Mish's Global Economic Trend Analysis

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• Fed Policies and Obama Programs Exacerbate Credit Crunch to Small Businesses
• France Considers Ban on Free Shipping by Amazon, a "Destroyer of Bookshops"; Prepare for Economic Collapse in France
• Oregon Governor Demands Tax Hikes and Emergency Powers or Will Call on National Guard to Police Troubled Counties

Fed Policies and Obama Programs Exacerbate Credit Crunch to Small Businesses Posted: 04 Jun 2013 05:34 PM PDT The Fed believes that holding interest rates low fosters business growth, hiring, and bank lending? So why isn't that happening? I have discussed many reasons, but today I have another one from Steve H. Hanke, Professor of Applied Economics at The Johns Hopkins University who discusses The Federal Reserve vs. Small Business. Hanke notes that one of the consequences of low interest rates is that "banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market." And why should they? Why take risk for nothing? Interbank Lending Banks Unwilling to Retain Loans Hanke Writes .... Without the security provided by a reliable interbank lending market, banks have been unwilling to scale up or even retain their forward loan commitments. This was verified in a recent article in Central Banking Journal by Stanford Economist Prof. Ronald McKinnon – appropriately titled "Fed 'stimulus' chokes indirect finance to SMEs." The result, as Prof. McKinnon puts it, has been "constipation in domestic financial intermediation" – in other words, a credit crunch. When banks put the brakes on lending, it is small and medium enterprises that are the hardest hit. Whereas large corporate firms can raise funds directly from the market, SMEs are often primarily reliant on bank lending for working capital. The current drought in the interbank market, and associated credit crunch, has thus left many SMEs without a consistent source of funding. As it turns out, these "small" businesses make up a big chunk of the U.S. economy – 49.2% of private sector employment and 46% of private-sector GDP. Indeed, the untold story is that the zero-interest-rate trap has left SMEs in a financial straightjacket. In short, the Fed's zero interest-rate policy has exacerbated a credit crunch that has been holding back the economy. Impossible to Prove I believe Hanke's theory is accurate. It is also impossible to prove. Nor can I prove my thesis that by holding interest rates low, the Fed encourages not hiring, but rather corporate investment in software and hardware solutions that enable companies to get rid of workers. Yet, why hire someone at increasing minimum wages, and increasing costs of medical care, when you can borrow money for next to nothing and invest in solutions that require fewer workers? People have replied that increasing productivity is the natural state of affairs. And Indeed it is. And the Fed can exacerbate that trend,  just as Hanke claims "Fed's policies are actually exacerbating the credit crunch" to SMEs (small and medium sized enterprises). What About Obamacare? Obamacare is a huge part of the jobless recovery problem as well. I have talked about this on numerous occasions. Here is a partial list: October 9, 2012: Is Obamacare Responsible for the Surge in Part-Time Jobs? October 20, 2012: Mish Obamacare Mailbag: Expect More Part-Time Jobs February 2, 2012: Obamacare in Action: Retail Workweek Hits 3-Year Low February 19, 2013: Opting Out of Obamacare (the Unaffordable Health Care Act); Not Even Labor Unions Want It May 3, 2013: Obamacare Affects Part-Time Employment Yet Again; Nullification Bill Passes South Carolina House; Analysis of Healthcare Penalty Rates   The evidence is now so overwhelming that no one but Obama and the Democrats can deny that Obamacare is responsible for the massive surge in jobs (nearly all of them part-time). Jed Graham at Investor's Business Daily writes ObamaCare's $96 an hour cost spike may end 30-hour workweek Here is the crucial chart by Jed Graham. Note the incremental cost of hiring someone who works more than 30 hours a week. It's nice to see someone quantify exactly what I said would happen nearly 8 months ago.  And it did, and the chart explains why. Companies across the board reduced hours of workers from 32 to 25 and had to make up for the difference by hiring hundreds of thousands more part-time workers. This explains the massive surge in jobs, and why full-time hiring is stagnant at best. One cannot blame the Fed for this. But one can blame Obama. One can also blame the Fed for holding rates so low that companies can borrow money for next to nothing and invest in hardware and software to eliminate employees. The Fed and the administration wonder why their policies do not work. I just explained why, so did Hanke, and so did Graham. Nonetheless, the Fed and Obama are both committed to the same policies that cannot and will never work. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

