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Friday, January 2, 2015

Mish's Global Economic Trend Analysis

Income Inequality Author Turns Down Prestigious Award; Can you Solve a Problem When You Don't Know the Cause?

Posted: 02 Jan 2015 11:52 AM PST

French economist Thomas Piketty, author of the surprise best-selling Capital in the 21st Century turned down France's top award, the Legion D'Honneur.

"I do not think it is the government's role to decide who is honourable", said Piketty.

Nobel Prize-winning economist Paul Krugman called it "the most important economics book of the year - and maybe of the decade".

Krugman likely says that because he believes in Piketty's socialist solutions to income inequality.

Thomas Piketty's Capital Review

Piketty's book is a massive 696-page slog. Fortunately, Harvard Business Review offers this synopsis: Piketty's "Capital," in a Lot Less than 696 Pages.

The argument. Capital (which by Piketty's definition is pretty much the same thing as wealth) has tended over time to grow faster than the overall economy. Income from capital is invariably much less evenly distributed than labor income. Together these amount to a powerful force for increasing inequality.

The method. Piketty does not offer his own theory of what drives economic growth, or what the optimal ratio of capital to labor income might be. In fact, a recurring theme of his book is that the theory-first approach of modern economics is a dead-end.

The evidence. The richest source of data for the book is France, thanks to the country's long tradition of excellent record-keeping and an estate tax that was enacted a couple of years after the 1789 Revolution. What the French numbers show is that the ratio of capital to income remained steady at about seven-to-one for centuries, plummeted around the start of World War I, and began recovering after World War II.

Piketty argues that the U.S. should consider a return to a "confiscatory" (his word) 80% top marginal tax rate even though it wouldn't bring in much money (he basically agrees with Arthur Laffer on that), well, that provokes some thoughts, doesn't it?

Everything You Need to Know

The Guardian offers an Everything You Need to Know synopsis of the surprise bestseller. I piece together some paragraphs out of order below to make rebuttals easier.

That capitalism is unfair has been said before. But it is the way Thomas Piketty says it – subtly but with relentless logic – that has sent rightwing economics into a frenzy, both here and in the US.

Piketty's argument is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth. So the fact that rich kids can swan aimlessly from gap year to internship to a job at father's bank/ministry/TV network – while the poor kids sweat into their barista uniforms – is not an accident: it is the system working normally.

If you get slow growth alongside better financial returns, then inherited wealth will, on average, "dominate wealth amassed from a lifetime's labour by a wide margin", says Piketty. Wealth will concentrate to levels incompatible with democracy, let alone social justice. Capitalism, in short, automatically creates levels of inequality that are unsustainable. The rising wealth of the 1% is neither a blip, nor rhetoric.

If he is right, the implications for capitalism are utterly negative: we face a low-growth capitalism, combined with high levels of inequality and low levels of social mobility. If you are not born into wealth to start with, life, for even for the best educated, will be like Jane Eyre without Mr Rochester.

Mish Comment: Already his thesis is suspect. One need only look at the developers of Google, Microsoft, and countless other extremely successful individuals who became the world's wealthiest by their actions, not their inheritance. Piketty attempts to explain this away later, but for now let's continue with the Guardian.

To understand why the mainstream finds this proposition so annoying, you have to understand that "distribution" – the polite name for inequality – was thought to be a closed subject. Simon Kuznets, the Belarussian émigré who became a major figure in American economics, used the available data to show that, while societies become more unequal in the first stages of industrialisation, inequality subsides as they achieve maturity. This "Kuznets Curve" had been accepted by most parts of the economics profession until Piketty and his collaborators produced the evidence that it is false.

In fact, the curve goes in exactly the opposite direction: capitalism started out unequal, flattened inequality for much of the 20th century, but is now headed back towards Dickensian levels of inequality worldwide.

One of the most compelling chapters is Piketty's discussion of the near-universal rise of what he calls the "social state". The relentless growth in the proportion of national income consumed by the state, spent on universal services, pensions and benefits, he argues, is an irreversible feature of modern capitalism. He notes that redistribution has become a question of "rights to" things – healthcare and pensions – rather than simply a problem of taxation rates. His solution is a specific, progressive tax on private wealth: an exceptional tax on capital, possibly combined with the overt use of inflation.

Piketty's Solution

Global Wealth Tax
15% tax on capital
80% tax on incomes above $500,000

Piketty in Three Minutes

Here is a very interesting video that offers still more perspectives.

link if video does not play: Piketty in Three Minutes

Can you Solve a Problem When You Don't Know the Cause?

