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Monday, February 24, 2014

Mish's Global Economic Trend Analysis

Ukraine Aftermath: Hunt for Yanukovich, Russia Denounces Interim Leaders, Documents Reveal Plans to Use Army on Civilians
Germany at Heart of Europe's Political Predicament; Squaring the Circle; When is the Breaking Point?
Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another

Ukraine Aftermath: Hunt for Yanukovich, Russia Denounces Interim Leaders, Documents Reveal Plans to Use Army on Civilians

Posted: 24 Feb 2014 04:30 PM PST

Let's tie up some loose ends on Ukraine, even as much uncertainty remains.

Documents Reveal Plans to Use Army on Civilians

Financial Times: Papers reveal Yanukovich plans to turn army against protesters

The Yanukovich regime had drawn up plans for a massive crackdown on protesters in Kiev using thousands of police and troops – and the chief of Ukraine's armed forces on Thursday last week ordered 2,500 army troops into the capital for an "antiterrorist" operation.

That order was never fulfilled, but leaked documents on Monday showed just how close Kiev came to a bloodbath that could have far exceeded the 100 deaths that occurred in clashes with police and snipers in downtown Kiev last week.

As well as the military documents, Ukrainian journalists were on Monday combing through piles of papers found dumped near Mr Yanukovich's luxury home outside Kiev, giving a fresh glimpse into his lavish spending and lifestyle.

One document apparently found at the log-built mansion at Mezhyhirya, posted online by Mustafa Nayem, an investigative journalist with the Ukrainskaya Pravda website, was a receipt for $12m in cash. Others included receipts stretching into millions of dollars for spending on decor at a gaudy home that has become a focal point of public rage.

But the most chilling were military and security papers. One set revealed that snipers who killed dozens of protesters on Kiev's central square last Thursday came from Ukraine's "Omega" special forces.

Hunt for Yanukovich

Financial Times: On the trail of Ukraine's missing Viktor Yanukovich

Viktor Yanukovich's whereabouts remained unknown for a third day on Monday, as rumours swirled that Ukraine's deposed president was hiding out in Crimea, a pro-Moscow stronghold with easy water access to Russia via the Black Sea.

While a few Ukrainian news outlets reported on Sunday night that Mr Yanukovich had succeeded in fleeing the country on his private yacht – the Bandido – by late Monday there were no reports of his arrival at a foreign destination. His options for escape, meanwhile, appeared to be narrowing.

Arsen Avakov, Ukraine's interior minister, announced early Monday that the new government had opened up a criminal case against Mr Yanukovich for "the mass murder of peaceful citizens". He added the government had been keeping careful watch over the former president's movements.

Russia Denounces Interim Leaders

Financial Times: Moscow takes aim at Ukraine's interim leaders and the west

Russia denounced Ukraine's interim leaders as dictators on Monday and blasted the western governments that it said helped bring them to power, in a sign that the toppling of President Viktor Yanukovich is triggering a regional stand-off.

The Russian foreign ministry claimed the new leadership was infringing on the human rights of Russians and other minorities in Ukraine. "This is headed towards the suppression of dissent in several regions of Ukraine by dictatorial and sometimes almost terrorist means," the ministry said in a statement.

Russia's furious statements came as the new Ukrainian authorities intensified their hunt for ousted president Viktor Yanukovich, who has not been seen since Friday, and tensions rose in Crimea, the Russia-friendly peninsula on the Black Sea.

In the Crimean port city of Sevastopol, home of Russia's Black Sea naval base, hundreds of pro-Russia protesters massed outside the city's main administrative building on Monday for more than five hours until the city council agreed to allow Alexei Chaliy, a Russian businessman, to take over immediately as mayor.

Waving Russian flags and wearing the arm bands of Russian Block, Crimea's leading pro-Russia political party, the crowd grew angry, shouting slogans such as "We won't let a fascist in!" and "Russia! Russia!"

Open House

Financial Times: Open house at Yanukovich's fabled palace

Ukrainians expressed shock and disgust as the full extent of Viktor Yanukovich's opulent lifestyle was revealed at the weekend.

Alerted via social media that Mezhyhirya – the president's fabled luxury estate, was no longer under heavily armed guard, thousands of people made the 15km trip from the capital to take a tour of the mansion and its attractions.

What they found was a 127-hectare site including manicured garden, a golf course, tennis courts, a shooting range, swimming pools and a marina as well as horses' stables. The purpose-built, five-storey dacha – essentially a large log cabin – was decorated with elaborate furniture and expensive chandeliers hanging from the ceiling.

Photographs on Twitter showed animals in a private zoo, a vintage car collection and a replica galleon on a lake. Visitors and commentators on social media expressed anger and disgust at the excesses revealed.

"I wanted to see where the money he [Mr Yanukovich] has stolen went," said Oleksander Heruk, 24, a computer programmer who visited the mansion.

"The first thing that shocked me was the colossal scale and tastelessness of the decor. It was shocking how megalomania had overtaken this person."

House Fit for a Tyrant

Mail Online: House fit for a tyrant: Protestors storm the sprawling, luxury estate of Ukraine's fugitive president which has its own private zoo, golf course and is half the size of Monaco

Mail Online has a series of images and videos. Here are a few images.

Many more pictures and videos on the site. It's amazing there was no destruction or looting. Cheers and best wishes to the citizens of Ukraine.

Unfortunately, many problems linger. Election uncertainty and chants of "Russia, Russia" in Sevastopol could easily lead to further violence.

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

Germany at Heart of Europe's Political Predicament; Squaring the Circle; When is the Breaking Point?

Posted: 24 Feb 2014 12:20 PM PST

Germany is at the heart of Europe's political predicament. Although the status quo cannot and will not work, there is no incentive to change.

Germany's Constitutional Court has strengthened the Eurosceptics and eliminates further moves by Germany towards debt mutualization.

Some think debt mutualization, eurobonds, and combined fiscal budgets are a good idea. Others, like myself, don't. Regardless, and as noted in Rethinking "Paper Tiger", those options remain off the table.

What remains on the table are policies that fuel high unemployment and undermine living standards says Brigitte Granville in Poking the Eurozone Bear.

Some take the sanguine view that the current "lie still" approach is adequate to ensure that the eurozone economy does more than avoid decline. From their perspective, Germany's decision over the last three years to permit actual and prospective transfers just large enough to prevent financial meltdown will somehow be enough to enable the eurozone finally to begin to recover from a half-decade of recession and stagnation.

But the fact is that these transfers – that is, European Stability Mechanism-financed bailout programs and the European Central Bank's prospective "outright monetary transactions" (OMT) bond-buying scheme – can do little more than fend off collapse. They cannot boost economic output, because they are conditional upon recipient countries' continued pursuit of internal devaluation (lowering domestic wages and prices).

Reinvigorating the eurozone economy requires a more radical effort to resolve the interlinked sovereign-debt and banking crises. Specifically, it demands sovereign-debt mutualization through Eurobonds, and thus the elimination of eurozone countries' fiscal sovereignty, and a full-fledged banking union with recapitalization authority and shared deposit insurance – a far cry from the arrangement that has been agreed.

If Europe's leaders continue to choose mild palliatives over bold tactics, the best-case scenario is a lackluster recovery, with GDP growing at a 1-2% annual rate. Unfortunately, this best case probably is not enough to prevent future sovereign-debt defaults in countries like Italy, Spain, and eventually even France. In other words, at some point, lying still will no longer be an option.

