Home Refinance Calculator: August 2012

Friday, August 31, 2012

Mish's Global Economic Trend Analysis

Spain's Budget Deficit Already Exceeds Maximum for Entire Year; Path of Convergence
China, Germany to Settle More Trade in Yuan, Euros; What's That Mean for Gold, the Dollar?
Brussels Pushes for Another "All Powerful" Banking Committee, Headed by ECB, In Spite of Objections by ECB and Germany
Bad News For Super-Models: Computer-Generated Fashion Models Better Than Real Thing; Fashion Questions of the Day

Spain's Budget Deficit Already Exceeds Maximum for Entire Year; Path of Convergence

Posted: 31 Aug 2012 10:08 PM PDT

Spanish unemployment rate is 25% and rising. Youth unemployment is 52.9% and rising. Meanwhile Spanish budget deficits are such that Spain will need more austerity. I keep wondering what it will take for this setup to blow sky high in riots.

Via Google Translate from Libre Mercado central government deficit already exceeds the maximum provided for the year

The central government posted a deficit of EUR 48,517,000 through July in terms of national accounts, the 4.62% of GDP, representing an increase of 25.8% compared to last year, according to data provided by the Secretary of State Budgets, Marta Fernandez Currás. The deficit figure exceeds the new limit has assumed the state, which has risen to a point, to 4.5%, for the extra year he gave Brussels to Spain to reduce the deficit to 3%.

The deficit through July was a result of payments stood at 100.694 million euros, up 9.8%, while revenues totaled 52.177 million euros, representing a fall of 1.8%. On a comparable basis, net of transfers to regional governments and social security, among other authorities, the deficit stood at 4.12% of GDP.

Humorous Comment of the Day

"We are on the path of convergence required by Brussels," said Currrás, recalling that the deficit is an annual target, so the balance recorded until July continues to be a reference.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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China, Germany to Settle More Trade in Yuan, Euros; What's That Mean for Gold, the Dollar?

Posted: 31 Aug 2012 01:30 PM PDT

Inquiring minds note China, Germany Plan to Settle More Trade in Yuan, Euros.

Germany and China plan to conduct an increasing amount of their trade in euros and yuan, the two nations said in a joint statement after talks between Chancellor Angela Merkel and Chinese Premier Wen Jiabao in Beijing on Thursday.

"Both sides intend to support financial institutions and companies of both countries in the use of the renminbi and euro in bilateral trade and investments," said the text of the statement.

It also said that both parties welcomed investments in China's interbank bond market by German banks and supported the settlement of business in the yuan by German and Chinese banks and the issuance of yuan-denominated financial products in Germany.

Announcement Mean Anything?

That's the announcement, and I have no doubt people who do not understand trade math will trump this up as if it's news of big significance.

Well, it's not. The announcement is a common sense function of math.

There is more bilateral trade between Germany and China, so fundamentally it makes sense that this agreement would be worked out. Indeed, mathematically, the markets would eventually force such an agreement.

If Germany goes back to the Deutschmark, then one should expect bilateral trade between the countries to be in Deutschmarks and Yuan.

The only relevance to the dollar is if Germany is taking away US trade with China. If not, the announcement is a meaningless function of math.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Brussels Pushes for Another "All Powerful" Banking Committee, Headed by ECB, In Spite of Objections by ECB and Germany

Posted: 31 Aug 2012 10:19 AM PDT

Once nannycrats grab on to an idea, they never relinquish it. Eurobonds are the perfect example. Many other ideas float around despite numerous objections in key places. Some of these ideas involve creation of more commissions and more working groups.

Here is a sampling of commissions and groups that I am aware of.

The European Commission is headed by president José Manuel Barroso
The European Council is headed by president Herman Van Rompuy
The Euro Group is headed by president Jean-Claude Juncker
The European parliament president is Martin Schulz
Numerous other committees set policy on trade, energy, and nearly everything else under the sun.

Barroso now wants another new commission, this one under the ECB with the task of being the "all powerful" banking supervisor.

As envisioned, Barroso's plan would create a 23-member board: a national representative from each eurozone country plus six independent members, including its chair and vice-chair.

No doubt there will be dozens if not hundreds of staff members all intent on expanding their own power.

The Financial Times has more details in Brussels pushes for wide ECB powers

The European Central Bank would be given sweeping authority over all 6,000 eurozone banks under a plan being drawn up by the European Commission, putting Brussels on a collision course with Germany and the ECB itself, which have urged a more decentralised first step towards "banking union".

The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU's senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries' failing banks, giving those powers to Frankfurt.

The German government has resisted centralising all supervisory powers with the ECB, however, arguing that Frankfurt should be left to deal with just the eurozone's 20-25 largest banks. National supervisors would then be left as independent and co-ordinating agencies for smaller banks.

Some senior ECB officials had taken a similar view in closed-door consultations with Brussels, EU officials said, though Mario Draghi, the ECB chief, is more sympathetic to the commission's view.