France is in a horrific state because of excessive taxation and government interference in the free markets, yet Piketty asks for more of the above.

Ironically, Piketty wants an 80% confiscatory tax rate even though he agrees with Laffer it would not bring in much money. How stupid is that?

Confusing Symptoms of Problems with Problems

Piketty proposes solutions to economic problems even though he does not know what drives economic growth. He also confuses symptoms of problems with the problem.

Rising income inequality is a symptom of government interference in the free markets, of increasing government percentage of GDP growth, and of inane central bank inflation policies.

It's no wonder that Krugman, also a socialist, calls Piketty's work the best of the decade.

I have a simple question: If confiscatory taxes, big government, and "save the local bookstore mentality" solved problems, why isn't France the economic shining light of the world?

Law of Bad Ideas

My question is simple isn't it?

Yet economists would rather deal with mathematical nonsense than answer simple questions. And in another irony, Pikkety says "theory-first approach of modern economics is a dead-end" while proposing his own inane theories about how to fix problems!

For further discussion, please see ...

August 26, 2013: Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity

March 13, 2014: Democrat Sponsored "Income Inequality"; Law of Bad Ideas, Yet Again

October 17, 2014: Irony of the Day: Yellen Moans About Income Inequality; Seven Things That Cause Inequality

Will Piketty or Krugman address my rebuttal? Of course not. It does not meet their socialist agenda.

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

Thursday, January 1, 2015

Mish's Global Economic Trend Analysis

How Much Did Your Rent Go Up in 2014? What's Your Expectation for 2015?
Disgusting Idea of the Day: Another Bush vs. Another Clinton
Happy New Year!

How Much Did Your Rent Go Up in 2014? What's Your Expectation for 2015?

Posted: 01 Jan 2015 09:41 PM PST

If you are a renter, how much did your rent go up this past year? What's your expectation for 2015?

Let's explore those questions starting with a chart on rent from the MarketWatch article Here's What Americans Spent on Rent this Year.

Cumulative Rent Growth

In isolation, the chart is misleading because it included growth in rent collected which varies by population increases. It does not reflect percentage increases in base rent.

Both MarketWatch and Zillow explain it that way, but one has to read carefully to pick that up.

Zillow says U.S. Renters Paid $441 Billion in Rent in 2014, Up Nearly $21 Billion Since 2013

Americans shelled out $20.6 billion more in rent in 2014 compared to 2013. Cumulatively, U.S. renters paid $441 billion in rent in 2014 compared to $420 billion last year, an increase of nearly five percent (4.9 percent), as both the number of renting households and the average rent rose nationally, according to a Zillow rentals analysisi.

Locally, the Bay Area, consisting of the San Jose and San Francisco metros, saw the largest jump in cumulative rent paid in 2014, up 14.4 and 13.5 percent respectively. Rent per household in the San Jose, Calif. metro rose by $197 per month, while rent in the San Francisco metro rose by $163 per month.

What Percentage Did Rents Really Go Up?

That looks like a shocking stat for San Jose and San Francisco. If one inaccurately places all of the increase on rising rent, the hike would be a whopping $2,364 per year!

However, Zillo explains "Nationally, the total number of renters is estimated to have grown 1.9 percent in 2014ii. Over the same time period, the median rent paid increased 2.9 percent."

Fair enough, but also consider this Zillow statement: "Over the past fourteen years, rents have grown at twice the pace of income due to weak income growth, burgeoning rental demand, and insufficient growth in the supply of rental housing."

Does income growth also factor in the rise in population? If not, it's a very invalid comparison.

Regardless, inquiring minds are probably interested in this question: In percentage terms, how much did rental prices really increase in San Jose, San Francisco, Miami, and Chicago?

Zillow did not even say.

Instead Zillow Chief Economist Stan Humphries explains "Next year, we expect rents to rise even faster than home values, meaning that another increase in total rent paid similar to that seen this year isn't out of the question. In fact, it's probable."

Fred to the Rescue

The St. Louis Fed also keeps tracks of rent, albeit in the form of "Owners' Equivalent Rent".

There are four pages to scroll through. Instead of posting the raw index for each chart, I displayed percent change from a year ago in each of the following charts.

CPI Rent of Primary Residence All Urban Consumers

OER New York, Northern New Jersey, Long Island

OER Miami, FT. Lauderdale

OER Los Angeles, Riverside, Orange County

OER San Francisco, Oakland, San Jose

An increase of 5.1% for San Francisco, Oakland, and San Jose is pretty steep, but nothing like the misleading Zillow-reported 13.5%.

