Economy News: March 2014

31.3.14

Mish's Global Economic Trend Analysis

No Increase in Wealth Inequality for Top 1% Since 1960
High Frequency Trading Hits 60-Minutes Scrutiny; Trading or Skimming?
Damn the Bubbles, More Printing Ahead; Property Bubbles and the Perils of Easy Money

No Increase in Wealth Inequality for Top 1% Since 1960

Posted: 31 Mar 2014 07:17 PM PDT

For all the ranting about the top 1% by the Economic Policy Institute and others, a US Berkeley study by Emmanuel Saez and Gabriel Zucman on The Distribution of US Wealth, Capital Income and Returns since 1913 shows no increase in wealth inequality for top 1% since 1960%.

All of the increase in wealth inequality is not in the top 10% or top 1%, but rather the top .1 or top .01%. Here are some charts to consider.

click on any chart for sharper image

Wealth Has Been Always Concentrated

Top 10%

Top 1% Led by Surge of Top 0.1%

Little Recovery for the Merely Rich (Top 1% Minus Top 0.1%)

The Real 1%

In regards to the above study, The Atlantic reports How You, I, and Everyone Got the Top 1 Percent All Wrong

For years, I've been making the same embarrassing mistake about U.S. economic inequality. Sorry.

I've written, over and over, that the most important divide in our wealth disparity was between the 1 percent and the 99 percent. For example, when I compared the evolution in investment income since the late 1970s, I often imagined a graph like this from the Economic Policy Institute, showing the 1 percent flying away from the rest of the country.

It turns out that wealth inequality isn't about the 1 percent v. the 99 percent at all. It's about the 0.1 percent v. the 99.9 percent (or, really, the 0.01 percent vs. the 99.99 percent, if you like). Long-story-short is that this group, comprised mostly of bankers and CEOs, is riding the stock market to pick up extraordinary investment income. And it's this investment income, rather than ordinary earned income, that's creating this extraordinary wealth gap.

The 0.1 percent isn't the same group of people every year. There's considerable churn at the tippy-top. For example, consider the "Fortunate 400," the IRS's annual list of the 400 richest tax returns in the country. Between 1992 and 2008, 3,672 different taxpayers appeared on the Fortunate 400 list. Just one percent of the Fortunate 400—four households—appeared on the list all 17 years.

Now there's your real 1 percent.

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

High Frequency Trading Hits 60-Minutes Scrutiny; Trading or Skimming?

Posted: 31 Mar 2014 12:58 PM PDT

In the wake of a 60-Minutes report on High Frequency Trading, numerous people have sent dozens of links. Let's take a look at a few of them.

CBS Video

High-Speed Traders Rip Investors Off

Michael Lewis says High-Speed Traders Rip Investors Off.

The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book "Flash Boys."

"The United States stock market, the most iconic market in global capitalism, is rigged," Lewis, whose books "Liar's Poker" and "The Big Short" highlighted Wall Street excesses, said during the interview. The new book comes out today. "It's crazy that it's legal for some people to get advance news on prices and what investors are doing," he said.

The author's comments follow New York Attorney General Eric Schneiderman's decision to investigate privileges marketed to professional traders that allow them to place their computers within feet of exchanges and buy access to faster data streams. Officials at the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission have also said market rules may need to be examined.

Dominating Volume

High-frequency traders account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. Exchanges rely on HFTs for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders who oversaw the buying and selling of equities. While critics such as Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.

One of the heroes of Lewis's book is Brad Katsuyama, who left Royal Bank of Canada in 2012 to form a new market, IEX Group Inc., along with other former traders from the Toronto-based bank. David Einhorn's Greenlight Capital Inc. hedge fund invested in the platform, which started trading in October and was established to minimize the influence of predatory strategies, Goldman Sachs Group Inc. has endorsed IEX and is the venue's biggest broker.
Ticket Prices

IEX was established partly to address concern that technology advances and fragmentation have made the $22 trillion U.S. equity market too fast and opaque. The platform, a dark pool with ambitions to officially become an exchange, imposes a delay of 350 microseconds, or 350 millionths of a second, on orders -- enough to curb the fastest trading firms. IEX aims for greater transparency by making its trading rules available for public review, unlike some other electronic venues.

Eric Ryan, a spokesman for the New York Stock Exchange, and Nasdaq OMX Group Inc.'s Rob Madden declined to comment on Lewis.

