Mish's Global Economic Trend Analysis

Prince Michael of Liechtenstein Warns "QE a Sign of Helplessness, Will Not Reach Economy"; Prince Michael vs. Martin Wolf
Rebels Advance Towards Mariupol; 15,000 Ukraine Troops Risk Encirclement in North; Kiev Lies Pile Up; New Maps
"World Running Out of Positive-Yield Bonds"

Prince Michael of Liechtenstein Warns "QE a Sign of Helplessness, Will Not Reach Economy"; Prince Michael vs. Martin Wolf

Posted: 23 Jan 2015 04:03 PM PST

I received an interesting email today from Geopolitical Information Service (GIS) regarding statements made by Prince Michael of Liechtenstein on European QE by the ECB.

Let's compare and contrast what Prince Michael has to say with what economic writer Martin Wolf had to say, also from today.

QE a Sign of Helplessness, Will Not Reach Economy

Please consider European QE Funds Will Not Reach the Economy by Prince Michael of Liechtenstein.

The European Central Bank's decision to introduce a programme of Quantitative Easing (QE) is not a win-win situation but rather an expression of helplessness ... that politicians in European Union countries are not prepared to address the necessary reforms, writes Prince Michael of Liechtenstein.

Necessary basic reforms are crucial in Europe if it is to restore global competitiveness, increase productivity and get the unemployed back to work. This includes reducing the share of national and local government in the economy. This will reduce the overheads of the national economy and reduce the deficit. Deregulation of laws which are too stringent such as labour and competition law, would enhance activities and ease innovation and job creation.

The 2008-2009 banking crisis saw the US focus on re-establishing the equity basis of the banks to a level which allowed the banks to lend to business. Europe instead chose the path of stress tests. In a simplified way we can say that if a bank reduced its loan portfolio to business, instead of increasing its sound equity basis, it could also pass the stress test. It also means that banks are reluctant to lend more money to business. This prevents new money trickling into the economy.

Zero to negative interest rates are also destroying savings and reducing personal retirement provisions. Pensions have been hit hard. This situation has been exacerbated by the fact that government pension schemes are insufficiently financed.

The real problem with the QE programme of buying sovereign bonds is that it takes the pressure for reform off the politicians. The ECB has already helped several European governments buy time so they can carry out reforms. Most of them – and especially France – have failed to use this opportunity.

It seems unlikely that these irresponsible attitudes will change with QE.

It Won't Work, "But It's a Start"

In contrast, Financial Times writer Martin Wolf says "Nobody knows whether ECB's QE will work but it is a start at least."

Actually, I am quite certain it will not work, and is in fact exactly the wrong thing to do. But let's dig deeper into Martin Wolf's thesis as outlined in Draghi's Bold Promise to do What it Takes for as Long as it Takes.

Wolf: Pity Mario Draghi, president of the European Central Bank. He is seeking to lead the eurozone to monetary water. Unfortunately, the beast has many heads: some long for a drink; others insist a drink would be bad for all. Yet the ECB has to try. Letting deflation take hold would be far more dangerous.
Mish: There's that nonsense about price deflation once again. A complete deflation rebuttal is below.

Wolf: So the ECB has decided to purchase €60bn of assets a month until at least September 2016. Above all, the purchases will continue until the bank sees a "sustained adjustment" in the path of inflation consistent with its aim of achieving inflation rates "below, but close to, 2 per cent" over the medium term. ...This is akin to Mr Draghi's 2012 pledge to do "whatever it takes" to save the euro. This time the ECB says it will buy some €1tn of assets, which is 10 per cent of eurozone GDP and a similar proportion of gross public debt. Above all, it will keep going until it hits its target. ... The crucial point is that the ECB has set a benchmark against which cessation of the programme must now be justified.
Mish: The crucial point is the stupidity of it all. Interest rates close to zero% did not fix the problem, or cause inflation. How in hell will interest rates going a few basis point lower fix anything? Here's the deal: The ECB cannot fix eurozone structural problems. And there are numerous problems to be sure. Add Prince Michael of Liechtenstein to the small list of people who realize the complete foolishness of the ECB's action.

Wolf: Failure to achieve the ECB's objective would devastate its credibility.
Mish: Credibility? What credibility? Prepare to be devastated.

Wolf: The eurozone might soon find itself coping with populist governments of the left or right utterly opposed to the policies imposed upon them. That way surely lies a far bigger disaster.
Mish: Populist policies are on the way because political leaders would not make the necessary reforms nor write off debt that cannot possibly be paid back.