Germany's objections also stem from a desire to keep national control over smaller, politically connected regional savings banks.

Despite the resistance, Mr Barroso this week decided to adopt the more ambitious proposal advocated by the commission's internal market directorate, drafters of the plan, which argued a narrower approach would disappoint financial markets.

Splitting responsibility could complicate the next steps in creating a banking union: setting up a eurozone-wide deposit guarantee scheme and bank bailout fund. If only large banks were covered by those schemes, depositors could flee smaller banks for more secure larger ones, officials argued.

To become law, all 27 nations must agree. Barroso hopes for a summit before the end of the year.

In addition to unanimous approval for such a position, I would point out that ceding power to Brussels is a change so sweeping that Germany would require a national referendum, just as with the eurobonds idea.

Nannycrats do not care about such issues, they just plow ahead, then blame Germany when it will not go along.

Speaking of which, I highly suspect Merkel has taken a partial stance out of political expediency. Perhaps she thinks she can avoid a referendum by limiting authority to only the largest banks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bad News For Super-Models: Computer-Generated Fashion Models Better Than Real Thing; Fashion Questions of the Day

Posted: 31 Aug 2012 08:36 AM PDT

Here is an easy prediction: Price of fashion models in advertizements is going to collapse, if indeed the industry survives at all.

Why should retailers pay for fashion models when an advertizing department can generate models with the perfect height, weight, breast size, nationality, and complexion for whatever designs they want to promote?

Bad News For Super-Models

MarketWatch describes the setup in 5 computer-generated sales pitches

To save on costs—and perhaps assembly time—Swedish retailing giant IKEA created computer-generated images of its furniture for the new catalog, rather than hiring a photographer. By next year, a quarter of the scenes depicted in IKEA's print and online advertising will be digitally drawn rather than photographed, The Wall Street Journal reported last week. In fact, IKEA says it is able to better depict its products with computer images than actual photography.

IKEA is not alone. Hollywood filmmakers increasingly create characters—and not just special effects—with CGI animation. And some fashion lines are finding that it's less expensive to create the perfect specimen digitally than to track down America's Next Top Model. These computer-generated realities may be cheaper, more appealing, and more versatile than the genuine articles.

Related Ideas

The MarketWatch article also discussed simulated driving of cars, movie special effects, and 3-D dream homes.

Special effects are nothing new. New car models come out only once a year. And I believe most people want real images of homes, not simulated models.

In contrast, clothing changes four times a year, with each season, and also varies by weight, height, size, nationality, skin color, age, etc.

Fashion Questions of the Day

Do I care if the person wearing a sweater in a printed image is generated or real? Why would I? How would I know in the first place?

Supermodels on magazine covers may or may not go away due to importance of name recognition, but every modeling job on down is likely to be eliminated over time.

Virtual models simply have too many advantages for real models to compete effectively. This in turn will pressure wages of even the super-models.

Looking for a career? Fashion modeling is not a good choice.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Thursday, August 30, 2012

Mish's Global Economic Trend Analysis

Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge
Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?
Eurozone Retail Sales Decline 15th Month, Plunge Led by Italy, France; German Sales Contract Slightly
France to Hire 150,000 Subsidized Workers With Zero Qualifications; Why Stop There?

Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge

Posted: 30 Aug 2012 11:10 PM PDT

Markit reports Japan Manufacturing PMI Hits 16 Month Low

Key Points:

Output and new orders down at accelerated rates
Near-stagnation of employment
Purchasing costs fall to greatest extent since November 2009

Markit/JMMA Manufacturing PMI

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers' Index™ (PMI™) posted 47.7 in August, down from 47.9 one month previously, signalling the sharpest worsening of Japanese manufacturing sector operating conditions since April 2011. Moreover, the latest deterioration in business conditions was broad-based across all three market groups.

Japanese manufacturing production declined further in August, with the rate of contraction accelerating to the fastest in 16 months. The latest reduction in factory output was the third in as many months.

Reflecting falling new orders and corresponding spare capacity, backlogs of work decreased further in August. The rate at which firms depleted work-in-hand (but not yet completed) was sharp, and the steepest since May 2009.

Japan is in its third deflationary decade in spite of massive fiscal stimulus, massive monetary stimulus, and the major industrial world's highest debt-to-GDP ratio.

US demographics are not as bad, but US consumer debt overhang and student loans are worse. The deflationary forces facing Bernanke are massive.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?

Posted: 30 Aug 2012 05:16 PM PDT

In response to Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation where I stated "The Fed Cannot Realistically Cause Hyperinflation" I received a couple of emails worth reviewing.

Reader Philip writes ...

I do not understand how you could say that the Fed cannot cause hyperinflation. The government has a huge debt. The debt is manageable at super low rates. But, if rates rise due to some inflation or even just caution from abroad then the government starts paying a very large sum in interest. That takes away from its obligations even more than the current deficit amount. Either the Fed has to step in and monetize the debt by printing more and more money spiraling out of control.