"We completely disagree with allegations that the U.S. equity market is rigged," Bats President Bill O'Brien said in an e-mail. "While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition. This has helped make our market the most competitive and liquid in the world, greatly benefiting individual investors."

New York's Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than is normally available to the public. Wall Street banks and rapid-fire trading firms pay for these services, providing millions of dollars in quarterly sales to exchanges and helping ensure their markets are supplied with standing orders to buy and sell stocks.

Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.

The investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies' servers and shave millionths of a second off transactions.

SEC Commissioner Daniel Gallagher said on March 28 that individuals are concerned that high-frequency traders detract from fairness in the marketplace.

"The problem with high-frequency trading right now is that there's a perception that for the little guy, the markets aren't fair," Gallagher told CNBC during an interview. "That perception to me is a reality. It's something we need to address."

Video Playlist

NY Attorney General: Market Race for Speed Inherently Dangerous

Synopsis: New York Attorney General Eric Schneiderman discusses his investigation into high-frequency trading and why he believes the SEC needs to revisit regulation on Bloomberg Television's "Market Makers."

PennTrade CEO: High Frequency Trading Isn't Rigged

Synopsis: Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, talks about high-frequency trading. Ehrlich speaks with Scarlet Fu and Tom Keene on Bloomberg Television's "Surveillance." Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, also speaks.

Co-Founder of Themis Trading: High-Frequency Trading Neither Good or Bad

Synopsis: Sal Arnuk, co-founder of Themis Trading, talks about high-frequency trading and industry regulation. Arnuk speaks with Stephanie Ruhle and Erik Schatzker on Bloomberg Television's "Market Makers."

Schneiderman, Levitt, Roach: High Frequency Trading

Synopsis: New York State Attorney General Eric Schneiderman, former Securities and Exchange Commissioner Arthur Levitt, and Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, speak about high-frequency trading. Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, and Sal Arnuk, co-founder of Themis Trading, also comment.

HFT Crackdown

On May 18, Forbes reported NY AG's New Crackdown Targets High-Frequency Trading

High-frequency trading remains in the spotlight as New York's Attorney General announced a new crackdown on vendors in the business.

NY AG Eric Schneiderman announced he will take a deeper look at high-frequency trading world, particularly vendors that provide services for HFT traders.

He called for reforms that he says would eliminate "unfair advantages" that high-frequency trading firms have over other investors. Those advantages are offered by exchanges and other service providers and include: allowing traders to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG's office said.

Last year, after probing from the AG's office, Thomson Reuters agreed to discontinue its practice of selling high-frequency traders a two-second sneak peek at certain market-moving consumer survey results.

"I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market," Schneiderman said in a statement.

Trading or Skimming?

Finally, please consider Speed Trading in a Rigged Market a Bloomberg column today by Barry Ritholtz.

On "60 Minutes" last night, author Michael Lewis made a bland assertion: High-frequency traders, he said, working with U.S. stock exchanges and big banks, have rigged the markets in their own favor. The only surprising thing about Lewis's assertion was that anyone could be even remotely surprised by it.

The math on trading is simple: It is a zero-sum game. One trader's gain is another trader's loss. Only in the case of HFT, the losers are the investors -- by way of their pension funds, retirement accounts and institutional funds. The HFT's take -- the "skim" -- comes out of these large institution's trade executions.

Several years ago, the founder of Tradebot, one of the biggest high-frequency firms, had said that the firm had "not had a losing day of trading in four years." The firm's average holding period for stocks is 11 seconds.

Any professional trader can tell you that his job is to manage risks. It is a statistical certainty that a percentage of trades will be losers. You are establishing a position with an unknown outcome. Sometimes they go your way, other times they go against you.

How is it possible that one of the largest high-frequency trading firms executes millions and millions of orders for four years without ever having a down day? The short answer is what they do is not trading -- it is skimming. I call it legalized theft. High-frequency trading is a tax on investors, encouraged by the exchanges, allowed by the SEC. It is prima facie proof that something is amiss.

It is interesting to note that the rigging theme is consistent with everyone who looks closely at this subject. My colleague Josh Brown notes that markets haven't become rigged, they have always been rigged. What is different is the ability of high-frequency traders to see other people's orders, jump ahead of them, and then sell that exact same stock to them, at a higher price. It is the ultimate market-skimming operation.

I am looking forward to reading "Flash Boys." I hope our members of Congress and the folks at the SEC do so too.