Wolf: Nobody knows whether this action will work. But at least it is a start.
Mish: Actually, no one can realistically "know" much of anything about the future except outside of basic mathematical truisms and the fact we will all eventually die. That said, we can be quite certain, the ECB's plan is indeed ridiculous as explained further below. Curiously, not even Wolf claims it will work. Yet, he calls it a "start". A start to what?

Wolf: That is far from a complete solution to the eurozone's woes. But it is a welcome effort to keep the eurozone show on the road.
Mish: What road is that? To Oblivion?
Debate Over

Eurozone Structural Problems

The problems in Europe are insurmountable, and well understood by many, but apparently not Wolf.

No fiscal union
Wildly differing social agendas of member states
Wide variances in productivity
Wage discrepancies
Retirement benefit discrepancies
One size fits all monetary policy
To make treaty changes every eurozone country must agree
Target2 imbalances

What the hell good would even €5 trillion in QE do to fix those?

What good would it do if the ECB bought every bond from every country and pushed rates to zero across the board? How would it fix any structural problem?

Michael Pettis, Steen Jakobsen, Prince Michael, Mervyn King, Mish vs. Wolf

Once again, and with reasonable logic instead of Wolf's unrealistic hope...

Mervyn King: More QE will not help the world.

Steen Jakobsen (Others): "Lower Interest Rates May Reduce Consumption". Michael Pettis at China Financial Markets and Lacy Hunt at Hoisington Management both agreed.

I wrote about Steen's theory in Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph, a rebuttal to Bloomberg author Barry Ritholtz, also in favor of massive QE.

Deflation Fighting Silliness

Let's once again review my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

I also strongly suggest Wolf consider Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices.

For a third take on the insanity of fighting consumer price deflation, please see Deflation Bonanza! (And the Fool's Mission to Stop It).

Problem is Debt

The problem with the global economy in general is debt. You cannot cure a debt-deflation problem via attempts to force more debt into the system. It is axiomatic the cure cannot be the same as the disease.

I have emailed Wolf before but he does not have the courtesy to respond no matter how politely I express things.

I will email Wolf again but do not expect a reply. At any rate, I am pleased to see the list of people willing to speak out on the ridiculousness of QE is growing in unexpected places.

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

Rebels Advance Towards Mariupol; 15,000 Ukraine Troops Risk Encirclement in North; Kiev Lies Pile Up; New Maps

Posted: 23 Jan 2015 12:57 PM PST

Kiev Lies Pile Up

Major advances were made by rebels in the last couple of weeks. A claim made by Kiev that Ukraine recaptured the airport in Donetsk is a now proven lie.

And the lies pile up. For example, on January 21, the BBC quoted President Petro Poroshenko "Russia has more than 9,000 soldiers and 500 tanks, heavy artillery and armoured personnel carriers in Eastern Ukraine".

How can you hide 500 tanks and heavy artillery from US spy satellites? The answer is you cannot. And if those vehicles were actually in Eastern Ukraine, the US would have complained about it long ago.

On January 19, the Russian Activist reported 382 Russian soldiers killed in Ukraine during last three days.

"Respected Russian human rights activist Elena Vasilieva has announced that 382 Russian soldiers have been killed in Ukraine during the last three days."

There were no pictures or names. The above sentence was the entire article.

Sadly, people believe nonsense like this USA Today report:

There could be as many as 15,000 Russian troops in Ukraine, many of them deployed there without official documents", said Valentina Melnikova, head of the Committee of Soldiers' Mothers.

Reader Jacob Dreizin (a US citizen who speaks Russian and reads Ukrainian) had this to say about Valentina Melnikova:

Mish,

There have been a large number of these "Russian soldiers killed in Ukraine" stories in the Western press since last spring or summer. As a whole, they tend to confuse Russian soldiers with any and all Russians killed in Ukraine.

Yes, there have been a lot of Russians, Cossacks, and Chechens who have crossed the border to join the rebel militia. Several hundred of them have been killed, and in most cases, their bodies have been shipped back, funerals held, etc.

That does not mean that they were serving with the Russian army at the time of death.

What's really confusing to the Western press, is that the Russian groups keeping track of the deaths include all Russian citizens killed in Ukraine in their tallies.

As for actual Russian military deaths in Ukraine, it seems there were maybe several dozen of those, mostly from last August. But it was nowhere near the "thousands of Russians and hundreds of Russians tanks" claimed by Kiev. President Petro Poroshenko's claims are out-of-this-world nonsense.