As it stands, Europe's political class is committed to internal devaluation in all of the troubled eurozone economies. The alternative approach – dismantling the eurozone to allow for external devaluations – has thus become the playground of hitherto marginal political parties, which are now surging ahead in opinion polls.

In France, the groups concerned – the National Front and the Union of the Left – represent political extremes. In Italy, a more ideologically neutral anti-establishment force may arise, with a much sharper anti-euro focus than Beppe Grillo's populist Five Star Movement, which emerged last year to become the country's third-largest political force. As these parties gain traction, the euro's chances of survival diminish.

In 2011, Edmond Alphandéry, a former economy minister, declared that a eurozone exit by a member country was as likely as a dollar exit by Texas or California. Here, on full display, was the wishful thinking that brought the euro into existence in the first place: its French architects dreamed of a Europe that could equal the US. That was always an illusory ambition, but it continues to cloud European leaders' judgment.

The single currency's advocates are right about one thing: political motives have always underpinned the establishment of monetary unions, from Latin America's in the period from 1865 to 1927 to that between Ireland and Britain from 1922 to 1979. But they are missing a crucial point: politics is also the reason for these unions' dissolution. When the economic costs and divergences become too much of a threat, the political will to do what it takes to ensure the common currency's survival collapses.

Voter reaction against the euro may well force the eurozone to stop lying still and take real action. The question is whether that would mean that some or all eurozone countries must go their separate ways.

Germany's Pyrrhic Victory

Also on Project Syndicate, please consider Germany's Pyrrhic Victory by Marcel Fratzscher.

The German Constitutional Court has ruled against the European Central Bank's pledge to buy potentially unlimited quantities of distressed eurozone countries' government bonds, and has called on the European Court of Justice (ECJ) to confirm its decision. Until that happens, the "outright monetary transactions" (OMT) scheme is effectively dead, weakening the ECB's ability to act as an effective and credible financial-market backstop at a time when European governments remain unwilling to fill the void.

How financial markets will digest the German court's ruling remains uncertain. There may be little initial reaction to the news, as there is no immediate threat to financial stability in the eurozone. But the big question is how markets will react in the future to bad news, whether about sovereigns or banks.

The tight feedback loop between sovereigns and banks in eurozone countries has become even more salient in recent years, as banks are holding an ever-larger share of their home countries' government bonds. The ECB's impaired ability to address sovereign and currency risks means that it will have to break the feedback loop via the banks – a more difficult and less effective approach that increases the likelihood of a market panic and a deeper crisis.

The German court's ruling jeopardizes the ECB's ability to act as an effective lender of last resort, thereby reducing its independence and ultimately undermining its ability to deal with market panics and crises – and thus to fulfil its primary mandate of price stability. The ruling makes it more urgent than ever that European governments establish a viable and effective banking union and strengthen the ESM as a backstop for countries in crisis.

When is the Breaking Point?

Notice the silliness of Fratzscher's last statement. He begs for a viable and effective banking union, when it should be perfectly clear the German constitution court won't allow for one.

Eventually something is going to break, and most likely at the worst possible time. Yet no one can say when. Meanwhile the imbalances continue to grow as complacency rules.

Spain 10-Year Government Bond Yield

That decline in yield looks like a good thing. But it comes with a huge risk. Spain's banks have plowed more and more into its own bonds. When yields rise, those banks are going to be in a huge amount of pain.

Here are some charts from Squaring the Circle.

Sovereign Bonds Held by Domestic Banks

Sovereign Bonds Held by Domestic Banks as Percentage of Assets

As long as yields decline, there are no problems. The crisis will be even bigger than before if and when yields rise. When that happens is anyone's guess. That it will happen is a near certainty.

One way or another Germany is going to pay a huge price. Theoretically, there are two solutions.

Germany can pay the price by debt forgiveness and mutualization of debt
Germany can pay the price via default when the eurozone breaks apart

If Germany will not allow option number one, the only viable choice is option number two. It would behoove Germany and the eurozone to have this discussion. Instead, Merkel has her head in the sand.

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

Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another

Posted: 24 Feb 2014 01:15 AM PST

Telegraph writer Ambrose Evans-Pritchard is back at it. In arguably his worst article ever, Pritchard complains France is Looking Straight Down the Barrel of a Deflation Shock.

Pritchard bemoans the horrors of falling prices and says "There is a technical solution to this. It is called QE. The European Central Bank can lift the entire EMU system off the reefs by launching a monetary blitz to meet its own M3 growth target of 4.5pc."

Pritchard ignores the fact that equity prices are back in bubble land. He ignores the fact that QE did not bring inflation to Japan. He ignores the fact that consumers desperately need falling prices. He ignores the fact that falling consumer prices do not stop consumers from buying anything.

Pritchard complains "French President François Hollande must now pay the price for kowtowing to the contraction polices of the eurozone."

Pritchard knows full well France is bound by eurozone policies. The only way France cannot "kowtow to the contraction polices of the eurozone" is if France leaves the eurozone. But Pritchard never mentions that. Instead he whines about falling prices.

One Centrally Bad Idea

Pritchard clings to the centrally bad idea that falling consumer prices will cause consumers to perpetually delay purchases.

In the real world, people have to eat. They have to buy gasoline for their cars. They have to buy clothes when they wear out. They have to heat their homes.

Those are relatively inelastic demands.

But there is also no evidence consumers will hold off for long on discretionary spending either. Every Christmas, shoppers line up for bargains. People continue to upgrade TVs, computers, monitors as they wear out, or simply because prices are lower and quality is up since they last bought.

In other words, people buy when bargains are many and stop buying when bargains are few.

Living Wages

Pritchard's solution is the same as that of many charlatans before him: Force prices up.

The Fed succeeded. As a result, people now bitch and moan about "living wages". Of course "living wages" are a moving target. Force prices higher and the more it takes to keep up with them.

People want $15 an hour for standing behind a cash register and handing you a sack of the worst food money can buy. It's ridiculous.

Hardly anyone ever points out the fact that wages have not kept up with inflation precisely because the Fed has done exactly what Pritchard wants.

People do not blame the Fed, nor do they blame economic illiterates like Pritchard. Instead they blame allegedly evil corporations like McDonalds and Walmart.

Actually, the world needs more Walmarts. I hope Walmart enters the health-care business in a big way. Costs would come down overnight. It would also be great if Walmart could directly compete with banks on financial services.

Costs Rising Faster than Wages

The problem is not that wages are too low, but rather costs rise faster than wages. Why does that happen? Because of the very central bank polices espoused by Monetarists like Pritchard.

Pritchard and others will note that falling home prices will slow bank lending and consumer credit. That is correct. OK, but what's the real problem?

The real problem is monetary inflation artificially jacked up the prices of assets (homes, cars, equities) upon which unsustainable loans were made. Rather than admitting that simple and obvious fact, Monetarists propose the solution is still more monetary printing which will do nothing but create even bigger asset bubbles.