To be fair, Fred added Oakland to the mix, but it's safe to assume rents did not rise anywhere close to 13.5%.

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

Disgusting Idea of the Day: Another Bush vs. Another Clinton

Posted: 01 Jan 2015 03:12 PM PST

A CNN/ORC Poll shows Bush surges to 2016 GOP frontrunner.

Bush took first place with 23% in a new nationwide poll, putting him 10 points ahead of New Jersey Gov. Chris Christie, who tallied 13%. Physician Ben Carson comes in third, with 7% support, and Sen. Rand Paul and former Arkansas Gov. Mike Huckabee are both tied for fourth with 6%.

Bush Dumps Corporate Commitments

Jeb Bush has not yet formally announced he is running, but actions suggest a 100% likelihood.

Fearing a backlash like Romney had with his ties to Bain Capital, Jeb Bush Resigned from All Boards, an action that will cost him as much as a million dollars a year.

I propose, if those board positions mattered ever, then they still matter now. Would it really have mattered if Romney shed all his ties with Bain Capital? Why would it?

If anything, dumping those corporate ties makes it look like there's some garbage that needs to be hidden. And if there is smelly garbage, it's 100% likely to surface.

But that's not how these guys see it.

Please consider Jeb Bush Sheds Corporate Commitments to Help 2016 Presidential Run.

Technically, Jeb Bush – son of President George Bush Sr and younger brother of President George W Bush – is still only "exploring" whether to seek the Republican nomination. But severing his many business ties means forgoing millions of dollars in consultancy earnings and is likely to prove almost as indicative of his determination to follow in family footsteps as did his announcement of a fundraising committee last month.

Disentangling the extensive business interests that Bush has built up since standing down as governor in 2007 has not been a simple exercise. His first major resignation – as an adviser to Barclays following its purchase of Lehman Brothers – was confirmed by the British bank three weeks ago, after questions were raised about whether it and other controversial relationships could prove his achilles heel.

He is also still reviewing what to do about some directly owned business interests such as the consulting firm Jeb Bush & Associates, according to the Washington Post, which first reported the latest news.

Various private equity investments in energy and aviation, made through a company called Britton Hill that is named after the highest point in Florida, were only disclosed last June. At the time, such investments were widely interpreted as a sign that Jeb might have decided to heed his mother Barbara's advice that there had already been enough Bushes in the White House.

But the Republican establishment is anxious for a well-known candidate to challenge more radical rivals such as senators Ted Cruz and Rand Paul, and the Bush name is seen as the most reliable rallying point for wealthy donors and the business community after the New Jersey governor, Chris Christie, was tarnished by a political scandal in 2014.

Who Isn't Running?

"The more the merrier," said the Kentucky senator Rand Paul when Bush first announced he was "exploring" a run in December, one of many indications that Paul's participation in the contest is in as little doubt as that of his equally ambitious conservative colleague Ted Cruz.

The Florida senator Marco Rubio also announced in a New Year's Day radio interview that he was "spending the holidays thinking about his future".

The unusually early launch of team Bush was thought to be aimed partly at deterring other establishment competitors such as Rubio and the New Jersey governor, Chris Christie, but their public prominence since and Mitt Romney's strong performance in polling suggests it may have only spurred them on.

And with governors from Indiana's Mike Pence to Rick Perry of Texas and Scott Walker of Wisconsin dropping similar hints in recent days, the easier question among top Republicans is who isn't running?

Republican Establishment Losers

And so the Republican establishment is already rallying around another loser just as they rallied around Mitt Romney.

When does the stupidity end? The next election, like the last, is highly likely to depend on independents, libertarians, and those who want change.

Neither Jeb Bush nor Hillary Clinton offers any change. That pairing would be one of the most disgusting ever.

I support Rand Paul as the only candidate possible to make a difference.

Admittedly it's too early to make any predictions, but Real Clear Politics shows Clinton beating Bush, Cruz, Paul, Huckabee, Christie, and Ryan, all by substantial margins.

One think Clinton has going for here is name recognition. There are a lot of people who do not know who some of the Republican candidates are. And there are many feminists who will vote for Hillary just to have a woman in the Whitehouse.

Name recognition will change with the passage of time and with the primaries. What may not change is the willingness of independents to rally behind Bush. I sure won't, but I won't vote for Hillary either.

