Mish's Global Economic Trend Analysis

Merkel Needs Opposition Party Votes to Pass Cyprus Bailout
Switzerland to Hold Referendum Banning its Central Bank from Selling Gold Reserves
Spain's Community Debt Tops €42 Billion as Unpaid Bills Mount; Madrid Worst Offender
Is the Fed Printing Money?

Merkel Needs Opposition Party Votes to Pass Cyprus Bailout

Posted: 18 Apr 2013 07:08 PM PDT

Germany approved the Cyprus bailout on Thursday as expected. However, Merkel required votes from the SPD and Green Party, to do so.

One might not understand the implications when reading the Wall Street Journal report Germany Approves Cyprus Bailout.

Germany's parliament on Thursday voted in favor of aid for troubled Cyprus by a large majority, giving Chancellor Angela Merkel's euro-crisis policies broad backing in the face of opposition criticism ahead of fall elections.

Despite a federal election in Germany just five months away, the ruling coalition led by Ms. Merkel succeeded in convincing coalition lawmakers and the main opposition parties—the Social Democrats and Greens—that the negotiated deal serves German interests, and a rejection would rattle the euro zone and lead to a Cypriot bankruptcy.

"Germany got what it wanted from the bailout," said Christian Schulz, senior economist at Berenberg Bank.

What vs. How

Merkel may have gotten "what" she wanted. I rather doubt she got it "how" she wanted. Reader Bernd from Germany explains ...

"The falling apart of CDU/ CSU and FDP coalition is beginning to show in all seriousness now. If Bundestag needs to vote one more time before the federal elections (i.e. on Slovenia, Spain, France), the Government might not make it."

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

Switzerland to Hold Referendum Banning its Central Bank from Selling Gold Reserves

Posted: 18 Apr 2013 02:09 PM PDT

In Swiss law, private citizens can put forth any initiative that can gather 100,000 signatures. A campaign by the Swiss People's Party to "Save our Swiss Gold" gathered 106,052 signatures so a vote will be coming up.

Switzerland is to hold a referendum on a popular measure that would ban the central bank from selling its gold reserves and force it to keep at least 20 per cent of its assets in the metal.

Under the terms of "Save our Swiss Gold", which is led by members of the ultra-conservative Swiss People's party, the Swiss National Bank would have to repatriate gold reserves held abroad and keep them at home.

Governments in the eurozone's beleaguered southern periphery tend to hold a large part of their total foreign reserves in gold – the Italian central bank holds 2,451 tonnes, more than 70 per cent of its total reserves, while Portugal's holding of 383 tonnes accounts for 90 per cent.

However, proponents of the Swiss measure flatly reject the idea of sales, arguing that disposals of gold reserves at low prices between 2001 and 2006, as well as more recently, have cost Switzerland billions of Swiss francs.

They insist that the SNB's gold reserves, which stood at SFr49.5bn at the end of February, accounting for about 10 per cent of its balance sheet, are the best store of value available to the central bank.

The Swiss National Bank is of course against the idea and will provide a response in "due course". I can translate their response in advance: "We reserve the right to trash the Swiss Franc at will, if and when we want to."

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

Spain's Community Debt Tops €42 Billion as Unpaid Bills Mount; Madrid Worst Offender

Posted: 18 Apr 2013 10:18 AM PDT

If you don't have the money, and cannot borrow the money, and cannot print the money, what can you do? The easy to understand answer is "you do not pay the bills" at least on time. This has been happening all over Spain, but particularly Madrid.

Via Mish-modified Google translate from Libre Mercado, please consider Hidden Debt Soars Thanks to Mayor Gallardón of Madrid.

Note: Alberto Ruiz-Gallardón is a Spanish politician and former mayor of Madrid.

Local authorities accumulated a total debt of €41.9642 billion euros at the end of last year, €6.545 billion more than in 2011, representing an increase of 18.4% yoy, according to data released Wednesday by the Ministry of Finance.

But the most striking is, once again, that of Madrid. Madrid owes a total of €7.4296 billion in 2012, the most municipal debt Spain. This amount is equivalent to almost 18% of total debt of local authorities, 21% of all municipal debt, nearly half (46.5%) of the debt accumulated provincial capitals, and 63.5% of the debt of the big cities. In fact, Madrid's debt is six times that of Barcelona (€1.780 billion) and nearly eight of Valencia (€975.7 million euros).