Brief History

Monetarists act on the theory falling prices are a bad idea
The Fed prints money and holds rates too low
Housing bubble builds
Medical and education prices soar
Student loans soar to "help" the students
Because housing is not affordable numerous affordable housing programs appear causing still more unwarranted housing demand. Few see the bubble because housing is not in the CPI
Housing crashes
The affordable housing advocates are abhorred by falling prices
Fed bails out banks and steps in to support housing prices
Income inequality soars
Students remain stuck with debt

Because of one idiotic notion, that "falling prices are a bad thing", the Fed has generally managed to keep the CPI rising, with some things going up much faster than others.

In response to uneven price inflation, we have seen numerous "affordable housing" programs, massive student aid programs, bank bailouts at taxpayer expense, Obamacare to make medical insurance affordable, cash for clunkers, Abenomics in Japan, and countless other economic idiocies.

People propose bad idea after bad idea simply to fix problems caused by the previous bad idea. This is corollary six to the Law of Bad Ideas.

Law of Bad Ideas Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.

Pritchard, like many before him and countless others yet to come, want higher inflation rates. Here is a table I put together that shows the silliness of it all.

Effect of Inflation Over Time

Year	2% Annual Inflation	4% Annual Inflation	6% annual inflation	10% annual inflation
1	100.00	100.00	100.00	100.00
2	102.00	104.00	106.00	110.00
3	104.04	108.16	112.36	121.00
4	106.12	112.49	119.10	133.10
5	108.24	116.99	126.25	146.41
6	110.41	121.67	133.82	161.05
7	112.62	126.53	141.85	177.16
8	114.87	131.59	150.36	194.87
9	117.17	136.86	159.38	214.36
10	119.51	142.33	168.95	235.79
11	121.90	148.02	179.08	259.37
12	124.34	153.95	189.83	285.31
13	126.82	160.10	201.22	313.84
14	129.36	166.51	213.29	345.23
15	131.95	173.17	226.09	379.75
16	134.59	180.09	239.66	417.72
17	137.28	187.30	254.04	459.50
18	140.02	194.79	269.28	505.45
19	142.82	202.58	285.43	555.99
20	145.68	210.68	302.56	611.59
21	148.59	219.11	320.71	672.75
22	151.57	227.88	339.96	740.02
23	154.60	236.99	360.35	814.03
24	157.69	246.47	381.97	895.43
25	160.84	256.33	404.89	984.97
26	164.06	266.58	429.19	1083.47
27	167.34	277.25	454.94	1191.82
28	170.69	288.34	482.23	1311.00
29	174.10	299.87	511.17	1442.10
30	177.58	311.87	541.84	1586.31
31	181.14	324.34	574.35	1744.94
32	184.76	337.31	608.81	1919.43
33	188.45	350.81	645.34	2111.38
34	192.22	364.84	684.06	2322.52
35	196.07	379.43	725.10	2554.77
36	199.99	394.61	768.61	2810.24
37	203.99	410.39	814.73	3091.27
38	208.07	426.81	863.61	3400.39
39	212.23	443.88	915.43	3740.43
40	216.47	461.64	970.35	4114.48
41	220.80	480.10	1028.57	4525.93
42	225.22	499.31	1090.29	4978.52
43	229.72	519.28	1155.70	5476.37
44	234.32	540.05	1225.05	6024.01
45	239.01	561.65	1298.55	6626.41
46	243.79	584.12	1376.46	7289.05
47	248.66	607.48	1459.05	8017.95
48	253.63	631.78	1546.59	8819.75
49	258.71	657.05	1639.39	9701.72
50	263.88	683.33	1737.75	10671.90

The above table shows what the price of something that costs $100 in year one will cost 49 years later at various inflation rates.

None of these inflation charlatans discuss what happens if wages do not keep up. Nor do they discuss the incentives businesses have to outsource jobs or automate because of high wages.

Amazingly, many people in academic wonderland are not satisfied with 2% annual inflation. They want 4% inflation or higher. For example, Laurence Ball at John Hopkins University claims to make a Case for Four Percent Inflation.

Ball is "grateful for suggestions from Olivier Blanchard, Daniel Leigh, Gregory Mankiw, and Richard Miller. This paper is prepared for the Central Bank Review, published by the Central Bank of the Republic of Turkey."

His paper was written in April 2013.

How is the Turkish Lira doing since that paper came out? Let's take a look.

Hmm. Once inflation steps in it seems difficult to turn it off.

Ball cited Gregory Mankiw, an economic professor at Harvard, who had an even more inane idea of drawing a number out of the hat every year and making currency ending in that digit worthless.

The effect would be 10% price inflation and lord only knows what asset price inflation would occur were Makniw to get his way.

Mankiw claims expiring currency would be a benefit. I responded Time For Mankiw To Resign

These charlatans sit in their academic ivory towers void of common sense and real world economics.

Of course economically asinine proposals from those in academic wonderland is expected behavior by corollary number four.

For the sake of completeness, here is a complete recap.

Law of Bad Ideas: Bad ideas don't go away until they have been tried and failed multiple times, and generally not even then.

Corollary One: Left alone, bad ideas get worse over time.

Corollary Two: The overwhelming desire to implement bad ideas leads to compromises guaranteed to make things worse.

Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented.

Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists.

Corollary Five: No politically acceptable idea is so bad it cannot be made worse.

Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.

Although there is strong evidence that consumers will hold off making asset purchases (homes, stocks, bonds), when asset prices fall, there is not a shred of evidence of a meaningful reduction in consumer purchases due to falling consumer prices.

The irony is that QE tends to foster asset bubbles that ultimately crash, not a price rise in general goods.

Central banks in general, and the Fed in particular, are excellent examples of those in power, hell bent on implementing various bad ideas.

For further discussion please see Deflation Theory Reality Check.

Also see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

In yet another irony in this madness, monetarist polices benefit those with first access to money, namely the banks and the already wealthy. Yet the same academics screaming for higher inflation are typically the same ones screaming about income inequality.

The amount of damage caused by one central thesis "falling prices are a bad thing" is staggering. And to fix problems inherent in that central thesis, countless other bad ideas are sure to follow.

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

Sunday, February 23, 2014

Mish's Global Economic Trend Analysis

Detroit Bankruptcy Proposal - No One is Happy - Does that Make a Good Settlement?

Posted: 23 Feb 2014 06:47 PM PST

The Detroit pensioners are up in arms over the latest proposal submitted on February 20 by emergency manager Kevyn Orr.

Bondholders are also upset. If everyone is upset, does that mean the deal is fair?

Let's investigate the idea starting with Detroit bankruptcy plan includes deep pension cuts

Detroit's plan to emerge from bankruptcy this year largely hinges on significant cuts to city workers' pensions and retiree health benefits — actions vehemently fought by public employee unions — as well as decreased payments to bondholders, according to a blueprint filed Friday to restructure the city's $18-billion debt.

In the plan, which probably will be amended in the weeks ahead, police, firefighters and those departments' retirees will take a 10% cut to their current pension payment. The pensions of all other city employees and retirees will be cut more than three times as much: 34%. Neither group will receive cost of living adjustments in the future.

Unions immediately decried the bankruptcy blueprint.

"The plan is unfair and unacceptable," Al Garrett, president of the Michigan branch of the American Federation of State and Municipal Employees, said in a statement Friday. "Retirees cannot survive these drastic cuts."

Many city employees maintain that pensions are protected under the Michigan Constitution, and that the state must chip in to make sure pensioners are made whole.