Regardless, if Republicans nominate another Neanderthal instead of someone who represents change, expect to see "no change" another way, with Hillary Clinton as president.

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

Happy New Year!

Posted: 01 Jan 2015 01:37 PM PST

Happy New Year to you and all your loved ones. May 2015 be your best year ever. For those of you seeking a job or a better job, better health, or simply peace of mind, may you find it in 2015. Mish

Wednesday, December 31, 2014

Mish's Global Economic Trend Analysis

Bluff of the Day: Germany Warns "Greece is No Longer of Systemic Importance For the Euro"

Posted: 31 Dec 2014 03:34 PM PST

In the obvious bluff of the day, Euro zone No Longer Obliged to Rescue Greece, Merkel Ally Says.

Actually, the eurozone was never obliged to rescue Greece, and in fact did not rescue Greece. Rather the EU and Troika rescued European banks holding Greek bonds.

Here's the actual bluff.

In an interview with Rheinische Post newspaper published on Wednesday, Michael Fuchs also said Greek politicians could not now "blackmail" their partners in the currency bloc.

"If Alexis Tsipras of the Greek left party Syriza thinks he can cut back the reform efforts and austerity measures, then the troika will have to cut back the credits for Greece," he said.

"The times where we had to rescue Greece are over. There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro."

Blackmail Potential

Curiously, there was little potential for blackmail years past when Greece ran a primary account deficit (Greece needed money from Europe to stay afloat), but now Greece has a tiny current account surplus (not counting interest payments).

Countries with current account surpluses are not dependent on foreigners to finance debt. This makes it all the more likely Greece can tell the Troika "go to hell".

Of course, Tsipras has made all kinds of pledges that would kill the surplus if carried out, but since when do politicians keep promises?

More than likely a default would wreck the Greece economy, but so does interest on €245 billion in "bailouts" for years if not decades to come. Tsipras may easily decide he has nothing to lose.

Ironically, if his economic proposals were better, Greece would indeed have everything to gain and nothing to lose by cramming this straight down the EU's throat.

Eurozone Financial Stability Contribution Weights

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

The above table from European Financial Stability Facility

I posted the above table on Monday in Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?.

Here's a second table I created today to put a potential €245 billion default into proper perspective based on percentage liabilities.

Responsibility in Euros

Country	Percentage	Greek Debt Responsibility
Austria	2.78%	6.79875
Belgium	3.47%	8.49317
Cyprus	0.20%	0.479465
Estonia	0.26%	0.62671
Finland	1.79%	4.3904
France	20.32%	49.79527
Germany	27.06%	66.308515
Greece	2.81%	6.88009
Ireland	1.59%	3.88913
Italy	17.86%	43.75651
Luxembourg	0.25%	0.611765
Malta	0.09%	0.221235
Netherlands	5.70%	13.96451
Portugal	2.50%	6.12892
Slovakia	0.99%	2.42795
Slovenia	0.47%	1.151255
Spain	11.87%	29.076355
Eurozone 17	100%	245

The idea that Greece is responsible to cover its own default is of course ridiculous, so mentally spread Greece's €6.88 billion liability to the other countries.

Italy's responsibility would rise by a little over €1 billion while Spain's liability would rise by a little under €1 billion. Germany would need to pick up about €2 billion, and France about €1.5 billion etc.

Where is Spain going to come up with €30 billion? Italy €45 billion? France €51 billion?

The simple answer is they aren't. So, does the ECB print the money in violation of rules and pass it out?

If not, who's bluffing whom regarding "systemic importance" of Greece?

The irony of the day is that Greece was no systemic threat to the eurozone until the Troika foolishly threw €245 billion at Greece hoping to prevent a default.

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

Tuesday, December 30, 2014

Mish's Global Economic Trend Analysis

Vermont Throws in the Towel on Inane Single-Payer "Medicare for All" Proposal; Live and Let Die; Why Does Single-Payer "Work" in Europe?

Posted: 30 Dec 2014 06:43 PM PST

Proponents of the single-payer healthcare idea who tout the idea such a system will save money need only look at Vermont to see reality.

Vermont Governor Peter Shumlin, a single-payer advocate, threw the single-payer idea on the ash heap of history admitting what any sensible person knew from the onset:

The plan would cost far more than estimated
The plan would quickly become insolvent
Massive tax increases would be required
Coverage would decline for many

MainWire explains in Lessons for Maine in Vermont's Failure.