Definition of Terms

As always, before one can have a rational discussion, one must agree on definitions. Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time.

Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation.

The US dollar is not headed to zero given the US has the largest stash of gold of any country. That alone would preclude hyperinflation. There are many other reasons that I have touched upon that suggest interest rates are not going up fast.

Credit Markets

The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force.

Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important).

Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces.

Would Printing $50 Trillion Tomorrow Do Anything?

Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything.

Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.

As previously mentioned, such massive printing might briefly cause a temporary attitude change accompanied by a brief asset bubble of some sort (especially in long-dated treasuries given banks would put some of it to that use).

However, massive printing would collapse treasury rates, further destroying those on fixed income, and make it even harder for pension plans to meet assumptions.

Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?

Theory vs. Practice

Certainly we are guessing as to what printing $50 trillion might do. As a practical matter, the odds of finding out are essentially zero. The Fed is not going to print $50 trillion tomorrow.

More realistically, would printing $2 trillion a year for the next 10 years cause hyperinflation?

No, it won't.

So where is Fed induced hyperinflation going to come from? The answer is it isn't.

Government vs. the Fed

At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless (which is exactly why Bernanke is begging Congress to act)

In contrast to a Fed that cannot spend money (except to meet its payroll and expenses and pay interest on reserves, etc), the federal government could actually spend $50 trillion tomorrow. But it won't.

Hyperinflation? Even from a monetary aspect hyperinflation is nowhere in sight.

Hyperinflation is a Political Event, Not a Monetary Event

It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.

I responded that way in an email to reader Peter who replied "Sorry, but your theory is not based on the data. Read the literature on high and hyperinflation episodes."

Well, I have read countless excerpts and Peter is badly mistaken.

Please consider Hyperinflation Nonsense in Multiple Places.

The entire post is worth a look for some remarkably silly predictions, but for the debate at hand, here is the pertinent snip:

Jeff Harding at the Daily Capitalist asks Why Does Hyperinflation Occur?

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes.

For example we all know what happened in Germany during after WWI when politicians, mostly socialists, blamed all their problems on reparations and continued to print so much money that it resulted in the famous cash-in-a-wheelbarrow photos. They literally had no clue what they were doing.

The post-Soviet empire collapse is easier to understand as former communist/socialist regimes fought for power and struggled with economic policy. Many of these countries have reformed or were forced to reform their monetary and fiscal policies.

Many of the socialist-Marxist regimes were Latin American populist governments who employed "revolutionary" anti-capitalist nostrums for economic policy. Chile (Allende) and Argentina are good examples. Argentina has had years of high inflation to hyperinflation since 1980. In Africa most countries were a mixture of strongmen with socialist-Marxist policies. I am not suggesting that these were pure socialist governments, but rather the typical situation where the government seizes or controls large parts of industry and issues regulations controlling much economic activity.

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Harding is correct. This is how I further elaborated...

Zimbabwe vs. Weimar

In Zimbabwe, the Mugabe government initiated a "land reform" program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

In Weimar Germany, printing for war reparations kicked off hyperinflation. Wikipedia provides a good accounting in Inflation in the Weimar Republic.

It is certainly not impossible for there to be a complete loss of faith in the US dollar, however there odds are extremely remote.

Can The Fed Cause Hyperinflation?

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

Hyperinflation by definition would destroy the currency and thus the banks

Hyperinflation would destroy the wealthy and all their corporate bond holding

Hyperinflation would destroy the Fed

Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend.

Hyperinflation Model is Complete Silliness

Those calling for hyperinflation are extremely misguided. It is not going to happen in any timeframe worth discussing.

On the political side, no country is going to force war reparations on the US. The US is not going to peg its currency to another, the Fed is not going to print $50 trillion (and it would not matter anyway unless Congress spent that much), government is not going to confiscate land to the point of causing massive human and capital flight, etc. etc.

Moreover, the US's gold holding, the fact the US has the largest capital and bond markets in the world coupled with ease in starting a business vs. nearly anyplace else in the world, absolutely 100% precludes a hyperinflationary outcome for the foreseeable future.

The hyperinflation model is absolute complete silliness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Retail Sales Decline 15th Month, Plunge Led by Italy, France; German Sales Contract Slightly

Posted: 30 Aug 2012 08:48 AM PDT

Once again there is grim data from Europe. The safe thing to do is expect grim data every time European data is reported. Except for an occasional outlier, you will not be too far off.

Eurozone Retail Sales Decline 15th Month

Markit Reports Eurozone retail downturn deepens in August

Key points:

Revenue contraction extends to tenth month

German sales flat; sharper falls in France and Italy

Inflationary pressures build up

Retail sales in the Eurozone continued to fall sharply on an annual basis in August. The rate of contraction accelerated to the fastest since May, and extended the current sequence of continuous decline to 15 months. This was despite a further year-on-year increase in Germany, and reflected substantial declines in both France and Italy.