"A more than 30% cut combined with the virtual elimination of healthcare is devastating to the people who dedicated a career to Detroit," Jordan Marks, executive director of the National Public Pension Coalition, said in a statement.

Creditors also objected to the plan Friday.

"While we understand that favoring pensioners and discriminating against bondholders and other creditors might be politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city's emergence from bankruptcy," Steve Spencer, financial advisor to the single largest unsecured creditor in the case, Financial Guaranty Insurance Company, said in a statement.

Detroit Bankruptcy Funding Hinges on Creditor Settlement

Bloomberg reports Detroit Bankruptcy Funding Hinges on Creditor Settlement.

Detroit's plan to end its $18 billion bankruptcy assumes bondholders offered 20 cents on the dollar will eventually swallow a deal that guarantees police and firefighters collect 90 percent of their pensions.

Within hours of the plan being filed, the creditors that city officials must win over rejected the proposal, even as they continue talking behind closed doors. Unions and bond insurers both registered their displeasure.

"While we understand that favoring pensioners and discriminating against bondholders and other creditors might be politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city's emergence from bankruptcy," Steve Spencer, a financial adviser for bond insurer FGIC Corp., said in an e-mailed statement.

"The proposed plan of adjustment is a gut punch to Detroit city workers and retirees," the American Federation of State, County and Municipal Employees said in a statement. "Retirees cannot survive these huge cuts to the pensions they earned. The plan is unfair and unacceptable."

Under the plan, the city's retired general employees, represented by AFSCME, wouldn't get as much as police and firefighters. If Rhodes approves the plan as-is, the general workers would be forced to take 66 percent of their current pensions. If the workers voluntarily accept the proposal, they would get 74 percent, and police and firefighters 96 percent, according to the filing.

The city's emergency financial manager, Kevyn Orr, told reporters yesterday that the $820 million contribution hinges on an "all in" deal.

"We need a settlement from everybody," he said. The foundations supplying the money are trying to protect the artwork in the city-owned Detroit Institute of Arts.

The proposal filed yesterday doesn't include any cash for creditors from a potential new source: a Great Lakes Water and Sewer Authority, which would take over responsibilities from the city. Detroit has said it wants to create the authority and then lease its water and sewer operations to it to boost creditor recoveries.

Under the plan, the city would fully repay water and sewer bonds, as well as other debt that's backed by collateral.

Money paid from the pension fund to the annuity savings program from 1999 through 2012 would be put back in the fund. Orr didn't divulge how much the restitution would cost the employees and retirees who may have received the payments, which totaled about $756 million from 1985 through 2007, according to city records.

The plan also places restrictions on the city's two retirement programs, and leaves open the door to changing their governing boards under a mediated settlement that includes Republican Governor Rick Snyder and the GOP-controlled legislature. The pension board would be required to limit to 6.25 percent their expected returns on investment.

After a vote, creditors can raise further objections at a confirmation hearing. Rhodes will take the votes and the objections into account before deciding whether to confirm the plan. Bankruptcy law permits him to override a "no" vote through a process known as a cram-down.

Impossible

Everyone wants to be made whole. Unfortunately that's impossible. If it were possible, Detroit would not be in a state of bankruptcy in the first place.

Who Pays and By How Much?

If paying off everyone at 100% is impossible (and it clearly is), the critical question is "Who Pays and By How Much?"

That is what the debate is all about, and no one is happy.

Yet, given that it's mathematically impossible for everyone to be happy, the standard argument that "no one is happy, so it's a fair deal" goes straight into the ash can where it belongs.

Unfortunately, in regards to "what is fair" details are lacking. For example, how much of the police and fire pensions are really funded?

The settlement assumes 6.25 percent returns on investment. I suggest that is enormously on the high side.

And what happens to whom if those assumptions are not met? And while other pensioners are whining about 34% cuts, bondholders face an 80% cut.

The plan does overly favor some bondholder interests (see Bank of America and City Official Fraud Enters the Detroit Bankruptcy Equation; Fair Settlement Reviewed Again), but the amounts involved seem tiny compared to the total haircuts required in dollar terms.

Even assuming (as I do) the plan is overly generous to Bank of America/Merill Lynch, it does screw other bondholders.

A rush agreement to accept the first proposal is not a good idea. Thus, I hope Judge Stephen Rhodes sends this proposal back to drawing board citing numerous "fairness" objections.

I do not think either side should get an unfair advantage. Both bondholders and pensioners should suffer.

For further discussion, please consider Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

Meanwhile, I suggest Rhodes is doing a brilliant job. Let's hope it continues.

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

Saturday, February 22, 2014

Mish's Global Economic Trend Analysis

Drought-Stricken California to Get No Irrigation Water; 17 California Communities Could Run Dry; Higher Food Prices Expected; Is Shutting Off Irrigation Water a Good Idea?

Posted: 22 Feb 2014 07:35 PM PST

As the California Farm Drought Crisis Deepens, a federal agency rules agricultural heartland won't get any federal irrigation water this summer.

In a move that will likely signal higher food prices nationally, a federal agency says California's drought-stricken Central Valley — hundreds of thousands of acres of the most productive farmland in the U.S. — won't get any irrigation water this summer.

Friday's announcement by the U.S. Bureau of Reclamation follows an earlier warning of no irrigation deliveries from the California State Water Project and leaves Central Valley farms and cities with only wells and stored water to get through the worst drought since the state began keeping records in the 1800s.

Statewide, some 8 million acres of farmland rely on federal or state irrigation water.

California Gov. Jerry Brown has declared a state of emergency following reports that the water content of snow in Northern California's Sierra Nevada, whose spring runoff is stored in reservoirs and moved by canals to other areas of the state, stands at 29% of normal.

The announcement is significant because California is the largest U.S. agriculture producer. According to the U.S. Department of Agriculture's most recent California Agricultural Statistics for the 2012 crop year, the state remains the leading state in cash farm receipts, with more than 350 commodities representing $44.7 billion, or 11% of the U.S. total, in 2012. Over a third of the U.S.'s vegetables and almost two-thirds of its fruits and nuts were produced in California, the USDA's National Agricultural Statistics Service said in a report. The federal agency's announcement will particularly affect San Joaquin Valley farmers who are last in line to receive federal water, San Jose Mercury News reported, adding that many farmers will have to pump already overtaxed wells or leave fields fallow this year. Farmers will leave 500,000 acres of fallow this year, the paper quoted Mike Wade, executive director of the California Farm Water Coalition, as saying.

17 California Communities Could Run Dry in 100 Days

SFGate reports California drought: communities at risk of running dry.

It is a bleak roadmap of the deepening crisis brought on by one of California's worst droughts - a list of 17 communities and water districts that within 100 days could run dry of the state's most precious commodity.

The threatened towns and districts, identified this week by state health officials, are mostly small and in rural areas. They get their water in a variety of ways, from reservoirs to wells to rivers. But, in all cases, a largely rainless winter has left their supplies near empty.

In the mountain town of Lompico in Santa Cruz County, the creek that provides the community with water has run dry, while three wells that tap an underground aquifer aren't drawing as much as usual.

The water district has required its 1,200 or so customers to scale back water use by 30 percent to preserve what little water it has, but officials aren't sure the conservation targets are realistic.