Last Wednesday, Vermont Governor Peter Shumlin announced that he was abandoning his plan for a single-payer health care system for the state, finally admitting in an unexpected news conference that it is "not the right time."

As one most liberal states in the nation, Vermont has faced years of internal pressure to adopt government-run health care. Shumlin made single-payer health care a major feature of his recent re-election campaign, and until last week, seemed to be blazing a trail towards the first single-payer system in the U.S.

His plan, which was designed partly by controversial Obamacare architect Jonathon Gruber, would have pushed for a single-payer – the state of Vermont – to pay health care costs, instead of private insurance companies. Nearly every Vermonter would have been required to be insured under "Green Mountain Care," a state-run agency funded primarily through taxes rather than insurance premiums.

The cost for Green Mountain Care was estimated to be approximately $2.6 billion, an astounding $300 million more Vermont's entire budget for FY 2015. The state would have needed an overwhelming 11.5% payroll tax on businesses and a new sliding-scale income tax of up to 9.5% just to get the program off the ground. Given that Vermont already boasts a top income tax rate of 8.95%, a 6% sales tax and 8.5% corporate income tax, these new taxes would have made Vermont the highest taxed state in America, by a significant amount.

Even with those new taxes, Shumlin's administration predicted that Green Mountain Care would be drawing a deficit by at least 2020, meaning additional revenue or tax increases would be needed in the near future.

Supporters assert that despite the huge tax increases, a single-payer system is ideal and could actually save money. They maintain that a single-payer system would lower health care spending by way of decreased administrative costs, discounts for buying bulk insurance, and lower reimbursement rates for hospitals.

However, there's plenty of evidence to suggest that none of the above would or could happen in America. Medicare and Medicaid (government insurers already in existence) do not have significantly lower administrative costs. Large insurance companies already buy in bulk and purchase more plans than entire countries that utilize the single-payer system. And while slashing reimbursement rates may sound good for taxpayers, it would also mean drastic pay cuts for hardworking doctors, nurses, receptionists, and technicians. No politician in their right mind would ever cut health care reimbursements, or at least not to the point where taxpayers would see any benefit.

Another major issue that Vermont encountered is the level of coverage to provide in a single-payer system. Instead of having consumers purchase health insurance based upon their needs or income, the single-payer model favored by Vermont forces everyone to pay for the same amount coverage, regardless of health care requirements. With all citizens reduced to a single coverage level, Vermont was faced with the catch-22 of choosing between a low or high coverage level, and deciding whether they wanted to decrease or increase coverage for many of their residents.

In the end, Vermont chose platinum level coverage for all, reasoning it wasn't fair to force anyone to decrease the quality of their insurance plan. While this was a polite gesture, it was nonetheless an expensive compromise, and a definite factor in the plan's eventual failure.

Proponents of "Medicare for All" Rally

In spite of the obvious ridiculousness of "Medicare for All", Politico notes that proponents refuse to thrown in the towel.

Advocates of a single-payer plan said Shumlin should not be able to cast aside Act 48, the 2011 law that called for the creation of Green Mountain Care, without repealing it. A group planned to hold a rally in front of the statehouse on Thursday to protest his decision.

"The governor's misguided decision was a completely unnecessary result of a failed policy calculation that he pursued without Democratic input," the group Healthcare Is a Human Right Campaign said in a statement.

Gruber Poison

Shumlin's plan was designed partly by Obamacare architect Jonathon Gruber. Thus, it's no wonder the plan was overoptimistic in what it could achieve.

Gruber is an admitted liar who will stop at nothing to get universal healthcare. As I noted on November 11, Gruber stated "Stupidity of American Voter" Needed to Pass Obamacare.

For his lies and deceit, he was paid $400,000 by the Obama administration. Vermont also paid the liar.

From Politico ....

Gruber, now infamous for his blunt assessments of the Affordable Care Act and his remarks about "stupid" voters, was until recently a state consultant. Days after the election, video emerged of him dismissing criticism of Vermont's plan in 2011 by asking, "Was this written by my adolescent children, by any chance?" State officials said they would cut off his contract.

Activists in California, Hawaii, New York, Illinois, Washington, Massachusetts, Ohio, Oregon and Pennsylvania still pursue their fantasy.

Vermont's outcome is a "small speed bump," said New York Assembly member Richard Gottfried, who's been pushing single-payer bills for more than 20 years. Gottfried has been introducing his New York single-payer bill every year since 1992. The cause is "not for the faint of heart."

