Why central bankers' composure is pure theatre

Federal Reserve, European Central Bank and Bank of England know extricating from stimulus policies is fraught with danger

Central bankers like to project a sense of serenity. The markets may be traumatised and the politicians may be panicking, but nothing fazes the technocrats in charge of our money. They are headmasterly figures: slightly detached but with their fingers on the pulse.

That's the image. In reality, the central bankers are in a funk about the health of their nations' economies and the challenge of extricating their institutions from the stimulus policies that have been responsible for what has, so far, been a tepid global recovery.

Why else would the Federal Reserve have bottled a decision on gradually winding down its bond-buying programme? Why else would the European Central Bank have surprised the markets with a cut in borrowing costs last week? Why else would the Bank of England feel the need to reassure the public that the 0.5% bank rate that has been in force since early 2009 would remain in place until unemployment came down to 7%, barring some unforeseen inflationary shock?

Mark Carney will face the press this week for the first time since he outlined Threadneedle Street's forward guidance in August and the governor will have the job of explaining why unemployment is now expected to come down faster than the Bank predicted three months ago.

On the face of it, this is an easy gig. Carney could stand up and say it is a jolly good thing the economy is doing better than expected and, therefore, interest rates can start to return to more normal levels a little earlier than planned. This, though, is the UK, and here there are really only three economic moods: periods when there is concern that the economy is not growing, periods when the worry is that it is growing too fast, and periods when a combination of steady growth and low inflation is considered too good to last.

For now, the UK appears to have moved from fretting about a triple-dip recession to fears about overheating without any intervening Goldilocks period. Accordingly, the financial markets will be focused in coming months on barometers of excess demand: the housing market, the trade figures, earnings and consumer spending.

Carney will have a period of grace before the markets start to demand action. In part that's because those indicators speaking of problems to come – the housing market and the trade balance – are flashing amber rather than red. In part, though, it is because problems are more acute elsewhere.

For the Fed, it is a question of when to taper, not whether. It wants to continue supporting what is a historically modest recovery with low interest rates and quantitative easing, but thinks the amount of new money creation each month should be reduced.

But it wants to do this without causing chaos either domestically or in the broader global economy. When the Fed chairman, Ben Bernanke, floated the idea of a gradual taper to bond-buying back in May, financial markets threw a fit. The laws of supply and demand have meant that bond prices have risen as central banks have bought more and more of them. The interest rate on a bond goes down as the price goes up, and these interest rates (bond yields) affect how much it costs firms and households to borrow over long periods.

Speculation about a Fed taper pushed up bond yields, which in turn made mortgages more expensive in the US. That put the dampers on the recovery in the housing market.

The same laws of demand and supply meant that electronically printing trillions of dollars has driven down the value of the US currency. It has also created a massive pool of funds looking for places around the world where returns were high. This was not in the west, where both growth and interest rates were low, but the emerging world, where growth was strong and borrowing costs much higher.

Even the threat of a Fed taper was enough to put this process into reverse. Money came flooding back out of emerging markets, putting pressure on their currencies as growth rates were slowing.

Europe has a different problem. Relief during the summer that the eurozone was at last coming out of an 18-month double-dip recession pushed up the value of the single currency. But a stronger currency means lower inflation because the cost of imported goods falls.

Inflation in the 17-nation bloc as a whole stands at 0.7%, well below the ECB's target of close to but just less than 2%. In those countries worst affected by the sovereign debt crisis it is already negative.

Deflation is not always a bad thing. In fact, if you are a saver it is a good thing because your money goes further. For debtors, though, a period of falling prices means that your debt burden increases. If interest rates are rising, then you can quickly find yourself in a situation where your debt is increasingly unpayable even if your income is going up at the same time.

What applies to individuals applies to countries also. Greece is already in a situation where it will require another bailout to make its debts sustainable and it wouldn't take much to push some other countries on the eurozone's periphery – Italy and Spain most notably – over the edge.

Economists at Fathom financial consultants have modelled what would happen to eurozone debt sustainability given plausible (if relatively generous) assumptions for budget deficits, growth rates and inflation. They found that if primary government budget balances (excluding debt interest payments) and growth rates were set at their long-term average, debt sustainability hinges on what happens to inflation.

At an inflation rate of 2%, the level of debt to national output (the debt to GDP ratio) declines for every country in the eurozone, including Greece. At 1%, and assuming a Fed taper leads to an increase in long-term interest rates of 1.5 percentage points in the next two years, debt becomes unsustainable for the peripheral eurozone countries. At zero inflation, even without a taper, debt sustainability is a problem for the core of the currency zone as well.

This threat explains many things. It explains why ECB head Mario Draghi moved so quickly to cut ECB interest rates last week. It explains why there is a lot of nervousness about the upcoming asset quality review of Europe's banks, since they are awash with eurozone bonds. It explains why the Americans, who know a taper is coming, are openly frustrated with Germany's failure both to reflate and to press ahead with banking union. And it explains why the sang-froid of central bankers is strictly for show.