Valentina Melnikova is totally off her rocker. Her group lost all credibility back in the early 2000s, when it inflated Russian deaths in Chechnya by a factor of three or four.

The allegedly widely respected Elena Vasilieva has claimed that entire Russian brigades have been wiped out in Ukraine. Keep in mind that a brigade is at least 2000 men. Of course, if 2000 bodies came back to one Russian base (or simply disappeared from one base), it would be all over social media in a split second. The western press has broadcast her claims with no questions and no sanity check. It is a disgrace.

Regards,
Jacob

Lies Repeated Often Enough Get Believed

The Telegraph, the Washington Post, the Daily Mail, and even respectable places like The Guardian have all carried such stories.

Lies repeated often enough get believed.

That does not mean I believe everything Putin has to say. I surely don't. Both sides lie. The first casualty of war is the truth.

But the preponderance of easily disputed lies is from Kiev. Yet, few in western media are willing to call President Poroshenko on them.

Ukrainian Dead Understated

Looking for accurate reporting of Ukrainian dead soldiers? Don't expect that out of Kiev either. CounterPunch explains in Ukraine's Lower Class Military.

Recently, there appeared on the Internet an electronic database with photo-documents of Ukrainian military personnel killed in the war in eastern Ukraine. The documents include passports, military IDs, drivers' licenses, personal files and credit cards. Some papers are half-burned, while others are untouched, as if nothing has happened to their owners. The documents were found with the dead bodies of these people in several areas of the Donbass region of eastern Ukraine, near the towns of Saurovka and Illovaisk, close to the cities of Donetsk, Lugansk and Gorlovka. The papers were published at the suggestion of the search teams so that the relatives of those killed could finally find out about their fate of their loved ones. As it happened, the majority were still officially listed as missing. They were also not included in the statistics of losses of the Ukrainian army.

The dead soldiers are from the 30th Mechanized Brigade of the Ukrainian armed forces, which in August was sent by its command into a crazy, suicidal mission.

The brigade was ordered to attempt a breakthrough that could lead to capturing the cities of Lugansk and Donetsk by the time of Independence Day in Ukraine, August 24.

In scanning the scanned papers of the dead soldiers, one can clearly see a social portrait of the soldiers of the Ukrainian army. It is ordinary people who were killed on the soil of Donbass. Soldiers and junior officers were mostly from peasant backgrounds.

We are often told that everyone is equal in death, but as we clearly see in this example, this is not the case. President Poroshenko, who is directly responsible for the catastrophic losses of the Ukrainian army and the death of civilians in Donbass, hypocritically mourns killed journalists in Paris on January 11 while in Donetsk, innocent people continue to die.

Children of Ukrainian politicians and oligarchs are not lying dead in the lands of Donbass. They enjoy a life full of fun and joy. They don't fear forced military conscription. The petty, provincial bourgeoisie can relax and pay a bribe so their sons will not be drafted into the army. The corrupt generals cover for such 'business as usual'.

Ukraine Maps

Let's step through a succession of maps, from August 2014, from September 2014, and one from the last two days.

Military Operations August 10-25

click on any map for sharper image

The above from August 26: Ukraine Offensive in Donetsk and Lugansk Fails

On August 26, I also posted Jane's Defense vs. Colonel Cassad: Someone Seriously Wrong.

Jane's Defense had made the claim Ukrainian Military Moves to Endgame.

My sources accurately challenged that claim.

Military Operations August 25 - September 1

The above from September 3: Ceasefire or Not?

Military Operations January 19-21

Note that many white areas on the previous maps are now pink (totally in rebel control). The hashed pink areas are recent rebel advancements (neither side controls completely). In the South note the march on Mariupol.

NATO Commander Visits Wounded

Here is a video of Ben Hodges, U.S. commanding general of NATO ground forces, visiting wounded/crippled Ukrainian soldiers in the hospital and giving them cheap little trinkets/mementos. Some of it is in English.

Link if video does not play: Ben Hodges Visits Troops.

This is what it boils down to ... Get drafted, lose an arm (or die), get a NATO trinket worth about $2.

Update From Jacob Dreizin

One of the leading rebel sources claims that the operation to close the Debaltsevo "pocket" has begun. If closed from its northern-most edge, this would trap as many as 15,000 Ukrainian soldiers and militia as well as some of Kiev's heaviest artillery.