Employment Declines 5th Month

Employment at retailers in the Eurozone declined for the fifth month running in August. The rate of job shedding remained modest, reflecting sustained workforce growth in the German retail sector. French retailers posted the steepest job cuts for over three years, while the rate of contraction in Italy eased since July.

Prices Paid Rise

The Prices Paid Index rose for the third month running from May's 19-month low in August, signalling a strengthening rate of inflation of wholesale prices in the Eurozone. Sector data signalled that clothing & footwear and food & drink drove cost pressures in August.

Gross Margins Drop

Retailers' gross margins continued to fall sharply in August. The rate of deterioration eased since July, but was still among the fastest registered to date. Reflecting the relative strength of demand, Italian retailers posted the steepest drop in margins, and German retailers the weakest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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France to Hire 150,000 Subsidized Workers With Zero Qualifications; Why Stop There?

Posted: 30 Aug 2012 08:19 AM PDT

Looking for a loony idea to address unemployment in France? Look no further because I have a doozie.

Via Google Translate from El Economista, France will create 150,000 jobs for young people without qualifications

The French Government has today adopted a draft law providing for the creation of 150,000 subsidized jobs for young people with little or no qualifications, which are most affected by unemployment and employability harder.

The beneficiaries of these so called "jobs of tomorrow" will work for municipalities, hospitals, schools, social organizations, associations or, exceptionally, in private companies, and will receive a grant of up to 75% of their compensation.

The estimated cost is 500 million euros in 2013 and "more than 1,500 million" next year by the state budget, said Labor Minister Michel Sapin, at a press conference.

"We want contracts defined privilege" said Sapin, who nevertheless admitted that the storms are also accepted, and said that public support will be maintained in each case between one and three years, provided that employers provide a "accompaniment" to "very great difficulty youth push" to which they are targeted.

He insisted that the "accompaniment", which may include training for classical channels is "fundamental" to the 500,000 eligible people likely to have between 16 and 25 years, lack of skills and work.

Why Stop at 150,000?

The second half of that translation is a bit choppy but the bill clearly targets "500,000 eligible people" between 16 and 25 with no skills and no qualifications.

So, why stop at 150,000? Why not hire them all? And why stop at age 25? Why not hire everyone with no skills and no qualifications regardless of age?

Hopefully the answers are so obvious that hiring even 5,000 with no qualifications seems preposterous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wednesday, August 29, 2012

Mish's Global Economic Trend Analysis

Governor Brown Admits the Obvious "We Have Lived Beyond Our Means"; Brown Agrees to Vast Overhaul of the California's Pension System; Unions Howl Over Obvious Truth
Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation
Investment Conference Featuring John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson

Governor Brown Admits the Obvious "We Have Lived Beyond Our Means"; Brown Agrees to Vast Overhaul of the California's Pension System; Unions Howl Over Obvious Truth

Posted: 29 Aug 2012 07:19 PM PDT

In a long-overdue moment, governor Jerry Brown has finally admitted the obvious, the state's pension system is broke and California Has "Lived Beyond Our Means". Unions of course are howling at that obvious admission.

Please consider California leaders strike public pension reform deal

California Governor Jerry Brown and lawmakers have reached a deal to raise public employees' retirement ages, have them pay more into their pension accounts, and cap retirement payments in a vast overhaul of the state's pension system that he says will save $30 billion.

California faces a huge liability for funding the nation's largest public pension system, but other states and cities also have enormous pension funding gaps and will be watching the state closely.

Brown did not get everything he wanted from lawmakers, such as a hybrid plan that would funnel some contributions into 401(k)-style accounts, and some of the deal's measures will not affect current employees.

"We have lived beyond our means," he said. "The chickens are coming home to roost and this is just one in a series of countermeasures that will be required over the next decade."

LABOR UNIONS OUTRAGED

Democrats in a conference committee of both legislative chambers approved the deal 4-0 late on Tuesday. The two Republicans on the committee abstained, protesting lack of time to study the measures, and labor groups were stunned.

"We are outraged that a Democratic governor and Democratic legislature are taking a wrecking ball to retirement security for teachers, firefighters, school employees, and police officers," said Dave Low, chairman of Californians for Retirement Security, which represents 1.5 million public employees and retirees.

Outside the state building where Brown unveiled the agreement, union activists said the deal unfairly bypassed collective bargaining rights.

"Labor did not have input on this and we are very, very concerned on what this will mean for rank-and-file workers," said Barbara Maynard, also with Californians for Retirement Security.

Labor Did Not Have Input

That my friends is precisely the way it should be. Labor does not deserve any input and collective bargaining by public unions needs to go the way of dinosaurs.

There is no public benefit to public unions, so there is no need for them. All public unions do is raise costs. The goal of public unions is to do no work for mammoth wages and benefits.

No one in their right mind would willingly take input from such a group.

Beacon of Light in Ocean of Darkness

The key sentence from Governor Brown stands out like a beacon of light in an ocean of darkness. In case you missed it, here it is: "This is just one in a series of countermeasures that will be required over the next decade."

