European Central Bank says Recovery Underway, is Opportunity to Fix Euro's Troubles

A sustained economic recovery is finally arriving in the 19-country eurozone, European Central Bank head Mario Draghi said Monday - a recovery he says must be used to complete the euro currency union and fix its problems for good.

Draghi said in a speech at a financial forum in Frankfurt that "most indicators suggest a sustained recovery is taking hold" as consumers and businesses grow more confident and banks become more willing to lend.

The head of the chief monetary authority for the shared currency said the upturn was helped by cheaper oil prices and by the central bank's stimulus policies.

The ECB has cut its benchmark interest rate to near zero at 0.05 per cent and launched large-scale purchases of government and corporate bonds with newly printed money to lower longer-term borrowing costs and raise inflation from worrisome low levels. It says it will purchase 60 billion euros a month through September 2016 for a total of at least 1.1 trillion euros ($1.2 trillion) in added monetary stimulus.

Draghi said Monday that member countries should use the breathing space given them by the central bank's stimulus efforts. He said they need to pass tough structural reforms that would make their economies more business-friendly so they can grow and prosper - and to enshrine supervision of such policies at the EU level. The 16-year-old currency union is still struggling to overcome troubles with too much government and bank debt that led to Greece, Portugal, Ireland, Cyprus and Spain needing bailout loans from the other countries. Despite two bailouts, Greece is trying to avoid a debt default that could see it leave the euro. Eurozone unemployment remains high at 11.2 per cent and prices are falling at a 0.3 per cent annual rate.

Draghi said that "a nascent recovery provides us with a window of opportunity, with the conditions to press ahead with reforms that will make the euro area less fragile and vulnerable to shocks."

Eurozone countries must make their economies more productive and "stand on their own two feet" because the eurozone doesn't provide for budget transfers from richer countries - the way U.S. states that suffer recessions can depend on tax transfers through the federal government.

The way to do that was to create new EU institutions in which countries would share sovereignty over their economic policies instead of leaving the responsibility at the national level. Draghi said any such institution would need strengthened democratic oversight and accountability to voters.

He didn't give a detailed picture of what such an institution would look like. The current EU-level reviews of national economic imbalances such as excessive labour costs and trade surpluses "has so far not gained much traction in national decision-making processes."

Draghi praised recent efforts by Spain and Portugal to lower labour costs to businesses - for instance by decentralizing wage negotiations in Spain - had helped those countries begin to recover.

Press Conference with Chairman of the Federal Reserve Bank Ben Bernanke

Press Conference with Chairman of the Federal Reserve Bank Ben Bernanke

Doug Casey on Bitcoin and Currencies

We’ve had a num­ber of read­ers ask for your take on this new Bit­coin sys­tem. As a per­son who likes to see the pri­vate sec­tor com­pete in areas that gov­ern­ments try to reserve for them­selves, this seems right up your alley — what do you think?

Doug: It’s a sign of the times. Lots of peo­ple are actively look­ing for an alter­na­tive to the dol­lar. I think Bit­coin is a very good thing, in prin­ci­ple. But after the recent dis­as­trous hack, it’s prob­a­bly a dead duck, at least in ver­sion 1.0.

It’s appro­pri­ate, how­ever, that we’re talk­ing about Bit­coin — an Internet-driven phe­nom­e­non — while you are in Bishkek, Kyr­gyzs­tan and I’m in Beirut, Lebanon, and we’re speak­ing essen­tially for free over the Inter­net. Money is increas­ingly going to be Internet-related. But first we should explain what Bit­coin is.

L: Sure. There’s a Wiki entry, but the basic idea is that Bit­coin is an online (and there­fore dig­i­tal), non-government-backed cur­rency. It’s not backed by any­thing, actu­ally, but that doesn’t seem to be a prob­lem for many users. The sys­tem has been adopted by a grow­ing num­ber of peo­ple around the world in just the last two years. Peo­ple are used to cur­ren­cies not backed by any­thing, so I guess I shouldn’t be sur­prised, but I am. On the other paw, unlike gov­ern­ment cur­rency, the Bit­coin sys­tem is based on a decen­tral­ized com­puter sys­tem that no sin­gle per­son or entity — includ­ing any gov­ern­ment — has con­trol over. That’s part of a design to keep the num­ber of Bit­coins in cir­cu­la­tion (infla­tion) strictly in check. So I can see why some peo­ple would see Bit­coin as being just like gov­ern­ment cur­rency, but bet­ter, because it’s sup­pos­edly inflation-proof.

That’s the idea, any­way, but in my view, it’s still not money — no more than unbacked gov­ern­ment promises are. You can only use them among oth­ers will­ing to pio­neer this cyber-frontier, so I really was quite sur­prised to see them catch on as well as they have. I’ve seen esti­mates that the mar­ket value of Bit­coins in cir­cu­la­tion rose to about $130 mil­lion before they crashed last weekend.

