Tuesday, February 5, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Currency Wars Heat Up: Hollande Proposes target for Euro; US Carmakers Want Obama to Punish Japan; Warnings From China, Russia; Sheer Madness

Posted: 05 Feb 2013 10:58 PM PST

With the Yen sinking to new lows nearly every day, and with French President Francois Hollande now in the act of pleading for a lower euro, it's time to step back and review the currency war madness of the past couple of weeks. There is plenty of madness to review.

Hollande Calls for End of Euro Fluctuations

Please consider Hollande's comments on euro fluctuations.
Mr Hollande called on government leaders to agree on a target for the currency's exchange rate over the medium-term, warning that the rising currency may deepen the recession.

"The eurozone must, through its heads of state and government decide on a medium-term exchange rate," he said.

"We can't let the euro fluctuate according to the mood of the market."

He added that the exchange rate should not be set artificially but that the eurozone should act on global markets to protect its interests.
Hollande says "Governments must decide exchange rates". Mish says really? What if governments don't agree with each other? Could that possibly happen?

Japan Must Stick With Stimulus says Pimco's El-Erian

Pimco co-CEO tossed his hat into the madness last week with his silly idea: Japan Must Stick With Stimulus.
Japan's government has to follow through with plans for stimulus spending, monetary easing and a doubled inflation target to sustain a weakened yen, said Mohamed El-Erian, co-chief investment officer of bond giant Pacific Investment Management Co.

Prime Minister Shinzo Abe needs to carry out stimulus spending while Japanese consumers will have to accept rising prices for goods such as oil as the yen depreciates, El-Erian said.
El-Erian says "Japanese consumers will have to accept rising prices". Mish says really? If so, it implies the US, Eurozone, China, UK, Brazil, and everyone else will "have to" accept a higher exchange rate vs the Yen.

Even if everyone "accepted" the idea, is that a good thing? For who? For aged Japanese consumers retired on fixed incomes invested in Japanese bonds earning zero percent?

Questions abound. Here is another important one: What does the US think about the plunge in the Yen? That question has an easy answer ....

U.S. Carmakers Urge Obama to Punish Japan for Weak Yen

Bloomberg reports U.S. Carmakers Urge Obama to Punish Japan for Weak Yen.
President Barack Obama should tell Japan's new government that the U.S. will retaliate for policies aimed at weakening the yen, a group representing Ford Motor Co. (F), General Motors Co. (GM) and Chrysler LLC said.

Japan's Liberal Democratic Party, which reclaimed power last month, has let the yen continue its slide against the dollar, making U.S. auto exports relatively expensive, the American Automotive Policy Council said yesterday in a statement.

"We urge the Obama administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures," Matt Blunt, a former Republican governor of Missouri and president of the Washington-based industry group, said in the statement.
Toxic Parcels

While pondering the above circular mess that apparently everyone must accept (except they don't), please consider Europe drawn into global currency wars as slump deepens by Ambrose Evans-Pritchard.
The world is edging closer to all out currency conflict as Europe's politicians join a chorus of policy-makers across the globe pushing for devaluations to fight for market share.

Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer willing to be the last economic player holding the toxic parcel of an over-valued exchange rate, describing the euro as "dangerously high" after its three-month surge against the dollar, yuan and yen.

The comments follow warnings by two French ministers this month that the strong euro is holding back efforts to pull the France out of deep industrial slump.

Alexei Ulyukayev, deputy head of Russia's central bank, said the tilt in EMU policy marks a new escalation as every major bloc of the global economy tries to drive down its exchange rate at the same time. "We are now on the threshold of very serious currency wars," he said.

Korea has asked the G20 take a stand against beggar-thy-neighbour policies in Moscow next month, accusing Japan and the West of covert debasement through loose money.
Once again Pritchard spoiled an otherwise excellent article with a silly finish: "The underlying problem is a global saving glut as the world saving rate hits a record 24pc of GDP".

Good Grief. With global credit exceeding global GDP by many multiples, and with the US credit market at $55 trillion vs. GDP of not quite $16 trillion, it is preposterous to speak of a global saving gut.

By the way, Austrian economists will correctly point out that it's impossible to ever have too much savings, in any circumstance. However, it's certainly possible to have too much debt (the opposite of savings).

Japan had massive savings, but the Japanese government foolishly squandered all of it with misguided Keynesian stimulus, the same measures that El-Erian now insists are needed.