Precisely. Brown's proposal is not the end of what needs to happen, it is the beginning of the beginning of what needs to happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation

Posted: 29 Aug 2012 10:09 AM PDT

According to Forbes, economist Sandeep Jaitly was forced to resign from his position at the Gold Standard Institute after expressing his views with Max Keiser.

Said Phillip Barton, president of GSI "Lest there be any misunderstanding, the views expressed by Sandeep Jaitly in his interview with Max Keiser are not the views of The Gold Standard Institute. To the contrary, we strongly disagree with those views. .... Sandeep Jaitly has resigned from his position as Senior Research Fellow with the Institute and we sincerely thank him for his past contributions."

Let's Tune Into Max

You can read the interview at Keiser Report: Frankenmarkets and Austrian Economics.

What appears to have gotten Sandeep in trouble is his criticism that Mises made "too many mistakes".

However, Sandeep did say, "He [Mises] was certainly the greatest economists of the twentieth century. It's just that he made a slight, few errors of observation. That's all."

Errors in Observation

When it comes to errors in observation, Sandeep has made a few of his own. For example consider these statements from the interview: "What I want to make very clear Max is that you don't need marginal quantitative easing from here for asset prices to start escalating. You only need what has already been printed to start spinning more quickly. And once things start spinning, nothing can slow it down."

Interestingly, the first sentence is true. However, the following sentences show Sandeep fails to understand the role of attitudes as well as the fundamental nature of credit in a credit-based economy.

The statements imply that printed money may come spinning into the economy at any time causing massive inflation the Fed could not stop.

There are two errors in such an analysis. The first error is that banks do not lend from excess reserves. Rather, banks lend, on two conditions, both of which need to be true.

Banks are not capital impaired
Banks believe they have credit-worthy borrowers.

By credit-worthy I mean "lending rates are high enough, or assets strong enough for banks to believe they will make a profit commensurate with risk".

Clearly banks made serious mistakes in the housing bubble in regards to the credit-worthiness of borrowers (primarily based on belief that home prices would not fall), however, both conditions were met.

Sure, banks can start lending again at any time (which is why Sandeep's first sentence regarding no need for further QE to ignite a credit boom is true in isolation). However, the idea that excess reserves are about to come spinning into the economy at any moment is fatally flawed.

For a complete rebuttal to Sandeep's mistaken observation, please see Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves?

Attitudes Have Changed

Note how much attitudes have changed. Banks are not lending now out of rightful fear of more losses.

Very few Austrian economists seem to understand the nature and role of attitudes and credit in boom and bust cycles. Most woodenly stick to views that excess reserves will come pouring into the economy 10 times over causing massive inflation.

Careful observation would suggest the economy does not act as prevailing Austrian theory believes it does. Unfortunately, this is why many Austrians have looked ridiculously silly vs. Paul Krugman when it comes to inflation predictions.

This is by no means a defense of Bernanke or Krugman, as Bernanke has created other very serious problems and economic distortions of all sorts. Moreover, Fed policies and deficit spending have indeed created boom-bust cycles of ever-increasing amplitude.

Indeed, the policies espoused by Bernanke, forever bailing out banks whenever they have gotten in trouble is one of the factors driving money and assets to the 1% vs. the 99%. Clearly, those on fixed income have been destroyed by Bernanke's policies.

Bernanke Translated

For a short, yet thorough trashing of Bernanke's defense of his policies, please see Mish Translation of Bernanke's Statements on the Treasury Carry Trade and the Tax on Savers.

The only way to fix the problem is to end fractional reserve lending and return to sound money. On this point the Austrians are 100% correct.

Spinning Out of Control?

The second error in observation Sandeep makes is belief that "once things start spinning, nothing can slow it down."

That is ridiculous.

The Fed could easily rein in inflation by the simple matter of hiking interest rates. Whether or not the Fed would do so is certainly debatable. However, please be aware that the Fed in and of itself cannot cause hyperinflation without purposely trying to do so, and perhaps not even then.

Fed Cannot Realistically Cause Hyperinflation

The Fed cannot force banks to lend. Nor can the Fed force consumers and businesses to borrow. In a credit-based economy that is what matters most.

Once again, my observation is Austrian economists in general have failed to observe this crucial point. Bear in mind that the Total Credit Market Debt Owed is over $50 trillion! From that aspect, the idea that $1.5 trillion in excess reserves is going to come spinning into the economy causing inflation the Fed cannot stop, is simply ridiculous.

Sure, in theory, the Fed could print $100 trillion and agree to pay 4% interest on excess reserves, but the Fed is not out to destroy the banking system.

Interestingly, if interest on excess reserves was zero, it is debatable whether printing $100 trillion would do much of anything at all other than perhaps cause a brief asset bubble and subsequent crash. I actually doubt it would spur lending or hiring and once again, careful observers will note lending and credit are what matters most.

Practical Restraints

Remember, the Fed is beholden to bankers. Moreover, the Fed does not want to wreck the system because to do so would wreck the banks and the Fed's power along with it.