Why Does Single-Payer "Work" in Europe?

Proponents of single-payer say countries in Europe proves the model works. But what does "work" mean?

The answer is enormous taxes, control of doctors' salaries, control of nurses' salaries, control of drug costs, etc., etc. In other words, government-run everything is why the model appears to work.

In the US, control of all of that is impossible, thankfully. When accurate assessments of tax hikes are imputed, no one wants to pay.

Single-payer advocates in the US don't want any controls even though US citizens are the most obese in the world and the most resistant to "rationing".

People expect the "free lunch" that liars like Gruber promise.

Live and Let Die

"Medicare for all" cannot and will not work in the US because the US is not willing to become France or Sweden. Meanwhile, government interference in the free markets has given the US the worst of possibilities.

The solution is not "medicare for all" with government controls over everything but to live-and-let-die.

Massive amounts of money in the US are wasted keeping people alive for another six months or less, in great pain. This holds true even for those without insurance.

Heck, it even holds true for the already dead!

Terri Schiavo Case

Let's not forget the Terri Schiavo Case. By any practical measure, Terri Schiavo was dead. She had no functioning brain. Yet it took a 7 year battle for her husband to get the right to remove her feeding tube.

George Bush signed legislation to keep her alive. in 2003 Florida Governor Jed Bush signed "Terri's Law" forcing the state to keep a dead woman breathing against the wishes of her husband.

Once someone is terminal, without proper insurance, nothing other than comfort drugs should be given. And in regards to drugs, the US has the highest prescription drug prices in the world because of import restrictions.

Obamacare will not let insurers charge more for smokers or obese. There are many healthcare cost items a free market could solve.

At what point do we say "you get food, comfort care, and pain relievers" but that's it?

Instead, we suffer with the worst of both systems, unwilling to become France or Sweden for tax purposes, unwilling to ration health-care based on life expectancy, and willing to pay the highest costs in the world thanks to very poorly written legislation.

It's time to scrap the whole damn thing and start all over.

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

1000% Inflation in Venezuela?

Posted: 30 Dec 2014 12:26 PM PST

Those looking for hyperinflation can find it in Venezuela. Here's the question of the day: How bad is Venezuelan inflation and how bad can it get?

Bloomberg reports Venezuelan 1,000% Inflation Seen by BofA Without Weaker Bolivar

Venezuela President Nicolas Maduro, set to announce a new currency system today, needs to devalue the bolivar or risk inflation passing 1,000 percent as soon as next year, according to Bank of America Corp.

Under the current system, Venezuela's overvalued bolivar means that the government effectively sells the dollars it gets from oil exports at a discount, compelling policy makers to print extra currency to cover domestic spending needs. Currency controls that limit Venezuelans' access to dollars have spawned a black market in which the greenback fetches 172 bolivars, compared with officially sanctioned exchange rates that range from 6.3 to about 50 bolivars per dollar.

"If we don't see a large adjustment of the exchange rate, we're almost certain to have triple-digit inflation and I wouldn't be surprised to see the economy veering into four-digit annual inflation," Francisco Rodriguez, the chief Andean economist at Bank of America, said by phone from New York on Dec. 28, before Maduro scheduled his announcement. The government "needs to print money to finance the deficit and it is running a deficit because its revenues in bolivars are too low."

Maduro said in televised speeches earlier this month that he saw no need to cut the government subsidies that leave gasoline selling for 6 cents a gallon, and that he will keep a 6.3 bolivar-per-dollar fixed exchange rate for priority imports.

The most recent official data is that annual inflation in Venezuela was 63 percent in August, the fastest in the world. A more up-to-date estimate based on the depreciation of the bolivar on the black market is 183 percent, according to Steve Hanke, a professor of applied economics at Johns Hopkins University and director of the Troubled Currencies Project at the Cato Institute.

The bolivar weakened 42 percent on the black market in the fourth quarter, according to data from dolartoday.com, outpacing even the 29 percent decline in the Russian ruble. Both currencies have been pressured by declines in price of oil, which makes up 95 percent of Venezuela's exports and is the country's principal source of hard currency.

With no access to international capital markets and falling revenue from oil sales, Maduro is dependent on loans from allies or on printing more money to plug his growing budget deficit.

"If they continue with their social welfare and income redistribution programs, they'll be forced to run the printing press at an ever accelerating rate," Hanke said. "There is tremendous pressure on them to keep spending and their sources of financing have dried up."

