Friday, June 8, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Bank of Spain inspectors question the viability of BMN Bank Group

Posted: 08 Jun 2012 12:19 PM PDT

Courtesy of Google Translate please consider Bank of Spain inspectors question the viability of BMN
The latest monitoring report prepared by the inspectors of the Bank of Spain on the integration process of the Banco Mare Nostrum (BMN) group casts doubt on its viability and even states that it "virtually impossible" to "return the financial support of the FROB."

The supervisor reports that BMN has spiraled out of control.

The report, which was completed on 8 May (three days before the announcement of the second reform of De Guindos) warns that deviations are "very significant".

But the failure to meet targets set in the plan, is not the only thing that is highlighted in the report. Inspectors also note changes in accounting principles, "inflated margins," inadequate risk rating and, an incorrect adjustment to reserves that would have rid the institution of record losses in 2011.

The BMN group, born from the union of Caja Murcia, Caixa Penedes, Sa Nostra and Caja Granada, received in June 2010 915 million preference shares FROB.
Quick Translation

The BMN group is bankrupt and it is "virtually impossible" to pay back money to the Fund for Orderly Bank Restructuring (FROB).

Clearly the alleged orderly restructuring process is not so orderly.

For more on the FROB, please see Lending to Peter so Peter Can Lend to Paul

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

Posted: 08 Jun 2012 09:35 AM PDT

Unemployment in France touched 10.2% in April, a number last seen in 1999 according to data from Eurostat.



click on chart for sharper image

The question on newly-elected President Francois Hollande's mind is what to do about it.

Economic Insanity
 
Hollande's layoff clampdown solution according to Labour Minister Michel Sapin is to "make layoffs so expensive for companies that it's not worth it."
France's new Socialist government is planning to ramp up the cost of laying off workers for companies in the coming months, its labour minister said on Thursday after data showed the jobless rate hit the highest level this century at 10 percent.

"The main idea is to make layoffs so expensive for companies that it's not worth it," Sapin said in an interview with France Info radio.

"It's not a question of sanctions, but workers have to have compensation at the right level," he said.

Industry Minister Arnaud Montebourg is also planning legislation that would force companies to sell plants they want to get rid of at market prices to avoid closures and job losses.
Four Things, All of Them Bad

  1. Mass layoffs will occur before the law passes.
  2. Companies will move any jobs they can overseas.   
  3. Ongoing, if it's difficult to fire people, companies will not hire them in the first place. 
  4. Corporate profits will collapse along with the stock market should the need to fire people arise.

The proposal to force companies to sell plants rather than fire workers as outlined by Industry Minister Arnaud Montebourg and Labour Minister Michel Sapin is nothing short of economic insanity.

Nannycrat Dilemma

Think the Nannycrats in Brussels will go for this idea? If they do, they will wreck all of Europe. If they don't, then how are they going to "harmonize" everything?

For more on nannycrats and the nannyzone please see ...


Also see my original post on the "nannyzone" written June 2, 2011, nearly one year ago today: Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

Addendum:

Reader "Bob" writes ....

Point 3 is the biggest but it gets even more insidious. The companies that have enough employees now are generally larger companies with a political voice. The companies that will need employees later are generally smaller, entrepreneurial companies with no political voice.

Since most job creation happens at the entrepreneurial level, the proposed policy will subsidize corporate stagnation while stemming the flow of entrepreneurial companies entering the market.

Over the long haul, this will kill France's economic competitiveness while increasing unemployment.

Recall government enforced jobs in the former USSR in the 1980's. How well did that go? Things got got so bad the USSR had to dissolve.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Monopoly Money vs. Bernanke Money, is there a Difference?

Posted: 08 Jun 2012 02:18 AM PDT

Occasionally I get an email from a reader that makes me pause and think. This is one of those times.

Reader Janet Dight writes ...
Hello Mish

As per Ben Bernanke Monopoly Official Rules "The bank never goes broke. If the bank runs out of money, the banker may issue as much as may be needed by writing on any ordinary paper."

Janet Dight
Clinical Psychologist
Monopoly Money vs. Bernanke Money

So what's the difference between "Monopoly Money" and "Bernanke Money"?

The difference is theory vs. practice.

In Monopoly, there is no difference between theory and practice. The rules are the rules and they will be honored and enforced by the players in the game. Money is printed and handed out without any regard as to whether it might be paid back. There is no such thing as excess reserves. Players are always willing to put money to use. If players don't put money to use, they will be bled to death by other players.

In the Bernanke's world, the Fed can print as much or as little as it wants. What the Fed does print is a loan. That money must be paid back. Collateral (even if speculative) is required and discounts are applied. In Bernanke's world, money is parked as excess reserves at the Fed if banks do not find good credit risks.

At times, it seems there is little difference between  "Monopoly Money" and "Bernanke Money". It all depends on the willingness of banks to lend and consumers and businesses to borrow.

However, even when it seems there is little difference, there is a major difference between a bank giving money to players to spend and loans that must be paid back.

Constraints are Key

Flashback November 23, 2010: Austrian economist Robert Murphy predicts "high inflation" and and writes a post Has Mish Deflated the "Inflationistas"?