"Here's the problem: We live in the Santa Cruz Mountains. People don't have lawns. They don't have gardens. How are they going to conserve 30 percent?" said Lois Henry, president of the Lompico Water District board.

Is Shutting Off Irrigation Water a Good Idea?

Of course it is. It was a bad idea to provide subsidies to water the desert in the first place.

California grows a lot of food. Much of it is because of subsidies that overcharge residential customers for the benefit of farm owners.

Might food prices go up?

Perhaps. So what? You cannot water the desert with water that does not exist.

I have a better idea: eliminate tariffs, crop supports, and all subsidies. We can get peppers, onions, tomatoes, and other produce and fruit items from places that do not have US taxpayer subsidies.

Activists will howl "other countries subsidize farmers". Without a doubt many do. An if so, it will be at their expense, not US taxpayer expense.

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

Ukraine Parliament Impeaches Yanukovich Who Fled Kiev in 'Coup'; Opposition Leader Freed from Prison; Elections Called

Posted: 22 Feb 2014 01:09 PM PST

Yet another Ukraine truce lasted all but a few hours. Civilian stormed the presidential palace Saturday morning and now control most of it.

President Viktor Yanukovych fled Kiev and is now in an Eastern Ukraine city closer to Russia.

Ukraine's Leader Flees the Capital; Elections Called

The New York Times reports Ukraine's Leader Flees the Capital; Elections Called.

Abandoned by his own guards and reviled across the Ukrainian capital but still determined to recover his shredded authority, President Viktor F. Yanukovych fled Kiev on Saturday to denounce what he called a violent coup, as his official residence, his vast, colonnaded office complex and other once impregnable centers of power fell without a fight to throngs of joyous citizens stunned by their triumph.

In the capital, protesters carrying clubs and some wearing masks were in control of the entryways to the presidential palace Saturday morning, and watched as thousands of citizens strolled through the grounds, gazing in wonder at the mansions, zoo, golf course and enclosure for rare pheasants, set in a birch forest on a bluff soaring above the Dnieper River.

With nobody clearly in charge, other than the so far remarkably disciplined fighting squads set up to protect a protest encampment in Independence Square, the Ukrainian capital and even the whole country faced a potentially dangerous power vacuum.

With security officers having disappeared from the streets, protesters claimed to have established control over Kiev. By Saturday morning they had secured key intersections of the city and the government district of the capital, which riot police officers had fled, leaving behind burned military trucks, mattresses and heaps of garbage at the positions they had occupied for months. There was no sign of looting, either in the city or in the presidential compound.

Ukraine Parliament Impeaches Yanukovich

Reuters reports Ukraine Parliament Removes Yanukovich, Who Flees Kiev in 'Coup'

Ukraine's parliament voted on Saturday to remove President Viktor Yanukovich, who abandoned his Kiev office to protesters and denounced what he described as a coup after a week of fighting in the streets of the capital.

Parliament also freed his arch-nemesis, former prime minister Yulia Tymoshenko, who walked free from the hospital where she had been jailed, completing a radical transformation in the former Soviet republic of 46 million people.

The apparent toppling of the pro-Russian leader, after bloodshed in Kiev that saw 77 people killed and the center of the capital transformed into an inferno, looks likely to pull Ukraine away from Moscow's orbit and closer to Europe.

Members of the Ukrainian parliament, which decisively abandoned Yanukovich after this week's bloodshed, stood, applauded and sang the national anthem after it declared the president constitutionally unable to carry out his duties and set an early election for May 25.

"This is a political knockout," opposition leader and retired world boxing champion Vitaly Klitschko told reporters.

Ukraine's parliamentary speaker said Yanukovich had been prevented from boarding a plane to Russia and was now in the Donetsk region, Interfax news agency reported.

Despite his defiance, the dismantling of his authority seemed all but complete, with his cabinet promising a transition to a new government, the police declaring themselves behind the protesters and his arch-rival Tymoshenko going free.

The release of Tymoshenko transforms Ukraine by giving the opposition a single leader and potential future president, although Klitschko and others also have claims.

The 53-year-old known for her distinctive blonde braid was jailed by a court under Yanukovich over a natural gas deal with Russia she arranged while serving as premier before he took office. The EU had long considered her a political prisoner, and her freedom was one of the main demands it had for closer ties with Ukraine during years of negotiations that ended when Yanukovich abruptly turned towards Moscow in November.

She had served as a leader of the "Orange Revolution" of mass demonstrations which overturned a fraudulent election victory for Yanukovich in 2004, but after a divisive term as prime minister she lost to him in an election in 2010.

Live Updates

The Guardian has live updates at this link: Ukraine: Tymoshenko freed as president denounces coup - live updates

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

Friday, February 21, 2014

Mish's Global Economic Trend Analysis

Project Midas: "Bad Bank" for "Bad Bank Debt"
Caracas Chronicles: Riots in Venezuela Continue 19th Day; Best Wishes but a Sober Assessment
Hilarious Transcripts of Fed Minutes from 2008 Reveal Completely Clueless Fed
Ukraine Truce: New Elections Announced; Will this Truce Last?
Ukraine's President Replaces Head of Armed Forces, Military Intervention Feared; Financial Crisis Threatens Russia; What's in Store for the Ruble?

Project Midas: "Bad Bank" for "Bad Bank Debt"

Posted: 21 Feb 2014 06:48 PM PST

I seriously do not understand this "Bad Bank" concept. The idea that you can take bad assets and shift them off to the side and it will make things better seems ludicrous.

If for some reason you disagree, please note that Spain now needs a "Bad Bank" for "Bad Bank Debt".

They call this proposal "Midas N + 1".

Via translation from El Economista, please consider Another bad bank? The government is considering transferring the debt of insolvent banking business to a fund

The Government is considering the possibility of creating a fund or financial vehicle to which banks could transfer the debt of insolvent companies in crisis. According to a banking source with knowledge of the negotiations, the Ministry of Finance instructed the investment bank N +1 to study the feasibility of this plan.

Concerned about the situation in which they find countless businesses in Spain burdened with high debt, there is a proposal to amend the law to try to save those companies and facilitate negotiations with creditors, mainly banks.

"We are working on legislation to adopt measures allowing companies with high debt and deleveraging but viable to continue operating," recalled a spokesman for Economy in relation to a legislative initiative announced by the Minister of Economy, Luis de Guindos , without elaborating.

According to the confidential document called 'Project Midas' N +1, the operating mechanism allows changing banking debt to capital.

The project calls for businesses to reduce debt through the capitalization of unsustainable debt, so the creditor banks participate capital of the company, albeit indirectly.

Specifically, the plan to repay the debt is set in a period of 5-7 years.

Capitalized debt would be covered by the provisions that banks accumulated to meet the total debt of the company, while the rest would be classified as normal risk and, therefore, the current payment.

However, the paper notes that to launch this N +1 initiative, the government would have to make some legislative changes to "a number of elements of the Spanish regulatory and policy framework that could limit or discourage the creation of such vehicles."

"Midas" An Appropriate Name

Midas is actually an appropriate name. The idea is to turn "sheet" into gold. Any investors in Midas will end up with "sheet", but the banks (via capital injections by suckers buying into the proposal) will make out like Midas.

Hopefully investors in "bad banks" in Spain have learned their lesson.