What is most relevant, however, is that Madrid's debt soared by €1.082 billion in 2012 alone, representing an increase of 17% yoy. This is the largest increase registered by the council since 2006, when it grew by €1.700 billion.

The reason lies in the payment of overdue invoices from suppliers. Alberto Ruiz Gallardón left a legacy to new mayor Ana Botella.

Gallardón was the mayor who accumulated the largest debt to suppliers throughout Spain. Close to €1 billion extra debt was the culmination of financial management of Gallardón, following years of waste and the red in front of City Hall. When Gallardón came into office in 2003, debt amounted to €1.455 billion euros, but when he left office in 2011, debt grew to €6.348, nearly four times more.

End Translation

Not to worry, the ECB, Brussels, and Prime Minister Rajoy have everything under control. If you have a hard time accepting that, please take another blue pill.

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

Is the Fed Printing Money?

Posted: 18 Apr 2013 02:18 AM PDT

Here's a seemingly simple question for you: "Is the Fed Printing Money?"

I suspect most of you will reply an emphatic yes, but some of you will say no. Before I give you my take, please ponder a similar question: "Is inflation or deflation coming?"

I posed the inflation question to the audience in my presentation at the Wine Country Conference. My answer was "It depends".

When I asked the audience "On what does it depend?", one person answered that it depended on what the Fed did. That answer is incorrect.

Whether the state of affairs is inflation or deflation has precisely the same answer as the question "Is the Fed Printing Money?": It all depends on the definition.

I started thinking more about definitions while reading the Hoisington Quarterly Review and Outlook for First Quarter 2013 by Lacy H. Hunt and Van R. Hoisington.

"The Federal Reserve is printing money". No statement could be less truthful. The Federal Reserve (Fed) is not, and has not been, "printing money" as defined as an acceleration in M2 or money supply. Just check the facts. For the first quarter of 2013 the Fed purchased $277.5 billion in securities (net) as their security portfolio expanded from $2.660 trillion to $2.937 trillion. A review of post-war economic history would lead to a logical assumption that the money supply (M2) would respond upward to this massive infusion of reserves into the banking system. The reality is just the opposite. The last week of December, 2012 showed M2 at $10.505 trillion, but at the end of March, 2013 it totaled only $10.450 trillion which was an unexpected decline of $55 billion. Printing money? No.

My Opinion

Personally, I think the Fed is printing. Indeed Bernanke is on record stating that he is printing.

For an extremely humorous look at the question of printing as captured on the Daily Show, please consider Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money"

The pertinent point is not whether or not the "Fed is Printing" but rather the consequences of alleged printing and the effect that is having on the credit markets and the Fed's ability to stimulate loans.

Rather than debate the meaning of "printing" let's look at the facts Lacy Hunt points out.

M2 is falling
Velocity is at a six decade low
No signs suggest credit creation is turning more productive
Debt Constrains Growth
Commodities are down 20% in the last two years

By Lacy's definition, the Fed is "not printing". By mine, the Fed is. Bernanke says one thing on one occasion and humorously denies it the next. Can all of us be correct? Yes, if Bernanke gets to change his definition mid-stream. Neither Lacy nor I have to.

Note that the unemployment rate is allegedly 7.6%. By a more reasonable measure, the unemployment rate would be over 10%. Of course that starts a debate as to the definition of unemployment.

Similarly, I contend this environment is extremely deflationary. Others mock the deflation assertion pointing out the massive increase in base money supply. They also have to ignore everything else under the sun generally typically equated with deflation.

Does the precise definition of printing or inflation really matter? Only in the context of a debate. One cannot have a debate without agreeing on definitions.

What's really important is not any definition per se, but rather an understanding of credit, the expansion of credit, and the Fed's futile attempt to stimulate both credit and hiring.

On that score, I am pretty much on the same page as Hunt and not on the same page as inflationists and hyperinflationists who have expected a massive outbreak of price inflation for the last eight years.

Someday the inflationists may be correct, but it sure does not look like that day will be any time soon.

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

Economy News

18.4.13

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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