My response which in retrospect has clearly carried the day was Failure to Consider Constraints - My Response to "Has Mish Deflated the Inflationistas?"

I invite you to read my detailed response to someone who was clearly wrong but here is the key snip.
Monetary Printing vs. Debt Deflation

There is $35 trillion in credit on the balance sheets of banks, little of it marked to market. Yet, printing $600 Billion is supposedly going to cause serious inflation.
Given the Money Multiplier Theory is totally bogus, The odds sure don't look very good to me

Practical Constraint Recap

  1. Ability of consumers/corporations to take on more debt
  2. Willingness of consumers/corporations to take on more debt
  3. Willingness of banks/credit companies to extend more credit
  4. Ability of banks/credit companies to extend more credit
  5. Unwillingness of the federal reserve to print themselves out of power
  6. Actions of other Central Banks
  7. Actions of Congress
  8. Demographics
  9. Global wage arbitrage
  10. Fed cannot create jobs
  11. Fed cannot give money away
  12. Fed is beholden to banks

In theory the Fed can cause inflation rather easily. In practice the Fed has to deal with many practical constraints.

Theory and Practice

Murphy claims "Bernanke has the power to raise prices if he so chooses". Can he? With whose help? At cost constraints Bernanke can ignore?

In theory, the Fed can cause massive inflation at will. In practice, they can't. As Yogi Berra once quipped "In theory there is no difference between theory and practice. In practice, there is."

You can lead a horse to money, you can't make him eat it. That's the very important difference. It's a question of attitudes.

The Fed can certainly encourage inflation by offering money at seemingly attractive rates, but it cannot force the issue.

Right now, neither consumers nor businesses want the risk. They are too loaded up with debt already, no matter how attractive the Fed wants debt to appear. It's like trying to give a kid one piece of cake too many. At some point, extra frosting makes the cake look less attractive, not more. At that point the kid will not take another bite.

That is the point we are at now. The Fed is hoping Congress will eat more cake. It's up to Congress, not the Fed, and I doubt Congress want to eat as much cake as the Fed needs.
Bernanke's Deflation Prevention Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 "helicopter drop" speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke's roadmap, and a "point-by-point" list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn't work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn't work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn't work...
4. Make low-interest-rate loans to banks. Check. That didn't work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn't work...
6. Lower rates further out along the Treasury term structure. Check. That didn't work...
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn't work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn't work...
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they're buying out to 7 years right now.) That didn't work...
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they "own" the agency debt market!) That didn't work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn't work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I'm still waiting for them to accept bellybutton lint & Beanie Babies, but I'm sure my patience will be rewarded. Besides their "mark-to-maturity" offers will be more than enticing!) Anyway… Check. That didn't work...
13. Buy foreign government debt (and although Ben didn't specifically mention it, let's not forget those dollar swaps with foreign nations.) Check. That didn't work...

Now What?

I wrote about Bernanke's Deflation Prevention Scorecard in April 2009.

Now, Bernanke is squealing like a stuck pig, begging Congress and China to help him produce price inflation in the US while still chastising Congress about a "fiscal cliff".

For details on the upcoming fiscal cliff please see Key Words of the Day: "Nothing", "Fiscal Cliff", "Later"; Bernanke Speech Template; U.S. Fiscal Cliff and What to Do About It

Regarding points 8 and 9 above: the Fed did purchase treasuries and agencies, but admittedly without an explicit ceiling.

Question of Timeframe

The point of this post is not to lay into Robert Murphy or any other misguided Austrian economists.  I had forgotten about the above debate and found it searching my blog for "constraints".

Also bear in mind that I happen to agree with the Austrian economists on most points of view except timeframe.

Their timeframe is way off because ...

  1. They view inflation as an exercise in printing, completely ignoring the role of credit 
  2. They ignore the changing attitudes towards lending by banks
  3. They ignore demographics and the changing attitudes of aging boomers headed towards retirement
  4. They ignore constraints on the Fed and constraints on banks
  5. They ignore the destruction of credit on the balance sheets of consumers and its effects on prices

Record Low Treasury Yields a Sign of What?

If massive inflation was coming 10-year treasury rates would not be yielding a record low 1.60% and consumers would certainly not be deleveraging!

Might massive inflation be coming down the road?

Certainly, but it will take a change in attitude by consumers and banks or massively reckless policies by Congress.

Interestingly, Congressional policies are indeed "massively reckless" just not reckless enough yet. The emphasis is on "yet". I will not be a deflationista forever, but I remain one for now.

Looking Ahead

I remain extremely amused by countless emails from people who tell me about how wrong I am going to be. 

They all miss my ability and willingness to change my mind! At some point I am going to change my tune. History suggests I will be far too early rather than late. Time will tell.

For now (and as I have been saying for as long as I have been blogging), hyperinflation or even "big inflation" is nonsense.

Constraints and Attitudes are Key

For now, attitudes, deleveraging, demographics, and the destruction of the value of credit on the balance sheets of banks absolutely and without a doubt overwhelm Bernanke's ability to do anything meaningful about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


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