Yet, I suspect not even though Midas is fresh on the heels of a December 2013 announcement Spain's Bad Bank "FROB" Admits More Taxpayer Losses Likely

In that post, Guru Huky (whom I quoted) commented on the "FROB" (Spain's bad bank).

"The FROB croaked 26 billion euros in 2012 and 10 billion euros in 2011. Until recently they even sold us the idea that we were going to make money. Now the question we ask is whether we will recover anything," said Huky.

Expect similar results from "Midas N + 1".
PT Barnum would be proud.

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

Caracas Chronicles: Riots in Venezuela Continue 19th Day; Best Wishes but a Sober Assessment

Posted: 21 Feb 2014 12:40 PM PST

Ukraine has been in the spotlight by every major news organization. Meanwhile, Venezuela simmered in riots for 19 days.

Where are the stories?

That's what Francisco Toro at Caracas Chronicles wondered yesterday in his report The Game Changed in Venezuela Last Night – and the International Media Is Asleep At the Switch

Listen and understand. The game changed in Venezuela last night. What had been a slow-motion unravelling that had stretched out over many years went kinetic all of a sudden.

What we have this morning is no longer the Venezuela story you thought you understood.

Throughout last night, panicked people told their stories of state-sponsored paramilitaries on motorcycles roaming middle class neighborhoods, shooting at people and storming into apartment buildings, shooting at anyone who seemed like he might be protesting.

People continue to be arrested merely for protesting, and a long established local Human Rights NGO makes an urgent plea for an investigation into widespread reports of torture of detainees. There are now dozens of serious human right abuses: National Guardsmen shooting tear gas canisters directly into residential buildings. We have videos of soldiers shooting civilians on the street.

And that's just what came out in real time, over Twitter and YouTube, before any real investigation is carried out. Online media is next, a city of 645,000 inhabitants has been taken off the internet amid mounting repression, and this blog itself has been the object of a Facebook "block" campaign.

What we saw were not "street clashes", what we saw is a state-hatched offensive to suppress and terrorize its opponents.

Here at Caracas Chronicles we're doing what it can to document the crisis, but there's only so much one tiny, zero-budget blog can do.

After the major crackdown on the streets of large (and small) Venezuelan cities last night, I expected some kind of response in the major international news outlets this morning. I understand that with an even bigger and more photogenic freakout ongoing in an even more strategically important country, we weren't going to be front-page-above-the-fold, but I'm staggered this morning to wake up, scan the press and find…

Nothing.

As of 11 a.m. this morning, the New York Times World Section has nothing.

Media, Paramilitaries, Abuses, and Some Blood

Today, writer Juan Cristobal Nagel writes about Media, Paramilitaries, Abuses, and Some Blood

The stories
The Media Blackout - From yanking a Colombian cable news channel off the air to taking an entire city offline, the government has made controlling the flow of information about the crisis a priority. This comes on the heels of the looming threat to newspapers all over the country, which we have documented extensively. President Maduro has already announced they will pull the plug on CNN En Español, an important source of independent information. Now their journos' official credentials have been revoked. All told, the past two weeks have been dreadful for the right of Venezuelans to be informed. The result? Tons of rumors, tons of disinformation, tons of uncertainty.

Paramilitaries: Let's call a spade a spade: colectivos are paramilitaries. It's silly that chavistas are somehow trying to minimize the role of these government-sponsored groups that now roam freely in the streets of Venezuela, heavily armed, accountable to God-only-knows whom. They have been repeatedly lionized by the government. They are christened by Ministers as the main line of defense of the Revolution. They talk to the foreign press and gleefully display their weapons and their fire power. Chavista governors give them orders via Twitter. And numerous eyewitnesses tell stories of violence. True – they don't always shoot live ammo. Sometimes their role is simply to intimidate. Regardless, they are real, and they are not going anywhere.

Human Rights Abuses - From the jailing of Leopoldo López to the alleged torture of student demonstrators, it seems clear that Venezuela crossed a rubicon in the past few days. This has been a PR disaster for the government, with everyone from Amnesty International to Human Rights Watch to (gulp) Madonna weighing in. I don't know if they care or not, but Maduro's cast in international public opinion seems set for now. He is an abusive, mustachoed thug. Any lingering claim to the moral high-ground or to hemispheric leadership that the revolution may once have held on to died this month.

News Suppression

Maduro threatens to expel CNN but suppression of the news does not change the facts. Those in Venezuela are well aware of the horrific situation, thanks in part to sites like Caracas Chronicles.

Mission Impossible to Stop Capital Flight

On January 23, in Venezuela Strengthens Currency Controls in Impossible Mission to Stop Capital Flight; Airlines Collapse; End of the Line I commented ...

Hyperinflation, and economic stupidity by the leftist government are both out of control. On the currency side, the official exchange rate is 6.3 Bolivars to the dollar. The exchange rate for foreign travelers was just set to 11.36 Bolivars per dollar. The black market exchange rate is 79 Bolivars per dollar.

The end of the line for the Bolivar is at hand. The leftist government nationalized oil reserves, and the result was an immediate collapse in production. The only way Venezuela can import anything is from dwindling US dollar reserves. When those run out, it's lights out for the Bolivar.

Ridiculous Idea

Hyperinflationists believe the same thing is going to happen in the US. The idea is ridiculous. For more on the story, please see Venezuela's Hyperinflation Anatomy; Army Storms Caracas Electronics Stores; Total Economic Collapse Underway; Could This Happen in US?

Plunging Oil Revenues

Two days ago professor Steve Hanke offered his stark view regarding Venezuela's Plunging Petroleum Production

A hallmark of socialism and interventionism is failure. Venezuela is compelling proof of this, having spent the past half century going down the tubes. Indeed, in the 1950's, it was one of Latin America's most well off countries. No more. Now it is a basket case – a failed state that's descending into chaos.

How could this be? After all, Venezuela's combined reserves of oil and gas are second only to Iran's. Well, it might have reserves, but thanks to the wrongheaded policies of President Hugo Chavez, Venezuela is the only major energy producer that has seen its production fall over the past quarter of a century. The following chart tells that dismal tale:

The above chart may not look so ominous. The next chart will.

Venezuela Foreign Reserves

Given complete mistrust of president Nicolás Maduro, and nationalization of the oil industry, Venezuela's massive energy reserves are not worth much.

Current production does matter to the extent Venezuela can keep paying its bills. At the current pace, those reserves will last another two years.

Best Wishes but a Sober Assessment

Best wishes and a tip of the hat to writers Francisco Toro and Juan Cristobal Nagel for the two lead stories in this post. Those interested in Venezuela may wish to bookmark Caracas Chronicles.

Unfortunately, my sad assessment is things are likely to get a lot worse, eventually culminating in complete or near-complete loss of value of Venezuela's currency, the bolivar. Meanwhile, ridiculous exchange rates ensure a constant shortage of consumer goods and food.

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

Hilarious Transcripts of Fed Minutes from 2008 Reveal Completely Clueless Fed

Posted: 21 Feb 2014 10:02 AM PST

Today the Fed released minutes of meetings at the start and during the great financial crisis. These minutes show how clueless the Fed Governors were at the start of the recession.