Also, one or more Ukrainian mortar shells landed next to some kind of bus or trolley in Donetsk this morning. The footage looks pretty bad. At least 8 civilians were killed, 7 of them inside that vehicle, and another 13 are in the hospital. "They are all Charlie", I'm sure.

Massive Ukrainian shelling of Gorlovka continues. Over 100 civilians have been reported killed there since the weekend.

Second Update

Colonel Cassad reports a rare setback for the rebels today. Jacob Dreizin comments ...

"A convoy of rebel towed antitank guns was shelled by Ukranian artillery near the town of Adveevka west of Donetsk airport, with 30-40 estimated dead and wounded. With a figure that high, it means all of the equipment was destroyed as well. Colonel Cassad makes the point that the rebels actually report their losses, whereas the Ukrainians don't."

Mariupol Next?

Dreizin had also reported that supply lines to Mariupol have been cut. A key bridge far west of the city in Ukraine-held territory has been blown up.

Interfax-Ukraine claims Train Movement on Damaged Bridge to Mariupol Restored.

Sad Quest for Symbolism

NATO and the US seriously underestimated the lengths Russia would go to stop the march of NATO eastward.

I have to wonder, how much longer Mariupol will last. Did Ukraine spread itself too thin trying to capture the Donetsk airport? I think so. And for what? Symbolism?

The entire war is nothing but a sad war for symbolism. Ukraine was never really one united country in the first place. Politicians create these messes by failure to take political, cultural, and religious differences into consideration when they draw maps.

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

"World Running Out of Positive-Yield Bonds"

Posted: 23 Jan 2015 10:20 AM PST

In the wake of ECB's €60 billion a month QE madness (see "QE already Working" Says IMF Lagarde; Ho-Hum Details Announced; Gold the Place to Be), one might be wondering what it may do to European bond yields.

German 10-Year Bond Yield

click on chart for sharper image

Since September of 2013, yield on the German 10-year bond has plunged from around 2% to 0.367%.

ECB Risks German Bonds Mismatch Exceeding 100 Billion Euros

With €720 billion annual asset purchases, a huge portion of the bonds the ECB buys will be German.

Bloomberg explains ECB Risks German Bonds Mismatch Exceeding 100 Billion Euros.

[Of the 60 billion monthly asset purchases], about 45 billion euros probably would be sovereign debt, according to a central bank official, equating to more than 100 billion euros of German securities this year, based on purchases being conducted in proportion to euro-zone members' contributions to the ECB's capital. That would shrink the tradable market for German bonds in a year when the debt agency already planned to reduce the amount of conventional bonds outstanding by 8 billion euros.

"It's going to cause a huge shock to the supply-demand balance in the European government-debt market," Anthony Doyle, investment director at M&G Group Plc in London, said before the ECB's decision was announced. "We might not be too far off the German bund market looking like the Swiss one, with a negative yield out to 10 years. It's pretty crazy."

ECB buying will be carried out in line with the capital key, Draghi said, which is a measure roughly in proportion to the size of each nation's economy. Adjusted for non-euro-region central banks, that works out as a 25.6 percent share for Germany, according to calculations based on data on the ECB's website.

If the ECB purchases about 450 billion euros of sovereign bonds over 10 months, about 115 billion euros would be earmarked for German debt. The exact amount has yet to be officially specified because the ECB plans to include debt of agencies and European institutions, as well as asset-backed securities and covered bonds in its purchases. As of Dec. 31, Germany had 1.16 trillion euros of tradable securities.

Finding Sellers

The difficulty for the ECB may be flushing out sellers and getting them to buy other assets instead. Banks and insurers need Germany's AAA securities to bolster their balance sheets and pension funds mop up bunds to match their liabilities. In a low-growth environment with scant inflation, investors are sticking with bonds, particularly when the ECB is levying charges on its overnight deposit facility.

Meanwhile, supply is shrinking. The German debt agency plans to sell 147 billion euros of conventional bonds this year, compared with redemptions of 155 billion euros, according to its outlook published in December. As much as 14 billion euros of inflation-linked bonds, which are also eligible for ECB purchase, will also be issued.

"Global central banks are petrified of deflation," said M&G's Doyle, whose firm oversees the equivalent of about $389 billion. "The real effectiveness of QE is through the portfolio-rebalancing effect. The world is running out of positive-yielding government bonds."

Just Can't Get Enough

In honor of the world running out of government sugar (a preposterous notion to be sure), I offer the following musical tribute.

Link if video does not play: Homer Simpson Cannot Get Enough.

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

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Mish's Global Economic Trend Analysis

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