Flash Boys

Lewis is a good writer, I too will pick up a copy of "Flash Boys", sure to be a best-seller.

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

Damn the Bubbles, More Printing Ahead; Property Bubbles and the Perils of Easy Money

Posted: 31 Mar 2014 11:27 AM PDT

Damn the Bubbles, More Printing Ahead

Fed Chair Janet Yellen was tooting her own horn today. Yahoo! Finance reports Yellen strongly defends easy Fed policies, cites U.S. labor slack

Federal Reserve Chair Janet Yellen gave a strong defense of the central bank's easy-money policies on Monday, saying its "extraordinary" commitment to boosting the economy, especially the still struggling labor market, will be needed for some time to come.

In her first public speech since becoming Fed chair two months ago, Yellen cited the struggles of three American workers in backing the policies of low interest rates and continued bond-buying. She said there remains "considerable" slack in the economy and job market, a sign that further monetary stimulus can still be effective.

"I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy-makers at the Fed," Yellen said at a community reinvestment conference.

Property Bubbles and the Perils of Easy Money

Meanwhile, China Defaults Sow Property Cash Crunch Concern.

The specter of default in China's trust loans market is deepening the distress of property developers that also borrowed in dollars.

Part of China's $7.5 trillion shadow-banking system, trust financing has been key to fueling the nation's 10 percent annual growth rate in the past decade by providing easy credit to companies considered too risky by banks. After trust loans to the property, solar, coal and other industries tripled in the past three years to 10.9 trillion yuan ($1.8 trillion), bondholders are becoming increasingly alarmed as the government reins in lending, housing demand cools and the economy slows.

Defaults Unavoidable

Cracks are already starting to appear. Closely held Zhejiang Xingrun Real Estate Co. collapsed earlier this month, less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. defaulted on its debt.

While China Credit Trust Co. was bailed out in January, Premier Li Keqiang has said some defaults may be unavoidable as the government shifts policy to tighten credit.

Home prices have soared 60 percent since the government provided 4 trillion yuan of fiscal stimulus in 2008 to bolster the economy after the financial crisis, prompting companies to borrow heavily to speed construction. Now, as China abstains from providing further stimulus for the economy, thousands of apartment buildings across the country sit empty.

Home Prices Up 60% Since 2008

Home prices in China rose 60% since 2008.

How much did that contribute to official inflation statistics? The answer is 0%.

Asset bubbles are ignored when calculating inflation. Instead central banks only factor in rent prices. Yet, asset bubbles spurred all sorts of financially untenable projects all dependent on Ponzi financing of debt to pay off existing debt. The party comes to a brick-wall halt the moment Ponzi financing stops or the moment the pool of greater fools runs out. Either or both happen at any moment.

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

30.3.14

Mish's Global Economic Trend Analysis

E-Money Digital Payments Sweep Africa, Head for Europe and India

Posted: 30 Mar 2014 06:44 PM PDT

An interesting, but inaccurate headline appeared on the Financial Times today: Africa's digital money heads to Europe.

A close look reveals this has little to do with "digital money" per se, but rather with monetary payments made by phone. Nonetheless, the wave is about to spread.

The mobile payment system that has revolutionised business and banking in sub-Saharan Africa is to come to Europe as Vodafone seeks to spread the popular digital currency outside emerging markets.

Vodafone has acquired an e-money licence to operate financial services in Europe, with plans to launch M-Pesa (which means mobile money in Swahili) in Romania as a first step to potential expansion in the region.

M-Pesa has become so popular in parts of Africa that it is now a virtual currency, offering a secure means of payment for people who do not have easy access to banking services. A mobile phone text message is all that is needed to pay for everything from bills and schools fees to flights and fish, and means that the mobile phone can double as an office for the continent's smaller entrepreneurs.

Vodafone now hopes to win over an estimated 7m Romanians who mainly use cash.

Michael Joseph, Vodafone director of mobile money, said that the European e-money license would allow Vodafone to operate M-Pesa in other markets, although he indicated that the focus would be on central and eastern Europe.

"There are one or two [countries] we are looking at but [these are] unlikely to be in western Europe in the next year or so," he said, adding that countries with a large migrant population such as Italy were potential markets.

In Kenya, where M-Pesa launched in 2007, the platform is so widely used that a third of the country's $44bn economy washes through the system, sold by 79,000 agents nationwide. It has since been extended to Tanzania, Egypt, Lesotho and Mozambique.