Here is a list of FOMC Transcripts and Other Historical Materials, 2008

Notes

I purposely cherry picked statements of various Fed governors. There was much more gloom in the early minutes than I show below. Yet, the consensus opinion, even though the recession had already started, was that a recession would be avoided.
Amazingly, Bernanke spoke of pent-up demand for housing in January of 2008
The January 29-30 transcript was a whopping 194 pages long. I slogged through most of it. Some outside consultants presented to the Fed at that meeting, generally giving an amazingly rosy view of the world as well.

January 9, 2008: Telephone Conference Meeting of the Federal Open Market Committee

Staff Report: The incoming data on spending and production have, on net, led us to revise up our estimate of real GDP growth in 2007:Q4 by about 1-1/4 percentage points relative to the December Greenbook.

Much of the upward revision is in consumer spending and reflects the November figures on retail sales and PCE services. In addition, the construction put-in-place data for November imply a sizable upward revision to our estimate of nonresidential construction in Q4.

For purposes of this update, we have not made any changes to our assumptions for the federal funds rate. In particular, the forecast update is predicated on the assumption that the funds rate will be held steady at 4¼ percent through mid-2009 and then lowered by 25 basis points in the second half of that year.

Real GDP growth is lower in 2008 and 2009 than in the December Greenbook, though the level of real GDP at the end of 2009 is only a bit lower than in the last Greenbook, reflecting the upward revision to our estimate of real GDP growth in 2007:Q4.

January 21, 2008: Conference Call of the Federal Open Market Committee

Mr. Lacker: Can you explain that third consequence of monoline downgrades? I
didn't quite get that.

Mr. Dudley: The monoline insurers don't have to mark to market the consequences of the deterioration in, say, the structured-finance product they insured. All they have to do is pay out, as it is incurred, the interest that the structured-finance product can't pay out. So their losses are going to be realized only very gradually over a long period of time.

Bernanke: Many of you have valid concerns about inflation. Let me just make a few comments on that. First, in the Greenbook, despite a 100 basis point drop in the rate assumption and the scenario that I take as being in some sense optimistic in that it avoids an outright recession, the preliminary Greenbook forecast for 2009 has total PCE inflation at 1.7 percent and core PCE inflation at 1.9 percent . This does not take into account any disinflationary effects that would arise if we did have an NB ER recession or worse. Again, I note that we have, for example, effects working through oil prices, which the Greenbook doesn't take into account directly. So I think, obviously, that we have to continue to watch inflation and inflation expectations carefully.

January 29–30, 2008: Meeting of the Federal Open Market Committee

Mr. Reifschneider: Not all the news was bad. Nonresidential construction activity has continued to be surprisingly robust, and defense spending looks to have been higher last quarter than we anticipated. Moreover, retail sales in November came in stronger than we predicted, and the figures for September and October were revised up. Overall, we read the incoming data as implying an increased risk of recession.

As you know, we are not forecasting a recession. While the model estimates of the probability of recession have moved up, they are not uniform in their assessment that a recession is at hand. Another argument against forecasting recession is that, with the notable exception of housing, we see few signs of a significant inventory overhang. In addition, the recent weakness in the labor market and spending indicators is still limited; for example, initial claims have drifted down in recent weeks rather than surging as they typically do in a major downturn. Finally, a good deal of monetary and fiscal stimulus is now in process that should help support real activity. That said, it was a close call for us.

Mr. Sheets: Going forward, we see the external sector contributing 0.5 percentage point to GDP growth in 2008 and 0.3 percentage point in 2009. Exports are expected to expand at a crisp 7¼ percent pace in both years, supported by stimulus from the weaker dollar.

Going forward, we see the external sector contributing 0.5 percentage point to GDP growth in 2008 and 0.3 percentage point in 2009. Exports are expected to expand at a crisp 7¼ percent pace in both years, supported by stimulus from the weaker dollar.

Mr. Evans: My modal outlook for 2008 is close to that in the Greenbook. I expect that we will eke out positive growth in the first half of 2008. This expectation largely reflects the judgment that businesses have not begun to ratchet down spending plans in the nonlinear fashion that characterizes a recession. Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear.

Mr. Rosengren: Our forecast returns to full employment by 2010 only if we reduce interest rates more than they are i n the Greenbook. Thus, our baseline forecast assumes that we reduce rates 50 basis points at this meeting followed by additional easing in 2008 , which eventually results in core inflation below 2 percent and the unemployment rate settling at our estimate of the NAIRU, somewhat below 5 percent.

Vice Chairman Geithner: Thank you, Mr. Chairman. Let me just start by saying it's not all dark. [Laughter]

Mr.. Mishkin: Don't worry; be happy?

Vice Chairman Geithner: I'm going to end dark, but it's not all dark. The world still seems likely to be a source of strength. You know, we have the implausible kind of Goldilocks view of the world, which is it's going to be a little slower, taking some of the edge off inflation risk , without being so slow that it's going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good.

Central banks in a lot of places are star ting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That's a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That's all good, I think. As many people pointed out, the fact that we don't have a lot of imbalances outside of housing coming into this slowdown is helpful.

Mr. Kohn: Thank you, Vice Chairman Geithner, for a little less gloom here. I didn't expect the bright side from that source. [Laughter] Like everyone else around the table, I have revised down my forecast, which looks very much like the Greenbook: a couple of quarters of very slow growth before a pickup in the second half of the year spurred by monetary and fiscal stimulus.

My forecast for 2008 was revised down only a few tenths from October. But that is because of the considerable easing of monetary policy undertaken and assumed in my forecast. I assumed 50 at this meeting, and unlike that piker, President Yellen, I assumed another 50 over the second quarter.

MS. Yellen: I'll see you and up you. [Laughter]

Mr. Mishkin: My view on the economy is that we are going to have quite a weak first part of 2008 , in which we're going to skirt recession. This is my modal forecast. I do think that the economy will be stronger in 2009 and 2010, but that's because I decided to be even less of a piker than Governor Kohn. He accused President Yellen, but I was going to accuse him because I did actually assume a 75 basis point cut at this meeting and then another 50 basis point cut at the meeting following. Then I hoped that afterward we would be able to reverse.

Chairman Bernanke: Now, the central issue here, though, ultimately comes back to the housing market. Certainly by this point there must be some pent-up demand for housing. We've had obviously very low sales for a period. House prices are soft. Mortgage rates are low. Affordability is better. What's keeping people from buying houses is the fact that other people aren't buying houses. If there were some sense that a bottom was forming in the market or in house prices, we probably could actually see a pretty quick snap-back, an increase in housing demand, and that in turn would feed back into the credit markets, I think, in a very beneficial way. So there's the possibility that, if the housing market can get restarted , we could get a relatively benign outcome.

March 10, 2008: Conference Call of the Federal Open Market Committee

Chairman Bernanke: Good evening, everybody. I am sorry, once again, to have to call you together on short notice. We live in a very special time. We have seen, as you know, significant deterioration in term funding markets and more broadly in the financial markets in the last few days. Some of this is credit deterioration, certainly, given increased expectations of recession ; but there also seem to be some self-feeding liquidity dynamics at work as well. So the question before us is whether there are actions we can take, other than monetary policy, to break or mitigate this adverse dynamic. There are two actions on the table, which I think we should just try to consider together, if possible. The first is the proposed term securities lending facility — I know you received the documentation on this without much notice, but we will get some explanation in the meeting. The second item — we have received formal requests from the European Central Bank (ECB) and from the Swiss National Bank (SNB) to expand and extend the currency swap lines that we have with them.