In a nutshell, hyperinflation fears caused by the Fed are silly. Hyperinflation fears caused by Congress giving away money are more realistic in theory. However, such odds are still extremely low because Congress would not give enough money away in the first place.

With a total credit market exceeding $50 trillion, $1 trillion deficits would not cause hyperinflation for a long, long time.

That said, a global currency crisis at some point in the future is unavoidable if countries keep on the path they are on. Deficit spending and competitive currency debasement globally for the sole benefit of banks and the wealthy (the 1%) is simply not sustainable. Something has to give somewhere, and it will, most likely in multiple places, at a very inopportune time.

Addendum:

Max Keiser reports that Professor Antal Fekete Supports Sandeep Jaitly, with Fekete stating "truth can be approximated only through debate and that at no point was GSI envisaged as a 'thought police'".

For a brilliant trashing of an article in The Atlantic against the gold standard, please see Pater Tenebrarum's article The Atlantic Weighs In on the Gold Standard

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Investment Conference Featuring John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson

Posted: 29 Aug 2012 12:08 AM PDT

I am pleased to announce an economic conference in Sonoma, California on April 5, 2013 featuring some of the best economic thinkers and speakers in the world including...

John Hussman
Michael Pettis
Jim Chanos
John Mauldin
Chris Martenson
Mish
Special Guests

Sonoma is in "Wine Country", west of the Napa Valley and slightly north of San Francisco. If you like the idea of enjoying great weather, excellent food and wine, plus inside access to many of today's best economic minds – all together in one of the most beautiful places in the world – this conference will likely interest you.

Reservations and Details

For reservations and details please click on Wine Country Conference.

The list of speakers includes select economic forecasters that I respect most. The group includes experts on China, monetary policy, and investment opportunities in a shrinking-yield world.

These minds have never all been in the same place at the same time before, so I cannot tell you how excited I am for us all to be together.

Net Proceeds to Charity

Net proceeds from this event go to an extremely worthy cause: funding research for ALS, more commonly known as Lou Gehrig's disease.

Matching $100,000 Grant From Hussman Foundation

From now until the start of the conference on April 5, 2013, the John P. Hussman Foundation will generously match $1,000 of each conference registration fee as well as match any donations made to the Les Turner ALS Foundation, up to a total of $100,000.

Book Your Conference Reservations Now

There will be presentations and panels throughout the conference, as well as ample time to meet the speakers during breaks and mixers.

Please book your reservations now. There is a nice discount for those who book early. The total number of reservations is limited to 200.

Donations and Raffle Tickets

Matching donations continue up to April 5th but raffle tickets are not included in that match.

For those not familiar with the raffle, it is something I organized in honor of my wife Joanne, who passed away on May 16, 2012 from ALS.

If you missed it, please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs

In response to the above article, donations have come in from 40 countries around the globe! See link for details.

Raffle Ticket Entries are split 50-50 with ticket buyers in a drawing to be held November 8 (a change from my original posting date of November 15). Ticket sales end September 27, but you can still make a donation at any time.

Checks

To make a cash donation by check or money order, please send a check or money order to
Lacey Wood
Mish Campaign
Les Turner ALS Foundation
5550 W. Touhy Avenue, Suite 302 Skokie, IL 60077
847.679.3311 (Main)
Any questions, please call the above number.

Credit Card

You can make a donation or purchase raffle tickets by credit card on the Les Turner ALS Site.

Some people emailed they did not like entering the information fields required. However, the purpose is only to ensure the foundation knows how to get in touch with raffle winners!

People move, phone numbers change, and email addresses change. It's as simple as that.

Thanks!

Thanks in advance to all who attend the conference, make a donation, or purchase a raffle ticket. Money will be used for ALS research, a very worthwhile cause.

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

Tuesday, August 28, 2012

Mish's Global Economic Trend Analysis

Capital Flight in Spain Hits 15-Year High
Anti-EU, Anti-Brussels Sentiment Rises in Netherlands; Don't Expect Much From a "Merkollande" Summit
Fed a Profit Center for Taxpayers?
Government Spending as Percentage of GDP

Capital Flight in Spain Hits 15-Year High

Posted: 28 Aug 2012 09:15 PM PDT

If Spain is going to be saved, someone better convince Spanish citizens because Deposit flight from Spanish banks hits 15-year high as bailout rumours grow

Spanish banks lost €1 out of every €20 deposited with them in July, making it the worst month for deposit flight in 15 years as rumours grew that the country is edging closer to a full bailout.

News that banks were losing deposits came as Spain's statistics institute revealed the current recession is worse than thought, with the economy shrinking at an annual rate of 1.3% in the second quarter.

"The downturn in the Spanish economy is deeper than previously thought and accelerating," warned Robert O'Daly of the Economist Intelligence Unit.

Tuesday's revised figures showed recession started three months earlier than previously indicated. "The data shows the recession started in the third quarter of last year," secretary for state for the economy, Fernando Jiménez admitted.