Doug: Again, it’s quite encour­ag­ing to see that so many peo­ple are so dis­gusted with gov­ern­ment cur­ren­cies, and the total lack of pri­vacy in bank­ing. That’s why Bit­coin could catch on at all. But let’s go back to basics, and see if Bit­coin qual­i­fies as money. Money is a medium of exchange and a store of value. Bit­coin may work as a medium of exchange some­times, but not a very good one, because it’s prov­ing so unsta­ble. It has fluc­tu­ated so much in value over its short life that it is totally unsuit­able as a store of value. Over 2,300 years ago, Aris­to­tle iden­ti­fied the five essen­tial attrib­utes that are nec­es­sary for a good money…

L: It has to be durable, divis­i­ble, con­ve­nient, con­sis­tent, and have value in itself. But don’t for­get your own adden­dum of “can’t be cre­ated out of thin air infinitely.”

Doug: Right. Let’s see how Bit­coin stacks up. First, is it durable? As noth­ing more than ones and zeros on a com­puter net­work, it might seem that the answer is no — it’s cer­tainly not as sub­stan­tial as gold. But a Bit­coin is arguably a lot more durable than a piece of government-issued paper than can be lost, burned, or even fall apart in your jeans pocket if you for­get to take it out before doing the laun­dry. More­over, since the Inter­net was designed to be mul­ti­ply redun­dant, and even able to with­stand nuclear attack, it’s arguable the Bits won’t just disappear.

L: We should point out that the recent prob­lem with a bunch of user­names and accounts being exposed was not a fail­ure of the Bit­coin sys­tem itself, but appar­ently of the phys­i­cal secu­rity of an inter­me­di­ary busi­ness that inter­faces between the pub­lic and Bit­coin. There’s another attack put together by hack­ers, not try­ing to crack the integrity of the Bit­coins them­selves, but to get arti­fi­cially paid by the Bit­coin sys­tem for doing com­pu­ta­tional work. Some­one has also released a virus aimed at steal­ing users’ Bit­coin account information.

Doug: Yes, these are all seri­ous attacks, and there are likely to be oth­ers. But it remains to be seen if Bit­coin will sur­vive the crash in value last week­end — Bit­coins had been trad­ing as high as $30 each and dropped to $0.01 at one point. Since Bit­coins rest on noth­ing but con­fi­dence, it’s going to be hard to restore that con­fi­dence now that it’s lost. But it’s inter­est­ing that the Bit­coins them­selves have proven quite resis­tant to tam­per­ing. In short, they’ve shown sig­nif­i­cant dura­bil­ity. So they pass that criterion.

L: Okay. Divisible?

Doug: No prob­lem there; they’re elec­tronic ledger entries, so they can be divided and sub­di­vided as many times as you like.

L: What about con­ve­nience? You can’t spend Bit­coins at a gas sta­tion or a vil­lage in Africa.

Doug: Don’t be so sure. More and more peo­ple are on the Inter­net these days. We’ve both seen vil­lagers in Africa with smart phones. It won’t be long before most every­body has one. Any­one with Inter­net access can arguably deal in Bit­coins, so they could poten­tially be very con­ve­nient to use. That’s a lot more peo­ple than the num­ber who will take, say, Russ­ian rubles, Zam­bian kwacha, or Viet­namese dong.

And Bit­coins are cer­tainly con­sis­tent; each one has iden­ti­cal properties.

L: Do they have value in themselves?

Doug: There’s the rub; I don’t see that they do. Bit­coins are just an elec­tronic abstrac­tion. They can’t be used for any­thing else, nor are they made of some­thing that can be used for any­thing else. They are like one of those knots in a string that dis­ap­pear if you pull hard enough on the ends of the string. They are not backed by any­thing at all. Like gov­ern­ment fiat cur­ren­cies, they are a con game, func­tion­ing only as long as peo­ple have con­fi­dence in them, regard­less of whether that con­fi­dence is well placed or not.

I’ve always said that the dol­lar is an “I owe you noth­ing,” and that the euro is a “Who owes you noth­ing.” With Bit­coins — which no indi­vid­ual can be held account­able for and which have no value in them­selves — I’d have to say they are a “No one owes you any­thing.” It was inevitable, there­fore, that the scheme would col­lapse… at least in its present form.

Their main value seems to have been as a spec­u­la­tive medium. Worse, actu­ally, in that they are — or were — based on find­ing a “greater fool” to pass them on to, for some­thing of value. The bub­ble in Bit­coins is, how­ever, just one of many to come as peo­ple try to get out of paper cur­ren­cies in the years to come. With the bub­ble that arose in tulip bulbs in 17th cen­tury Hol­land, you might at least have wound up with a flower. This time, peo­ple just got stung. The mes­sage is clear: Get used to bub­bles, as gov­ern­ments print up more and more fiat money.

