Mish's Global Economic Trend Analysis

---

Harvard Professor Frankel Proposes "ECB Should Buy US Treasuries" to Fix Eurozone Problems Posted: 14 Mar 2014 10:48 AM PDT Jeffrey Frankel, a Project Syndicate columnist and professor at Harvard University's Kennedy School of Government says the ECB Should Buy US Treasuries. The European Central Bank needs to ease monetary policy further. Eurozone-wide inflation, at 0.8%, is below the target of "close to 2%," and unemployment in most countries remains high. Under current conditions, it is hard for the periphery countries to reduce their costs to internationally competitive levels, as they need to do. If inflation in the eurozone as a whole is below 1%, the periphery countries are condemned to suffer painful deflation. That paragraph alone makes it easy to see that Frankel is in academic wonderland. Europe could actually use falling prices. So could every other country on the planet. Ask any consumer if they want falling prices and the result would be close to unanimous. As I have pointed out on numerous occasions, the idea that falling prices stop people from buying goods is as idiotic as it is well entrenched. The question is how the ECB can ease policy, given that short-term interest rates are already close to zero. Most of the talk in Europe concerns proposals to undertake quantitative easing (QE), following the path taken by the US Federal Reserve and the Bank of Japan. But QE would present a problem for the ECB that the Fed and other central banks do not face. The eurozone has no centrally issued and traded Eurobond that the central bank could buy. (And the time to create such a bond has not yet come.) By purchasing bonds of member countries, the ECB would be taking implicit positions on their individual creditworthiness. The German Constitutional Court believes that the OMT scheme exceeds the ECB's mandate, though it has temporarily tossed that political hot potato to the European Court of Justice. The legal obstacle is not merely an inconvenience; it also represents a valid economic concern about the moral hazard that ECB bailouts present for members' fiscal policies in the long term. That moral hazard – a subsidy for fiscal irresponsibility – was among the origins of the Greek crisis in the first place. What, then, should the ECB buy if it is to expand the monetary base? For several reasons, it should buy US treasury securities. In other words, it should go back to intervening in the foreign-exchange market. For starters, there would be no legal obstacles. Operations in the foreign-exchange market are well within the ECB's remit. Moreover, they do not pose moral-hazard issues (unless one thinks of the long-term moral hazard that the "exorbitant privilege" of printing the world's international currency creates for US fiscal policy). Finally, ECB purchases of dollars would help push down the euro's exchange rate against the dollar. From there, Frankel jumps straight into the economic loony bin. In this case we are talking about an ECB purchase of dollars that would change the euro money supply. The increase in the supply of euros would naturally lower their price. Monetary expansion that depreciates the currency is more effective than monetary expansion that does not, especially when, as is the case now, there is very little scope for pushing short-term interest rates much lower. Monetary expansion by definition depreciates currency and distorts pricing mechanisms. Frankel continues ... Depreciation of the euro would be the best medicine for restoring international price competitiveness to the periphery countries and reviving their export sectors. Once again Frankel proves he does not understand the forces in play. The major problem in the periphery is lack of competitiveness with Germany and the Northern Eurozone countries. Affecting the exchange rate of the euro itself does nothing to correct those imbalances. If abandoning the euro is not the answer, depreciation by the entire eurozone is. Frankel keeps digging bigger and bigger holes. Out of the blue he makes a statement akin to "If fishing is not the answer, then sending a spaceship to pluto is." What if "fishing" is the answer? In context, abandoning the euro is precisely the answer because that is the fastest way for the periphery to shed debt and regain competitiveness with Germany. By now, readers can easily see the "Law of Bad Ideas" in play, specifically  Corollary Number Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists. For a thorough rebuttal to the absurd notion that deflation is a bad thing, please see Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Corrupt Politicians on the Take (Another Addition to the Law of Bad Ideas); Losing Respect for Governor Christie Posted: 14 Mar 2014 09:16 AM PDT Governor Chris Christie is damaged goods. Revelations regarding lane closures on the Washington Bridge peaked with a 'Very Sad' Chris Christie Apology. Yet, I suspect the final chapter on that sorry saga is not written. To refresh your memory, as political revenge, a Christie aide ordered the closings of traffic lanes on the bridge, during rush hour, as political payback. Traffic was snarled for days. NewJersey.Com reports Fort Lee woman died as GWB closures delayed medical help. Christie No Free Market Advocate I do like how Christie has handled unions, but other Christie ideas have me shaking my head. For example, Tesla, NJ Governor Christie clash over direct sales to customers. Tesla Motors Inc said New Jersey Governor Chris Christie's administration was pushing forward with a regulation that would hamper sales in the state by forcing the electric-car company to use dealers instead of selling directly to customers. Tesla said on Tuesday the administration was undermining its model of selling cars, while the administration says Tesla has long known the company needed a law change to accommodate its sales model. The New Jersey Motor Vehicle Commission introduced a rule in October that made explicit the need to have a franchise license to sell cars in the state, and that rule was due to be approved on Tuesday. New Jersey would effectively be the third state to bar Tesla from selling its cars directly, along with Arizona and Texas, according to Tesla. Why Franchises? Why should anyone need a franchise to sell anything? If Tesla, Ford, GM, or any car maker wants to sell cars on Ebay, through Amazon, or their own online site, why should anyone care? If the buyer and seller think it's OK, of what business is it to the state of New Jersey, Texas, or Arizona. "It seems like Chris Christie is intent on driving traffic into New York with this decision," Northland Capital Markets senior analyst Colin Rusch told CNBC. "We're going to see folks coming into Pennsylvania or into New York."  Texas is certainly peculiar. What the hell are these states thinking? Corrupt Politicians on the Take As some may have guessed in advance, the answer is political cash contributions from car dealers. Tesla doesn't use car dealerships.  They sell directly to the consumer. No haggling, no upselling, no commission for employees, and uniform prices at every store.  You just point to the car, say "I want that," and you buy it. It makes a lot of sense for Tesla.  Customers don't like car dealers, and car dealers don't like electric cars, so why would you try to sell an electric car to a customer through a car dealership?  It is capitalism – a producer of a good is responding to the incentives of the market. But the car dealerships feared, perhaps correctly, that if Tesla Motors could sell cars directly to consumers, there would be no way to stop other car companies from selling directly to consumers.  And they got their way because they bought the laws they wanted, laws which prop up their outdated business model at the expense of Texas consumers and innovative entrepreneurs. Why? Well, the Texas Automobile Dealers Association lobbied hard against letting Tesla sell cars in Texas, spending $278,750 on Texas political campaigns – about 75% to Republicans. In addition to the $278,750 from the TX Auto Dealers Assoc. Pac, the Texans for Public Justice website, shows $453,324 from Thomas Dan Friedkin of Gulf State Toyota, the $331,310 from Gulf States Toyota PAC, and $306,500 from B.J. 'Red' McCombs, of the Red McCombs Auto Group. Corollary Seven to Law of Bad Ideas I have no idea how much car dealers donated to Chris Christie. But I do know a bad idea when I see one. And the above articles shows exactly how and why some bad ideas get implemented: campaign contribution bribes and political revenge. It's time for another corollary to the Law of Bad Ideas. Law of Bad Ideas Corollary Seven: Coercion, threats, bribes, political revenge, and campaign contributions to corrupt politicians on the take explain how some bad ideas become law. For corollary six to the "Law of Bad Ideas", please see Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are subscribed to email updates from Mish's Global Economic Trend Analysis To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610