Venezuela's M2 money supply, a measure of the amount of bolivars in the economy that includes bank notes in circulation as well as retail savings, rose by 64 percent in the past 12 months. That is three times as fast as any other country tracked by Bloomberg.

Curious Headline

The Bloomberg headline "Venezuelan 1,000% Inflation Seen by BofA Without Weaker Bolivar" is rather curious given a weaker bolivar and Venezuelan inflation go hand in hand.

In isolation, the headline makes little sense.

However, the article explains Venezuela is bleeding foreign reserves in an effort to defend the official exchange rate and also to provide subsidies.

Selling gasoline at 6 cents a gallon is ridiculous. Can anyone really get gas at that price? If so, how much? Black market siphoning of gas to sell at higher rates elsewhere has to be going on.

Regardless, and as I have pointed out before, foreign reserves and hard cash from oil sales are the only things preventing a total collapse in the bolivar.

Once reserves are gone, there will not be merchandise in stores at any price, let alone the nonsensical official rate of 6.3 bolivars per dollars.

The black market rate of 172-per-dollar vs. the official rate of 6.3-per-dollar is a decline of 96.34%. That's not not as bad as Zimbabwe, but Maduro is surely trying.

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

Monday, December 29, 2014

Mish's Global Economic Trend Analysis

Gmail Dead in China, All Google Products Blocked; Reserve Currency Silliness Review
Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?
China's Zombie Factories Provide Illusion of Work and Prosperity; Rebalancing Chinese Style

Gmail Dead in China, All Google Products Blocked; Reserve Currency Silliness Review

Posted: 29 Dec 2014 12:43 PM PST

Access to Gmail in China was difficult, but not impossible. Workarounds included Outlook, Apple Mail, and third-party Gmail hosts.

Starting last Friday, the "Great Firewall" became nearly impenetrable as China's Censors Took Final Step in Blocking Gmail.

In the six months since Google's mail service Gmail was blocked in mainland China, users had been able to access it using third-party email applications such as Microsoft Outlook or Apple Mail.

Beijing now appears to have closed the loophole, completely shutting down access to Gmail behind the so-called Great Firewall. Google data showed Gmail appeared to have been walled off starting Friday. Google spokesman Taj Meadows acknowledged the drop in traffic and said Monday that "there's nothing wrong on our end."

Google clashed with Beijing in 2010 after the company decided to stop censoring its Internet search results in China. Google shifted most of its Chinese operations to Hong Kong as a result, and it has been hard since then to access the company's services on the mainland.

As with Google search functions, Gmail users will now have to access the application through virtual private networks or other censorship circumvention channels, putting the email service on par with Facebook and Twitter in the eyes of Beijing censors.

Reserve Currency Silliness

China has no sizable bond market, no floating currency, few political freedoms, no freedom of speech, massive censorship, and questionable property rights, yet every week I see some article promoting the idea that the yuan will soon replace the dollar as world's reserve currency.

The idea is laughable. Lack of a bond market in sufficient size is enough to kill the notion.

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

Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?

Posted: 29 Dec 2014 10:18 AM PST

Despite fearmongering by Greek prime minister and the EU, prime minister Antonis Samaras fell 12 votes short of a needed majority to elect a new Greek President.

As a result, snap elections will be held on January 25.

Stavros Dimas, a former EU commissioner, captured 168 votes in Monday's decisive third presidential ballot,12 short of the required three-fifths majority after a weekend of frantic backroom politicking failed to round up additional votes from independent lawmakers and small opposition parties.

A sombre-looking Mr Samaras said in a televised statement: "It's time for voters to do what parliament couldn't — end uncertainty and restore stability so that we can continue with reforms and make a decisive exit from the bailout."

"Be optimistic and cheerful, austerity will soon be over," said Alexis Tsipras, Syriza's firebrand leader, as he left parliament after the vote. "The Samaras government which looted society and decided to take further austerity measures is finished."

Along with the IMF and the European Commission, the ECB played a key role in overseeing the four year €245bn bailout of Greece. "The ECB holds the key," said Greek finance minister Gikas Hardouvelis in an interview with Greece's To Vima newspaper on Sunday. He added: "This key can easily and abruptly turn off bank funding and strangle the Greek economy in a split second."

Commenting on Monday's vote, Wolfgang Schäuble, Germany's finance minister, said in a statement: "We want to give Greece further support on its path of reform, helping it to help itself. If Greece chooses another way, it will be difficult. New elections will not change any of the agreements made with the Greek government. Any new government must keep to the contractual agreements of its predecessor."