Bit­coin reminds me of the so-called “barter cur­ren­cies” peo­ple tried to start in the U.S. some time ago, sup­pos­edly trad­ing units of “barter.” Peo­ple traded chits, where a bar­ber might charge ten for a hair­cut, and a lawyer 100 for an hour of coun­sel. But they were just another paper cur­rency, based on con­fi­dence. And, when you’re deal­ing with total strangers, con­fi­dence is hard to come by…

L: Sounds like a con­tra­dic­tion; the whole con­cept of barter is trad­ing in goods and ser­vices directly, not via media of exchange.

Doug: Well, barter chits were sup­posed to encour­age trade among those who used them. And they were also a tax dodge, since no offi­cial money changed hands. That was a major incen­tive for using them. But they all dried up and blew away, and the peo­ple who wound up hold­ing them had noth­ing. Sort of like when the Argen­tine peso col­lapsed ten years ago. The provinces decided to set up their own cur­ren­cies, but they weren’t backed by any­thing either, and they all dried up and blew away as well, leav­ing those who held them hold­ing an empty bag.

So, way before the dol­lar value of Bit­coins stepped off a cliff last week­end, I was telling peo­ple who asked me that I didn’t use them and didn’t plan to use them.

Frankly, I can’t see why any­one would, when there’s already an elec­tronic dig­i­tal cur­rency like Bit­coin but backed with gold: Gold­Money. I should dis­close that I’m a small investor in the com­pany. But I have to say that I really do like Gold­Money. It does every­thing Bit­coin does — or did — but is backed by some­thing of real value: gold. That means it’s not just an abstrac­tion, but an actual store of wealth. The ulti­mate proof of that is that you can take deliv­ery of your gold if you want to. With Bit­coin, there’s noth­ing to take deliv­ery of. I don’t under­stand why any­one would use Bit­coin when they can use Gold­Money, which does all the same things but has real backing.

L: Nei­ther do I. I was quite sur­prised to see that the idea had actu­ally caught on. I loathe the gov­ern­ment cur­rency monop­oly as much as any­one, but I wasn’t even tempted to try Bit­coin out, because it wasn’t backed by any­thing. Maybe it’s sim­ply Bitcoin’s case for being inflation-proof. This gets to your adden­dum to Aristotle’s five qual­i­ties: Peo­ple clearly placed great value on Bitcoin’s promise to limit cir­cu­la­tion to a finite num­ber. The per­cep­tion among peo­ple who’ve for­got­ten what money really is — which is most peo­ple — is that money is only a medium of exchange. In this case, the meme that “it’s bet­ter than gov­ern­ment paper” cre­ated enough per­cep­tion of value to keep the things in cir­cu­la­tion — or did until last week­end. Bit­coin looks more like “Bit the Dust” now. But in spite of its prob­lems, do you still seem pleased with the whole Bit­coin experiment.

Doug: I like the fact it’s untrace­able and secret. I like the idea that it was try­ing to be an alter­na­tive to the dol­lar; it’s great to see peo­ple try­ing to get out of the U.S. dol­lar. The dol­lar is a state monop­oly of the worst kind. It’s not only the world’s reserve cur­rency for cen­tral banks, but it’s become the world’s de facto inter­na­tional cur­rency. If you’re Cana­dian or Asian or African or South Amer­i­can and travel abroad, you pretty much need U.S. dol­lars as soon as you leave the bor­ders of your coun­try. Even the euro isn’t much good out­side of the euro­zone. That some­thing like Bit­coin can gain any trac­tion at all is a real — if early — chal­lenge to the supremacy of the U.S. dol­lar. This is quite sig­nif­i­cant. That was prob­a­bly one thing on Sen­a­tor Charles Schumer’s warped lit­tle mind when he referred Bit­coin to the Jus­tice Depart­ment for inves­ti­ga­tion recently. Schumer is always on the wrong side of absolutely everything.

The U.S. dol­lar has actu­ally become a major weapon in the hands of the U.S. gov­ern­ment now. All bank trans­ac­tions go through the U.S. SWIFT sys­tem. Even the Chi­nese and Rus­sians, who have no love for the U.S. gov­ern­ment, have to use dol­lars for inter­na­tional trade. They don’t like it. Mus­lims all around the world are com­ing to feel that they are ene­mies of the United States, so they don’t want to use the dol­lar either. And the more reg­u­la­tions the U.S. puts in place about how money is trans­ferred and used — like FATCA — the harder peo­ple will look for alter­na­tives. The U.S. gov­ern­ment is treat­ing everyone’s dol­lars as its per­sonal prop­erty. They’re becom­ing des­per­ate, and des­per­ate gov­ern­ments are espe­cially dan­ger­ous. This one is start­ing to thrash around like a large, stu­pid dinosaur in its death throes — stay out of its way.