Also note that Russia is in on the complaining act.

There are a few sane voices in the wilderness. Jens Weidmann at the German central bank is one of those voices.

Weidmann warns of currency war risk

The Financial Times reports Weidmann warns of currency war risk.
The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany's Bundesbank warned on Monday.

Jens Weidmann, whose institution's own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was "perhaps right" in forecasting an end to the era of central bank independence.

"It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy," Mr Weidmann said in a speech in Frankfurt.

"Whether intended or not, one consequence could be the increased politicisation of the exchange rate," he said, according to a text of his speech provided by the Bundesbank. "Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way."
Alarming Infringements

Weidmann commented on alarming infringements and increased politicisation in Hungary and Japan. He failed to point out Switzerland. Brazil is also complaining mightily, and of course French president Hollande is in on the act? Anyone else?

Of course! Currency manipulation talk and China go hand in hand. Recall that Republican candidate Mitt Romney stated many times that one of the first things he would so would be to label China a currency manipulator. What does China think?

Yi Warns on Currency Wars as Yuan Close to 'Equilibrium'

About a week ago, the deputy governor of China's central bank, Yi Gang Warns on Currency Wars as Yuan Close to 'Equilibrium'
China's foreign-exchange regulator urged Group of 20 nations to improve collaboration to avoid any so-called currency wars while signaling he's comfortable with the value of the yuan.

Yi, who heads the State Administration of Foreign Exchange, said he's concerned about the potential fallout from expanded asset-purchases programs and near-zero interest rates in the world's advanced economies.

"Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows," Yi, who is also head of China's foreign-exchange regulator, told reporters. "Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?"
Yen Policy Under Fire

Reuters reports Japan defends stimulus, yen policy under fire.
Japan's economy minister rejected criticism on Saturday that his country's extraordinary fiscal and monetary stimulus program was aimed at weakening the yen and undermined central bank independence.

"You might think there's a deliberate policy to drive down the value of the yen but we in government refrain from commenting on the exchange rate of the yen," Amari said in response to criticism of Japanese action.
Mish Translation "We have a deliberate policy to drive the Yen lower. No other country supports that, so we don't comment on exchange rates."

Dangerous Situation

The Reuters article continues ...
A European Central Bank source, speaking on condition of anonymity, said the ECB was "not very happy" at what was seen as a step towards competitive devaluations and the Group of 20 major economies' finance ministers and central bankers should address the issue next month.

"It's not a problem yet. But if they (Japan) continue in that direction and we see also what's happening with quantitative easing in the United States and Britain, then we would be the only one who would not follow suit.

"The risk is that this would indeed have an effect on the exchange rate and that we would get into a dangerous situation," the ECB source said.
Mish says "If you are following this discussion at all, you know damn well that the situation is already far beyond dangerous".

Beggar Thy Neighbour Tactics

Please consider this discussion on Wikipedia regarding Beggar Thy Neighbour tactics.
In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.

Beggar-thy-neighbour policies were widely adopted by major economies during the Great Depression of the 1930s.

Alan Deardorff has analyzed beggar-thy-neighbour policies as an instance of the prisoner's dilemma known from game theory: each country individually has an incentive to follow such a policy, thereby making everyone (including themselves) worse off.

An early appearance of the term, which presumably originates from the name of the Beggar-My-Neighbour card game, is seen in the title of a work on economics from the early period of the Great Depression.
Currency War Idiocy

One voice of reason in midst of all this madness is my friend Pater Tenebrarum on the Acting Man Blog who writes about The Currency War Idiocy
Harvard University professor Martin Feldstein, long a critic of the euro, said on Jan. 5 that European policy makers should consider a coordinated approach to weaken the euro as a way to rally growth via exports.  "A lower euro would make each of the euro-zone countries more competitive relative to the countries outside the euro zone," Feldstein said."

There you have it. Even in Harvard they just know somehow that once your money buys less, you've actually become richer. It seems to be the modern-day version of the philosopher's stone. Alchemists everywhere recommend it!

Let us hypothetically assume that we have entered Orwell-land ('war is peace!') and one can actually get richer by lowering the value of one's currency. One problem is obviously that not everybody can do it at the same time. If one wants to cheapen one's currency, other currencies must by necessity increase in value. The next problem is how does one go about it? How can one's currency become worth less than that issued by others? The only solution seems to be to increase its supply – at a rate that exceeds that of the competition. This process is also known as 'inflation'. So in other words, what the wise gentlemen listed above are all advocating is that one should attempt to get rich by means of inflation.