France Considers Ban on Free Shipping by Amazon, a "Destroyer of Bookshops"; Prepare for Economic Collapse in France Posted: 04 Jun 2013 09:24 AM PDT The amount of economic illiteracy in France is simply staggering. Please consider French minister hits at Amazon 'dumping'. France's culture minister has attacked Amazon, the online retailer, for deliberately undercutting traditional rivals to create a "quasi-monopoly", in the latest assault by the socialist government on internet companies. "Today, everyone has had enough of Amazon which, through dumping practices, smashes prices to penetrate markets to then raise prices again once they are in a situation of quasi-monopoly," said Aurélie Filippetti, the culture minister. Calling Amazon a "destroyer of bookshops", she added that she was considering a ban on free postage offers and ending the current regime of allowable 5 per cent discounts on books. Ms Filippetti was speaking in Bordeaux where the government announced a €9m joint plan with French publishers to support independent booksellers. "This is an unprecedented effort in favour of the book and reading because without independent bookshops there will be fewer publishers and authors, less choice for the reader and fewer social networks in towns," she said. What's the Goal? If the goal is to get people to read books, logic would dictate the cheaper the price the better. Kindle, Nook, and other eBook readers come to mind. What good would banning free shipping do? Amazon could easily up shipping charges and lower the price of the book and get the same result. Of course, France would then want to dictate the price of books as well, all in the name of "preserving culture." It's easy to spot the problem. France does not need and cannot afford a culture minister whose obvious goal is to stop the spread of technology and preserve culture as she sees fit. But France is France. So when does this fool announce a tax on Kindle or campaign to bring back the horse and buggy? Prepare for Economic Collapse in France Government spending is already 56% of GDP. Hollande has threatened to take over steel, auto makers, and other industries to preserve jobs. Every month, France becomes less and less competitive. It is no wonder French unemployment soared. And unemployment will continue to rise. Economic idiocy in France has even led to an open feud between French President Francois Hollande and German Chancellor Angela Merkel. For details, please see Simmering Feud Between France and Germany Erupts Into Verbal Warfare; France Tells Brussels to Shove It Prepare for an economic collapse in France, because it is on the way. And Germany cannot possibly carry the European economy on its own. That is yet another reason IMF Growth Estimate for Germany is Still Too Optimistic. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Oregon Governor Demands Tax Hikes and Emergency Powers or Will Call on National Guard to Police Troubled Counties Posted: 04 Jun 2013 12:58 AM PDT Looking for amazing arrogance coupled with economic stupidity at the state government level? You can find it in Oregon where Governor Kitzhaber Demands Tax Hikes and Emergency Powers and Warns he Might Turn to National Guard, if the legislature does not see things his way. Gov. John Kitzhaber warned Monday that he could be forced to mobilize the National Guard to police financially troubled timber counties if legislators and local officials can't agree on a rescue plan to provide basic law enforcement. Kitzhaber urged lawmakers to pass an unprecedented measure that would allow him -- with the approval of legislative leaders and local county commissioners -- to impose a temporary local income tax in counties that have slashed patrol, jail and prosecutorial services. Under House Bill 3453, those local taxes would be matched with an equal amount of money from state taxpayers. Kitzhaber and several key legislative leaders are pressing ahead with the bill after Josephine and Curry counties rejected public safety property-tax levies last month. The two counties, which have lost the federal timber payments that once paid for most of their local operations, have largely halted their sheriff's patrols and cut the number of jail beds in use. Under questioning, Kitzhaber said that he would first look at another option --asking legislators for more money for state police patrols in troubled counties. "If I was unable to get that, I'd have about no other resources than the National Guard," he said, adding that the state has a "moral obligation" to preserve the public safety in those counties. The governor said an income tax would be a better option than a property tax because it would affect those who have more ability to pay. However, HB 3453 ran into strong opposition from several officials from Josephine County, which has a charter provision prohibiting a local income tax. Rather than raising taxes how about cutting expenses, instituting right-to-work laws, ending prevailing wage laws, outsourcing police contracts to sheriff's associations, and most importantly letting counties govern themselves. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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