Mohamed Mohatir in Malaysia, fol­low­ing the dic­tates of the Koran, which I under­stand states that only gold and sil­ver should be used as money (the dinar and dirham), actu­ally made moves towards estab­lish­ing a new gold stan­dard. He tried to get other Islamic gov­ern­ments to buy into it, and cut the dol­lar out of their inter­na­tional trade. But most of those gov­ern­ments — then as now, although things may be chang­ing — are both U.S. stooges and klep­toc­ra­cies, so they weren’t inter­ested in hon­est money.

There’s huge and grow­ing appetite around the world for alter­na­tives to the dol­lar. Bit­coin is a beta ver­sion of what’s com­ing in the post-dollar world. Gold­Money, how­ever, is already a proven ver­sion 2.0.

L: So … Invest­ment implications?

READ ON... at Howestreet.com

United States Treasuries Snap Decline as Fed Plans to Purchase Notes Today

US Treasuries snapped a decline from yesterday as the Federal Reserve prepared to buy as much as $6 billion of U.S. debt today, after saying it intends to stick to its plan to purchase $600 billion of securities by June 30.

Yields have risen too far given that inflation is running slower than the Federal Reserve wants, according to Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank. The U.S. government is scheduled to sell $29 billion of seven-year debt today, the last of three note auctions this week.

“It will take a few quarters for inflation to pick up,” said Hiroki Shimazu, an economist at Nikko Cordial in Tokyo. “That will make Treasury yields fall in the next few months.”

Ten-year notes yielded 3.41 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 1/2. The yield increased eight basis points yesterday.

U.S. government securities have fluctuated between gains and losses for the past eight sessions. The 10-year rate will fall to 3 percent by March 31, Shimazu said.

The Fed will buy $4 billion to $6 billion of notes maturing from July 2012 to July 2013 today, according to its website.

The euro was near a two-month high versus the dollar before a German report forecast to show consumer prices rose at the fastest pace in two years. The 17-nation currency rose to $1.3722 yesterday, the strongest since Nov. 22.

Extra Yield

The extra yield investors demand to hold two-year German notes instead of similar-maturity Treasuries expanded to 70 basis points today, the most since January 2009.

The difference between 2- and 30-year rates was 3.96 percentage points. The spread widened to a record 3.98 percentage points on Jan. 20 based on closing levels, indicating investors have been demanding greater compensation for rising costs in the economy.

Ten-year Treasury Inflation Protected Securities show bondholders expect the consumer price index to increase 2.27 percentage points annually on average over the life of the debt. Economists surveyed by Bloomberg forecast an inflation rate this year of 1.7 percent.

Treasuries fell yesterday as the Fed maintained its bond- purchase program while saying the pace of economic expansion is insufficient to lower unemployment. The jobless rate has been more than 9 percent for 20 months.

Government securities also declined after the U.S. sold $35 billion of five-year notes and a report showed sales of new homes rose more in December than economists forecast.

‘Full Speed Ahead’

While commodities have risen, “longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” the central bank said in a statement yesterday after its two-day meeting.

The inflation gauge watched by the Fed, which excludes food and energy costs, increased 0.8 percent in the 12 months through November. The figure is below the 1.6 percent to 2 percent range central bank officials say is consistent with achieving their legislative mandate for stable prices.

Treasuries are heading for a fourth monthly decline on signs the economy is improving. U.S. debt has handed investors a 3 percent loss since the end of September, based on Bank of America Merrill Lynch data.

The MSCI All Country World Index of stocks returned 11 percent in the period, according to data compiled by Bloomberg. U.S. corporate bonds fell 0.2 percent, the BOA indexes show.

Durable Goods

Orders for U.S. durable goods and pending home sales both rose in December, economists said before government and industry reports today. At General Electric Co., the world’s biggest maker of jet engines, operating earnings will increase “nicely” this year, Chief Executive Officer Jeffrey Immelt said Jan. 21.

The Fed’s purchases of Treasuries and mortgage debt reduce the supply of those securities, according to Fidelity Investments, the Boston-based fund manager that oversees $1.6 trillion of assets.

“The corporate bond market is still reasonably attractive,” David Prothro, a debt fund manager at Fidelity, wrote in a report yesterday on the company’s website. “The U.S. economy is stabilizing.”

The seven-year notes being sold today yielded 2.77 percent in pre-auction trading, compared with 2.83 percent at the previous sale of the securities on Dec. 29.

Investors bid for 2.86 times the amount on offer last month, up from 2.63 times in November. Indirect bidders, the class of investors that includes foreign central banks, bought 64.2 percent of the debt, versus a 10-sale average of 50.9 percent.

--Editors: Nicholas Reynolds, Jonathan Annells

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.