A collapse in internal consumption in a country squeezed by government austerity and massive unemployment is largely to blame for the recession, as this fell at an annual rate of 3.9% in the second quarter.

Unemployment is already at 25% but the speed at which jobs are being destroyed quickened to an average rate of 800,000 jobs a year in the second quarter, according to the statistics institute.

That helps explain why Spaniards, and their companies, are both reducing spending and putting less money in the bank.

The amount of money Germany is going to lose when Spain and Italy decide to exit the euro grows leaps and bounds every month.

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

Anti-EU, Anti-Brussels Sentiment Rises in Netherlands; Don't Expect Much From a "Merkollande" Summit

Posted: 28 Aug 2012 11:17 AM PDT

Emile Roeme, a socialist running on an anti-Brussels, anti-austerity plan is likely to become the next prime minister of the Netherlands.

On the extreme right, populist Geert Wilders wants the Netherlands to withdraw from the eurozone completely.

The centrists who support the nannyzone feel squeezed in the middle, and their days appear numbered.

In a case of Dutch Discontent, Socialists Ride Wave of Anti-EU Sentiment

The economy is in trouble and unemployment is rising -- in the Netherlands as in much of the rest of Europe. Ahead of upcoming elections, the Socialists are riding a wave of euro-skepticism and may emerge as the strongest political force in the country.

According to the polls, [Emile Roeme] the former elementary school teacher could become the next prime minister of the Netherlands.

'Over My Dead Body'

Roemer owes this popularity to his skepticism about Europe. "Having even more Brussels is not the solution to Europe's crisis," he says. The Socialist rails against the European Commission's austerity targets, under which the Netherlands is supposed to reduce its budget deficit to below the Maastricht Treaty ceiling of 3 percent of GDP by next year.

"Over my dead body," says Roemer, referring to the possibility of penalties being imposed by the European Commission. It is also a jibe at the German chancellor, who used similar language to express her views on introducing euro bonds. Too much power has been placed into the hands of uncontrollable technocrats, Roemer claims. "The economic policy Brussels wants to dictate to us is downright antisocial."

If Roemer prevails in the parliamentary election on Sept. 12, German Chancellor Angela Merkel will lose one of the few supporters of her Europe-wide austerity program. The Dutch have stood with the Germans when it comes to imposing strict conditions on countries like Greece.

Now the Socialist leader wants his fellow Dutchmen to vote in a referendum on the fiscal pact, one of Merkel's pet projects, which aims to impose budgetary discipline on the 25 signatory countries. The government in The Hague, which collapsed in April over a national austerity package, has not ratified the agreement yet.

One Fewer Gold Star

Right-wing populist Geert Wilders, who is known for his anti-Islam stance, is also fighting against Europe. He opposes the euro and wants the country to withdraw from the European Union. He even says that one of the 12 gold stars should be removed from the European flag if the Netherlands were to leave the EU.

The left and the right in the Netherlands are coming at the traditionally pro-European centrist politicians from both sides. "It's like a horseshoe," says a senior EU official, talking about his home country. "The extremes are almost touching each other." The center-right Christian Democratic Appeal party (CDA) and the center-left Labor Party are being overtaken by populists on the left and the right.

In a country that, like Germany, has particularly benefited from the common currency, champions of the euro have seen their numbers decline. "Some 60 to 70 percent of our income depends on exports to other European countries," says Mona Keijzer, a top Christian Democratic politician. But she too stresses that each country should address its own problems, and she roundly rejects any additional transfer of sovereignty to Europe. "We want to be a sovereign country," says Keijzer. "We are Dutch."

First Sarkozy, Now Merkollande

Former French president Nicolas Sarkozy and German chancellor Angela Merkel were uneasy allies in an effort to unite Europe. Sarkozy wanted eurobonds, an idea Merkel emphatically rejected at least 20 times.

Hollande has now replaced Sarkozy, and the alliance would appear to be even more tenuous. Not only does Hollande want eurobonds, he also wants to rework some of the austerity measures insisted upon by Merkel.

Thus it is amusing to see politicians who cannot see eye-to-eye on much of anything agree to work together on solution to eurozone crisis.

Germany and France have moved on Monday to bury months of squabbling over how to resolve the euro crisis by agreeing to form a joint policymaking body to create a more integrated economic and fiscal policy in the eurozone and structure a new banking supervision regime.

The German and French finance ministers, Wolfgang Schäuble and Pierre Moscovici, said the aim of the new working group was to produce common policies on how to deal with Greece, Spain and Italy. as well as mapping out longer-term strategies. The Germans hope this will conclude in a full-scale political union within the eurozone.

Full-Scale Political Union? Really?

OK, Hollande wants to save the euro too. Lovely. However, he does not want to cede power to Brussels.

Consider this snip from the Wall Street Journal article France Shows Caution on EU Integration on July 8.