Pure genius! No-one has ever thought of that one! No, wait, a few people have: ...
Please read the rest of the article because Russia, Norway, South Korea, and the UK are all in on the act and Pater has some humorous comments.

Bear in mind, a few years ago there was near-universal agreement the US dollar needed to drop. Now the cat-calls are predominantly for the euro to drop. In practice, nearly all the central bankers want their respective currencies to drop.

What We Know

  • The US wants a lower Dollar
  • Eurozone ministers want a lower Euro
  • Japan wants a lower Yen
  • The UK wants a lower British Pound
  • Norway wants a lower Krone
  • Brazil wants a lower Real
  • China wants a lower Yuan

What We Also Know

  • The above is mathematically impossible in relation to each other
  • The above is mathematically possible in relation to something else

That something else is a currency untouched by central bank and political madness.
That something else is gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Making the Case for 100% Automation with Zero% Efficiency

Posted: 05 Feb 2013 02:31 PM PST

In regards to robots taking the place of humans, I can make a case that in some easily-defined setups, that 100% automation combined with 0% efficiency would be the best possible outcome.

Care to take a stab at that seemingly-impossible concept before reading further?

The idea stems from my post Robot Wars in China; Burger Flipping Robots Serve 360 Gourmet Burgers an Hour, where I concluded "If a job is repetitive and programmable, a robot is out to get it. That even includes minimum wage jobs in manufacturing and in food service."

In response to the above, reader Craig wrote ...
To the extent that's true, it's also true that tens of millions of white-collar government bureaucrats and bureaucrats in the private sector who administer and oversee government regulations and tax codes will NOT be automated. The economic and social implications are tremendous.  They create no wealth, and many keep wealth from being created.
Curious Setup

Craig is essentially correct. However, the solution is certainly not to automate the tasks as Craig seems to imply, but rather to kill the idiotic regulations (and I am sure Craig would agree).

Nonetheless, let's ponder the automation aspect.

Specifically, please consider economically destructive ideas such as price controls in Argentina or massive taxes coupled with incomprehensible tax rules in Italy.

Let's further assume that price controls in Argentina and tax collection in Italy could suddenly be automated with 100% enforcement at zero percent cost. Would you do it?

On the plus side, you would get rid of a bunch of bureaucrats, many of them taking bribes to look the other way when the time comes.

On the minus side, if those tasks could be fully automated with high levels of compliance, then Italy would collapse under tax burdens, and black markets would take over the economy in Argentina as shortages of goods at official prices skyrocketed. 

Indeed, many regulations are so bad that the combination of inefficient bureaucrats, bribery, and evasion is a better choice than automation (assuming of course, that automation would actually work as bureaucrats intended).

In such instances, full automation with zero percent efficiency and zero cost would be perfect. In the real world, zero percent efficiency out of a government implementation is certainly conceivable. Unfortunately, zero cost isn't.

However, if costs are low enough, and efficiency low enough, then automation would be a better choice than the status quo.

Addendum:

Here is an email from reader Micael that describes the problem nicely.
The big problem with unemployment is all the regulations in the labor market preventing the market to quickly adapt to changes.

Examples

  1. Welfare systems encourage the unemployed to stay unemployed instead of taking a minimum wage job
  2. Welfare systems tend to keep people employed in dying segments of job markets
  3. Wage regulations
  4. Labor union induced regulations
  5. School systems not geared toward market demands 
  6. Wages are generally stiff on the downside
  7. Regulations preventing entrepreneurs from creating new jobs
  8. Tax policy is a drain on productive sectors of the economy

Government and Fed policies accelerated the flight of jobs overseas, and now accelerate (by cheap money) the use of robots. Robotic disruption would have happened anyway, but policies have accelerated the pace.

Meanwhile, efforts by the Fed to induce price inflation put a huge squeeze on fixed incomes recipients as well as the unemployed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Spoiled Brat Syndrome

Posted: 05 Feb 2013 10:16 AM PST

Here we are once again. In spite of $trillion deficits as far as the eye can see, neither Obama nor the Democrats want to do anything about it.