Opinion polls at the weekend gave Syriza a lead of 3-4 percentage points over Mr Samaras's centre-right New Democracy party, but pollsters say it is unclear whether this would be sufficient to ensure an outright majority at election.

Yields Soar

Greek stock and bond markets reacted with disapproval. The Athens stock market fell about 10% and Yield on the 3-year note sailed above 12%.

On August 24, yield on the 3-Year note fell to an absurdly low 3.14%. Today it sits at 12.15%.

Potential Cascade to Spain, Italy

To prevent default on €50 billion or so of Greek bonds, the Troika gave Greece a €245 billion bailout, a sum that will be impossible for Greece to ever pay back.

Yet, German finance minister Wolfgang Schäuble insists "new elections will not change any of the agreements made with the Greek government."

Either Germany changes its tune, or Greece may default on €245 billion. The following table shows what may happen.

Eurozone Financial Stability Contribution Weights

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

The above table from European Financial Stability Facility

Who Has the Upper Hand?

Supposedly, Greece is responsible for 2.81% of its own default, quite illogical to say the least. Its portion would have to be spread out accordingly.

Spain's portion of a Greek default (not counting the extra spread) would be would be 11.87%.

Where is Spain supposed to get €29 billion or Italy €44 billion?

Yes, the IMF and EU could ruin Greece. But if Greece wants to play hardball, it actually has the upper hand.

One way or another, sooner or later, a significant portion of that €245 billion bailout (not of Greece, but of bondholders) will not be paid back.

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

China's Zombie Factories Provide Illusion of Work and Prosperity; Rebalancing Chinese Style

Posted: 28 Dec 2014 11:41 PM PST

China has zombie malls and even zombie cities, so zombie factories can hardly be a surprise. And as the malinvestments pile up, so do unrealized shadow bank losses.

The Financial Times reports China Zombie Factories Kept Open to Give Illusion of Prosperity.

In the shadow of a group of enormous smokestacks and abandoned foundries, a peeling sign welcomes visitors to the Wenxi Steel Industrial Park.

Highsee stopped paying its 10,000 employees six months ago. Local officials estimate the plant supported indirectly the livelihood of about a quarter of Wenxi county's population of 400,000. Highsee was the biggest privately owned steel mill in Shanxi, accounting for 60 per cent of Wenxi's tax revenues. For those reasons, the local government was reluctant to allow the company to go out of business, even though it had been in serious financial difficulties for several years.

"By 2011 Highsee was already like a dead centipede that hadn't yet frozen stiff with rigor mortis," says one official who asks not to be named because he was not authorised to speak to foreign reporters. "More than half the plant shut down, but it was still producing steel even though its suppliers wouldn't deliver anything without cash up front and it was drowning in debt."

In the past month alone Chinese media have reported on at least nine large steel mills that appeared to be suspended in limbo after halting production but which are forbidden from going formally bankrupt.

"There are large numbers of companies across China that should go bankrupt but haven't done so," says Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office, a Beijing legal practice. "The government doesn't want to see bankruptcy because as soon as companies go bust, unemployment spikes and tax revenues disappear. By stopping companies from going bankrupt, officials are able to maintain the illusion of local prosperity, economic growth and stable taxes."

The outstanding volume of non-performing loans in the Chinese banking sector has increased 50 per cent since the beginning of 2013, according to estimates from ANZ, the Australian bank, but the sector-wide NPL ratio remains extremely low, at just over 1.2 per cent.

In private, however, senior Chinese financial officials admit the real ratio is almost certainly much higher, obscured by local governments trying to prop up companies.

Rebalancing Chinese Style

As part of China's rebalancing effort, growth must slow (or an even bigger crash will come later), and shadow banking losses recognized. So far, all we see is the slowdown in growth.

Even then, China recently cut interest rates hoping to keep the illusion alive (as some might see it), or smooth the transition (as others might see it).

Regardless how one sees it, these closures are at the back end of a collapse in commodity prices as China moves from an investment (malinvestment) driven pattern of growth, to a consumer-driven pattern of growth.

The transition will not be easy. The SOEs (state-owned-enterprises), the regional governments, and all those who got wealthy from the prior boom will not let go easily.

Nor it seems will the central government. Failure to recognize absurdly high deposit rates are proof enough.

For a look at unsound deposit rates, please see Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits.

For more on rebalancing implication, please see Pettis on Strains in China's Banking System; Avoiding the Fall.

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