Article Source : http://www.guardian.co.uk
Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike and if u want to Setup ur business in United Kingdom then  its not difficult in this modern age for more info visit our site Azure Global and join us also On Facebook

Gas industry employee seconded to draft UK's energy policy

Documents reveal Decc's head of capacity market design comes from ESB, which owns three gas-fired power plants

A major state subsidy scheme for the UK's gas-fired power stations is being designed by an employee of a gas company working on secondment to the government, according to a document released by the Department of Energy and Climate Change (Decc).

The list of industry secondees, released to Greenpeace under freedom of information (FOI) rules, shows that the head of capacity market design at Decc is an employee seconded for two years from the Irish energy company ESB, which owns three gas-fired power plants in the UK.

A separate industry document names the employee as Fergal McNamara and describes him as the head of capacity market design at the ministry as well as being a "government representative". However, the ESB and Decc declined to confirm his identity when contacted by the Guardian.

The document also reveals that several other employees of big gas companies are working at senior levels within Decc, prompting criticism that there is an unhealthy closeness between the government and the big fossil fuel companies.

Green party MP Caroline Lucas said: "Ed Davey is trying to convince us that he's taking a tough stand against the energy companies. How on earth are bill-payers supposed to take him seriously when they get reminders like this of the cosy relationship between government and the gas industry?

"It's quite incredible that someone employed by a company that builds gas-fired power stations has such an influential role in government. Even more so given that rising gas prices are the main cause of energy bill increases in recent years."

The "capacity market" is a subsidy scheme aimed at encouraging companies to build new generator plants, to ensure that the lights do not go out as old and dirty power stations are closed down. It will pay millions of pounds to energy companies whether the plants are generating or not, in order to ensure that electricity is available when needed. The cost will be added to customer bills via a compulsory levy.

In October, David Cameron ordered a review of all the levies on energy bills in order to find ways to reduce costs to consumers. On Sunday, the energy and climate change secretary, Ed Davey, clarified the position, ruling out the possibility of scaling back programmes that help insulate the homes of people on low incomes. He said those green levies could be shifted into general taxation. "There is no way I could support any move which undermined our effort on either energy efficiency or fuel poverty," he told the Sunday Telegraph.

Capacity market payments are theoretically open to any energy technology but are expected to be dominated by gas plants, which are relatively fast to build and flexible enough to provide back-up for intermittent renewable energy. Four existing gas plants have already been mothballed owing to a lack of profitability, and a recent report from financial consultants EY, commissioned by the industry group EnergyUK, said 23,000MW of new gas generation has received planning permission but almost all is on hold "with owners waiting to see if the economic and policy environment become more favourable".

ESB said it was the only company currently building gas-fired generation in the UK and that its employee, a corporate regulation executive, was interviewed for the Decc role. He is paid a salary by taxpayers, which is topped up by the company. "Due care and attention was given to any perceived conflict of interest and it was confirmed that none existed," said a spokeswoman. "The opportunity to build a greater knowledge of the market arrangements from involvement in the Decc secondment programme is attractive to us."

Apart from the three power stations ESB already owns, the company has also begun building a £700m, 880MW plant at Carrington, Greater Manchester, and aims to build a 1,500MW plant at Knottingley in Nottinghamshire.

The FOI document revealed that three further energy company employees are or recently have been working on secondment at Decc. Shell is providing two staff, British Gas-owner Centrica one, and a ConocoPhillips employee recently completed an 18-month posting.

The Centrica employee, working as head of grid management strategy and provided to Decc for free, was previously a regulatory affairs executive at Centrica who "led a number … of political lobbying campaigns" and was "responsible for managing the impacts of industry and regulatory change for [Centrica Energy]", according to the employee's LinkedIn profile.

"It is perfectly normal practice for businesses to second experts in particular areas to government departments," said a Centrica spokesman.

A spokeswoman for Decc said: "Secondees bring with them knowledge and expertise which are vital to helping Decc do its job effectively. Decc ensures that any secondee is bound by the professional codes of practice relevant to their industry or services provided."

The contracts signed by secondees ask them to self-police any conflicts of interest. It states: "It is a condition of the secondment that the secondee ensures to the best of their ability that in the course of their duties for Decc there will be no conflict of interest or perception of such."

Greenpeace UK's deputy political director, Joss Garman, said: "When the government said it was going to take on the energy industry, we didn't realise that meant hiring their [staff] and letting them write the rules. This is a straight-up conflict of interest and the public are the losers, shut out of decision-making by the companies bleeding them dry with rising bills."

Commenting on the new revelations on the role of energy company employees in government, Tom Greatrex, Labour's shadow energy minister, said: "Industry has a role to play in helping government to ensure policies are workable, but handing over the detailed design of the capacity mechanism to [an employee of] a company with a vested interest in a particular outcome is remarkably complacent bordering on negligent. It is time energy secretary Ed Davey got a grip, so policies are implemented in the interests of consumers, rather than fuelling suspicions about the motives of secondments into Decc."

An earlier investigation by the Guardian showed that employees from other energy companies, including EDF and RWE npower, had been seconded to Decc. An analysis of declared meetings showed that there were 195 meetings between Decc ministers and energy companies and their lobby groups between the 2010 general election and March 2011. There were 17 meetings with green campaign groups.

Article Source : http://www.guardian.co.uk
Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike and if u want to Setup ur business in United Kingdom then  its not difficult in this modern age for more info visit our site Azure Global and join us also On Facebook