Please consider Obama to Urge Congress to Delay Automatic Spending Cuts
President Barack Obama will urge Congress to postpone automatic spending reductions scheduled to begin March 1 as Senate Democrats debate options for replacing part of the $1.2 trillion in across-the-board cuts.

Obama will ask Congress to delay "deep, indiscriminate cuts to domestic and defense programs" in remarks scheduled for 1:15 p.m. today, according to a White House statement. "Uncertainty around the sequester is already having a negative impact on our economic growth," according to the statement.

"The challenge we face right now is the fact that government spending is completely out of control," Senator Mitch McConnell of Kentucky, the Republican leader, said yesterday on the Senate floor. "So to focus on a tax of any kind is to miss the point entirely."

In an interview on Bloomberg Television today, House Majority Leader Eric Cantor said Democrats and the president have been "absent" in working toward fiscal discipline. "All we hear from this president is 'we've got to raise people's taxes.' That's just not the answer," said the Virginia Republican.

Boehner of Ohio and House Budget Committee Chairman Paul Ryan of Wisconsin, both Republicans, have said they expect the full spending cuts to take effect.

While Defense Secretary Leon Panetta once called the automatic cuts a "doomsday mechanism," Deputy Defense Secretary Ashton Carter said in a Jan. 29 interview that it is "more likely than unlikely" they will take effect.
Defense Cuts

Defense programs would be cut by 7.3 percent, or $42.7 billion, during the last seven months of fiscal 2013. Non- defense budgets would be trimmed by $42.7 billion.

Many programs that Democrats care most about would be reduced. Obama's Office of Management and Budget said the plan would make reductions of 2 percent to Medicare providers and 7.6 percent to non-defense programs such as temporary assistance for needy families.
Will Republicans Wimp Out Again?

Notice the talk of doomsday cuts even though the war in Afghanistan is winding down and the war in Iraq is over.

Pray tell what's wrong with going back to a level of military spending in 2008, 2004, or even long before that?

What I fully expect is for Republicans to cave in on social spending cuts in return for Democrats caving in on military cuts, effectively kicking the can down the road again.

Cookies, Candy, Spoiled Brats 

The political process is similar to the way spoiled mothers treat spoiled brats whining for candy bars and cookies. The brats are of course Republicans (whining for cookies),  with Democrats (whining for candy bars).

Cookies represent increased military spending of course, and candy bars represent social spending.

The prudent thing would be for neither brat to get anything because they are seriously obese already. However, the whining babies are willing to placate each other (temporarily forever), and Mother (Obama) is willing to placate both of them to get them to stop whining.

Yet, in the end, after stuffing themselves with more cookies and candy, neither brat will be happy.

Republicans will be upset Democrats got candy bars, and Democrats will be upset Republicans got cookies. Nonetheless, whining for more cookies and candy bars will continue, once again, temporarily forever. Taxpayers who cannot afford the party will ultimately have to pay the bill.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Argentina Announces Price Freeze to Control Inflation; Expect a Robust Black Market and Falling Tax Revenue

Posted: 05 Feb 2013 01:23 AM PST

Argentina just announced price controls. Yet, common sense alone is all it takes to know that price controls cannot work.

For example, if government sets prices too low, suppliers will not sell merchandise at a loss, and shortages will appear. It will not matter one bit what the official prices are, because it will be impossible to get merchandise at deep discounts to true market prices.

It's as simple as that, yet politicians think they can halt the incoming tide by decree.

Please consider Argentina Freezes Prices to Break Inflation Spiral.
Argentina announced a two-month price freeze on supermarket products Monday in an effort to stop spiraling inflation.

The price freeze applies to every product in all of the nation's largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies' trade group, representing 70 percent of the Argentine supermarket sector, reached the accord with Commerce Secretary Guillermo Moreno, the government's news agency Telam reported.

The commerce ministry wants consumers to keep receipts and complain to a hotline about any price hikes they see before April 1.

Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it's trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.
Expect a Robust Black Market

The government's official CPI measurement is 10.8%, but no one believes that, especially with the government attempting to hold wage hikes to a mere 20%.

Setting up a hotline is a waste of time and money. Actually, it's worse than that.

If the hotline and other enforcement mechanisms succeed at anything, it will be to drive transactions to the black market. And then the government will lose tax revenue in the process.

The more "success" the government has in suppressing illegal price hikes, the bigger the black market will become.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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