve been in a bear market for 12 months, since it peaked.  In Thursday’s Gartman Letter, “in retrospect it does appear that gold has not been in a bull market but has indeed been in a bear market” since August 2011, when it peaked above $1,900. “Since then,” he added “each new interim low has been lower and each new interim high has followed. How, we ask, had we missed that fact!”

The world has been experiencing the largest liquidity boom, as the central banks’ seven-month easing binge continues. Over this time, ISI counted 127 different stimulative policies, such as printing money, lowering interest rates and other easing measures, taken by governments around the world. The policy shifts helped carry the equity market a long way from the low on March 9, 2009. At the time, we noted in a special Investor Alert that there were significant government policy changes that signaled the market had hit rock bottom. According to USA Today, from the 2009 bottom through the end of the first quarter, the S&P 500 Index increased more than 100 percent. No wonder U.S. equity investors are singing.

However, the side effect of the abundance of printing by the central banks in the U.S., Europe, Japan and England has bloated balance sheets amounting to nearly $9 trillion. This is double the amount that it was three and a half years ago, says Ian McAvity in his recent Deliberations on World Markets, as the printing presses have pumped our monetary system full of liquidity. This is merely “kicking the can down the road,” as central banks will have to deal with the overhang later.

This has historically been a strong positive catalyst for gold. An analyst at the Economics and Finance Fanatic blog put together a visual that illustrates just how strong of a catalyst the nonstop printing of money is. The chart compares the U.S. adjusted monetary base since 1990 with the “surging” price of gold. As you can see below, the amount of money in the U.S. system climbed to extraordinary heights since 2008, with gold following the same path.

The economic challenges of the U.S. and eurozone “promise to be a prolonged one with sluggish economic growth,” says the blog, and easy monetary policies will likely be the remedy for awhile. I believe this provides a strong case that any pullback in the gold price appears to be a buying opportunity. Ian says, “Tax uncertainty, festering toxic debt that’s out there but out of sight and impossible debt service ability looming? I’ll stick with gold and sleep better at night.”

Investors might sleep better at night with an allocation to gold in the face of continued negative real interest rates. The chart below shows how gold has historically climbed when interest rates fell below zero percent, with a strong correlation from 1977-84, and again recently when rates turned negative in early 2008.

What would have to change to make me turn bearish? I believe the following three actions would need to be taken:

1. Real interest rates would have to increase 2 percent above the CPI in the U.S. and Europe

2. GDP per capita in Chindia would need to fall, negatively affecting the Love Trade

3. Substantial fiscal cuts would need to be made in entitlement programs in the U.S. and Europe

I believe there is a low probability of these events occurring any time soon. In this environment, gold should thrive.

Fed unwinding will definitely deal a deadly blow to gold bulls, so the real question investors should be asking is: are we out of the woods yet?

If the gradual pace of economic improvement in the U.S. and the relative calm of European markets persists, then the global economy might be close to the edge of those woods.  No QE3 and higher interest rates before late-2014 would cause further damage to gold, as it would signal an improving economic environment where capital should once again channel into productive, and thus riskier, assets. 

Bernanke has remained cautious, noting downside risks still abound, while ECB chief Mario Draghi was blunter on Wednesday saying risks are definitely skewed to the downside.  Housing markets in the U.S. remain depressed and labor markets, while healthier, are still relatively weak.

With the Bernanke Fed guiding markets over the last couple of years, it should come as no surprise that gold prices are very sensitive to monetary policy.  Record low interest rates amid a weak global economy pushed nervous investors out of both risk assets and the safety of Treasuries.  A weak U.S. dollar, along with massive liquidity injections via QE, helped investors look to gold for it has always been: a store of value.

At this stage gold is set to continue being erratic in the immediate-term, relying on the economic expectations.  And the improving economic outlook does face substantial threats, though, particularly the European sovereign debt crisis (which promises to flare up again), which could stoke recessionary fears.  Add inflation, and you could see the yellow metal rally rise through the ashes like the phoenix.  At the end of the day, it all boils down to the true strength of the economic recovery.  Stay tuned !