Bernanke was clearly worried about inflation as late as January 2008.

By March, panic set in with emergency measure after emergency measure and an alphabet soup of Fed programs, culminating in numerous unsound bailouts, fiscal stimulus, 10% unemployment, the complete collapse of the monolines (reinsurance companies like MBIA and Ambec), and ultimately the collapse of Lehman.

At no point has any Fed official admitted causing this financial mess due to their bubble-blowing policies. They did not see the last crisis or dot-com bubble in 2000 either.

The Fed will not see the next crisis either.

A global currency crisis awaits, most likely coupled with another stock market crash.

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

Ukraine Truce: New Elections Announced; Will this Truce Last?

Posted: 21 Feb 2014 07:39 AM PST

As I stated yesterday, it was impossible to predict which way the crisis would head. Today we have the possibility of settlement to the crisis.

President Viktor Yanukovych and the opposition signed an Agreement on the Settlement of the Crisis in Ukraine.

Treaty Synopsis

Restore the Constitution of 2004
Constitutional reform, balancing the powers of the President, the government and parliament, will start immediately and be completed in September 2014.
Presidential elections will be held as soon as the new Constitution is adopted but no later than December 2014.
Investigation into recent acts of violence will be conducted under joint monitoring from the authorities, the opposition and the Council of Europe.
The authorities will not impose a state of emergency. The authorities and the opposition will refrain from the use of violence. Illegal weapons should be handed over to the Ministry of Interior bodies within 24 hours of the special law.
The Foreign Ministers of France, Germany, Poland and the Special Representative of the President of the Russian Federation call for an immediate end to all violence and confrontation.

Will this Truce Last?

The key issue today is whether this truce will last any longer than the last one did. While pondering that subject, please consider Ukraine leader, opposition sign deal to end crisis.

Ukraine's leader and opposition on Friday signed a deal to end the splintered country's worst crisis since independence after three days of carnage left nearly 100 protesters dead and the heart of Kiev resembling a war zone.

President Viktor Yanukovych's dramatic decision to hold early elections and form a new unity government was met with caution by the tens of thousands gathered on central Kiev's main square for a protest that began exactly three months earlier.

The deal was signed in the presidential palace's Blue Hall in the presence of EU envoys by Yanukovych and and three top opposition leaders who included the charismatic boxer turned lamaker Vitali Klitschko.

The peace pact met the demands the opposition had laid down at the start of the protests: the balance of political power would shift back to parliament -- as it had been before Yanukovych assumed the presidency in 2010 and took the nation of 46 million on a course away from the West and toward Russia.

It would also create an opposition cabinet with the authority to reverse Yanukovych's decision in November to ditch an historic deal that would have put Ukraine on the path to eventual membership of the EU, which many Ukrainians see as their protector from centuries of Russian domination.

Life appeared to be returning to normal in much of Kiev as the city's vital metro network resumed service after being shut down to keep protesters from reaching Independence Square on Tuesday night.

But many protesters told AFP that the deal represented too little and came much too late.

"These steps were what we needed but I think it is now too late after all the blood that has been spilt," said 58-year-old Sergiy Yanchukov.

"It was a crime against humanity and Yanukovych should be sent to The Hague (home of the International Criminal Court).

I rather doubt people are going to hand over their weapons. Regardless, let's hope the bloodshed and riots stop.

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

Ukraine's President Replaces Head of Armed Forces, Military Intervention Feared; Financial Crisis Threatens Russia; What's in Store for the Ruble?

Posted: 20 Feb 2014 11:55 PM PST

The situation in Ukraine grows more desperate by the hour. President Viktor Yanukovic had already replaced the head of the army. Today Yanukovic replaced the head of all armed forces.

Given that lower ranks are divided in support, calling out the military could start an all-out civil war.

"If there is a decision to use force to clear the protesters, it can be done but will start a civil war," said Ihor Smeshko, former head of Ukraine's SBU security services. "The army is so far neutral, but if it is pulled into this conflict it will be a point of no return. Army personnel are themselves split 50/50 in their views of Ukraine."

The government prepared the way for using the army on Wednesday, when the defence ministry said the military could be deployed in "antiterrorist" operations. Authorities and legal experts had previously said the army could only be used within Ukraine if a state of emergency was imposed.

Mr Yanukovich on Wednesday night also replaced the head of all Ukraine's armed forces with the former navy chief – just weeks after he already replaced the head of the army – in what appeared to be a move to ensure loyalty in the top ranks.

"[The Yanukovich government] have put their placemen into the army," said James Sherr, a Ukraine scholar at London's Chatham House think-tank. "But still the question is what proportion of units would obey such orders?"

Financial Crisis Threatens Russia

The Telegraph reports Financial crisis threatens Russia as Ukraine spins out of control

The dramatic escalation of Ukraine's civil conflict and fears of Russian military intervention have sent financial tremors across Eastern Europe, turning the region into the new fulcrum of the emerging market crisis.

"This has suddenly gone from a domestic Ukrainian story into a geopolitical clash," said Lars Christensen, from Danske Bank.

The Russian ruble has fallen to a record low against the euro, with contagion reaching Poland, Hungary and Romania in recent days. "The moves in Russia are very like the events during the war in Georgia in 2008. Markets are pricing in the risk of Russian intervention," he said.

Regis Chatellier, from Societe Generale, said there is a "high risk" that Ukraine will be pushed into default on its €60bn sovereign debt, triggering a credit shock for Russian banks. Sberbank and VTB are both large holders of Ukrainian bonds. Global emerging market bond funds hold 3pc of their portfolio in Ukrainian debt. "The spillover effect of a Ukrainian default would be significant, but not systemic," he said.

The decision by the Ukrainian nationalist stronghold of Lvov this week to declare "independence" from Kiev has upped the ante, creating a volatile climate in which the Ukrainian army may be forced to intervene to head off civil war.

"Ukraine is on the verge of splitting into two countries. We're looking at events that we have not seen in Europe since the break-up of Yugoslavia," said one City economist with links to Lvov. "When you have this level of hatred and mistrust, anything can happen."

Ukraine's foreign reserves are down to survival levels. Russia has so far kept the country afloat with a $3bn loan, the first tranche of a $15bn bailout, but further payments are in doubt.

Russia faces the choice of large losses from a default or the ever rising costs of propping up Ukraine's economy. Military intervention to subjugate the rebels in the Catholic strongholds of Western Ukraine orbit could lead to a quagmire.

The International Monetary Fund said in a report for the G20 summit this weekend that emerging market woes are the key risk for global recovery, warning that a trifecta of "capital outflows, higher interest rates and sharp currency depreciation" could set off a corporate debt crisis.

Societe Generale said in a new report that emerging markets have risen from 18pc of world output to 40pc over the past 20 years, implying that a broad upheaval in these countries today would have "much greater ramifications for the global economy".

US$ vs. Ruble

Euro vs. Ruble

It is impossible to know what's ahead. A civil war could break out tomorrow, but so could another cease fire. The military could even oust the president.

The longer this simmers, the more pressure there is on emerging markets and the more pressure there is on any banks that lent money to Ukraine. Meanwhile, check out the collapse in the Ukranian Hryvna.

Euro vs. Hryvna

So far, things are still orderly. If a full scale civil war breaks out, it won't be.

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