As they debate over the pace of future political integration, Mr.Hollande and Ms. Merkel are expected to spar over whether time has come to appoint a euro-zone budget czar. German officials have called for giving the European Commission more powers to police national budget, and make sure profligate nations don't put the currency union at risk any more.

France, fearing a loss of control over its national budget, has so far rejected that idea.

Instead, Mr. Hollande wants to boost the status of the leader of the Eurogroup, the informal forum where the leaders and finance ministers of the countries that use the euro currency meet.

How Long Can the Merkolande Alliance Last?

My guess is not long given radically different viewpoints on how to get there from here.

United States of Merkel

Let's recap what I said yesterday, in Merkel Pushes Convention to Draft New EU Treaty; United States of Merkel?

Do the German people want a centralized authority over budgets led by bureaucrats in Brussels or is is it primarily Merkel?

I suggest the latter. Merkel wants as her legacy a United States of Merkel (which I define as a United States of Europe in which she gets primary credit for building). She does not care what it costs Germany as long as it gets her in the history books forever and a day.

Numerous Problems

The problems should be obvious. Many countries, especially the club-med states, do not want austerity or loss of sovereignty. They want printing.

Also note that Holllande wants to continue his tax the rich policies while lowering the retirement age and preventing businesses from firing workers.

Will Hollande's ideas work in a United States of Merkel?

Let's assume they will work. Indeed that should be Germany's big fear. Put a bunch of nannycrats together and they are likely to decide anything. And whatever rules they decide will apply to every country in the nannyzone that foolishly signs the treaty.

If the treaty is a simple majority rule treaty, Germany would be at risk of being overruled by the club-med states. If the treaty is by percentages, the club-med states would be at risk of being dominated by what is good for Germany and France (assuming of course Germany and France can agree).

Do-or-Die Political Expediency

Finally, politicians might want a nannyzone, but citizens of many countries would not, and I strongly suspect that includes Germany.

Recall that France and Germany pushed through a treaty in December (still not ratified). Also recall that Hollande ran on a platform of renegotiating the treaty.

Germany and France are still bickering. How's that supposed to work? Does Merkel think an agreement now is likely?

I think not. Instead, her proposal is simply a matter of do-or-die political expediency and her one last chance to push for the United States of Merkel.

Don't Expect Much (Except Bickering) From a "Merkollande"Summit

While Hollande is skeptical at best, the Netherlands is downright anti-Brussels belligerent.

So please tell me again how the Merkolande summit is supposed to work given the Netherlands, Germany, and France still not have ratified the last one, and numerous countries do not want to create a United States of Merkel led by nannycrats with budgetary veto powers.

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

Fed a Profit Center for Taxpayers?

Posted: 28 Aug 2012 08:52 AM PDT

Congratulations to CNBC for one of the silliest economic assertions in history. Please consider this sentence from Fed steps up release of results, says first-half income up.

Its release of first and second quarter results detailed a sharp rise to $46.447 billion in its payments to the Treasury, from $40.456 billion in the first six months of 2011, reminding U.S. taxpayers the Fed has been a significant source of income.

Fed a Significant Source of Income?

Say what? From Federal Reserve FAQs

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Federal Reserve System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

Got that? The Fed receives interest on government debt. The more it bloats its balance sheet, the more interest it receives (from the government, courtesy of US taxpayers of course). Whatever the Fed does not waste on salaries and other expenses, it returns to the US treasury.

Somehow the authors of that article managed to turn the Fed into a significant, $46 billion, profit center for the US taxpayers. Wow.

Furthermore, by suppressing interest rates, the Fed has crucified those on fixed income. Also recall that Fed fueled the housing bubble in the first place by holding interest rates too low, too long, in its open market operations.

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

Government Spending as Percentage of GDP

Posted: 27 Aug 2012 11:08 PM PDT

Here are a couple of charts from Doug Short at Advisor Perspectives regarding government spending.

Federal Government Spending as Percent of GDP

Total Government Spending as Percent of GDP

I asked Doug for those charts because Paul Krugman said he would be concerned if government spending hit 50% of GDP. The trend does not look good, but by Krugman's measure there is a ways to go.

Nonetheless, I think we should be concerned now. The numbers ignore exploding national debt and interest on national debt. Interest on national debt will skyrocket if rates go up or growth estimates penciled in do not occur. Both of those are likely, although Japan proves that amazingly low interest rates can last longer than anyone thinks.

For a discussion of interest, please see Trends in Interest Rates on National Debt Suggest Currency Crisis is Coming

The figures also ignore ever-escalating costs of Medicare, Social Security, and pension promises, all of which are guaranteed to soar in the not so distant future. Romney says Unfunded liabilities amount to $520,000 per household.

I will point out that those liabilities are not debt yet. So might Krugman. However, I am comfortable in reducing benefits and slashing spending while Krugman is not.

Clearly there are many ways to spin this data but please note that government spending in France exceeds 50% of GDP. Also note that French unemployment is 10.2% and Hollande is poised to hike the top marginal tax rate to 75%.

Do we really want to imitate France?

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