More recently, M-Pesa has been introduced in India, where Vodafone is seeing rapid growth given the large numbers of people without bank accounts. More than 1m people have registered in India, although Vodafone expects that will accelerate if revised regulations being considered by the Reserve Bank of India ease restrictions on such money platforms.

Romanian M-Pesa customers will be able to transfer as little as one new Romanian leu (0.22 euro cents) up to 30,000 lei (€6,715) per day.

"The majority of people in Romania have at least one mobile device, but more than one-third of the population do not have access to conventional banking," Mr Joseph said.

M-Pesa had about 16.8m active customers at the end of last year, generating about €900m in transactions per month. While M-Pesa was originally conceived as a means to retain customers in Kenya's mobile phone market, it is now profitable in its own right with $143m in revenues from the 18.2m M-Pesa customers in Kenya alone, or about 18 per cent of overall country sales.

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

China Accelerates Bad Debt Writeoffs; Reflections on "Policies to Counter Economic Volatility"

Posted: 30 Mar 2014 11:23 AM PDT

Financial stress related to Ponzi financing and other bad debts in China is readily visible in numerous places. One result is China's Big Banks Double Bad-Loan Write-Offs.

China's biggest banks more than doubled the level of bad loans they wrote off last year, in a sign that financial strains are mounting as growth in the world's second-largest economy slows.

The five biggest Chinese banks, which account for more than half of all loans in the country, removed Rmb59bn ($9.5bn) from their books in debts that could not be collected, according to their 2013 results. That was up 127 per cent from 2012, and the highest since the banks were rescued from insolvency, recapitalised and publicly listed over the past decade.

The sharp acceleration in write-offs is the latest indication of the turbulence now buffeting China's financial system. The bond market suffered its first true default in March, two high-profile shadow bank investment products were spared from collapse by last-minute bailouts earlier this year, and a small rural lender suffered a brief bank run last week.

Data also point to a deeper economic downturn in the first quarter than expected, putting China on track this year for its slowest growth since 1990.

The deterioration has fueled expectations that Beijing will act soon to shore up the economy. "Increasing downward pressure on the economy should not be neglected," Li Keqiang, China's premier, said last week. "We have policies in store to counter economic volatility."

Anecdotes from China

There was an interesting post on the Motley Fool titled Random China Observation, by "GoCanucks" who was in China for a month on family business. He talks about the property bubbles and the readily apparent stress. He concluded ...

The bubble is so obvious (admittedly it felt that way 3 years ago), but when I asked my friends "what if", the common answer is "the government won't allow it to happen". And every time I hear that phrase, I can't help thinking of the following quote from Michael Lewis's essay on Irish RE bubble: "Real-estate bubbles never end with soft landings."

Policies to Counter Economic Volatility

Yes indeed, central banks have "policies in store to counter economic volatility", and they use them. It was those policies in the wake of the dotcom bust that led to an even bigger debt bubble and subsequent housing crash.

The Bernanke Fed created the biggest equity and corporate bond bubble in history in the wake of the housing crash.

China has acted at every turn to counter the slightest unwanted slowdown, while maintaining ridiculously high growth targets. Those growth targets led to Ponzi financing of cities that are vacant, the world's largest mall (yet devoid of customers), airports and trains that go unused.

These kinds of malinvestments are the direct result of "policies to counter economic volatility", yet China's premier, the Fed, the Bank of Japan, the People's Bank of China, the ECB, the Bank of England, the Bank of Canada, the Reserve Bank of Australia, etc, all arrogantly believe they can "counter economic volatility" without consequences.

Logic alone suggests the notion that anything can be centrally planned without huge damaging consequences is as ridiculous as it is arrogant. History proves it.

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

29.3.14

Mish's Global Economic Trend Analysis

Spain Misses 2013 Budget Deficit Target in Spite of Massive Tax Increases; So Much Pain for Virtually No Reward

Posted: 29 Mar 2014 07:16 PM PDT

The official results are in. Spain missed its budget deficit target considerably by reasonable reporting, barely by another.

Spain's Budget Deficit Only Two Tenths Lower in 2013 Despite Massive Tax Increase

Via translation from Libre Mercado please consider Spain's Budget Deficit Only Two Tenths Lower in 2013 Despite Massive Tax Increase.

Spain's budget deficit fell from 6.84% of GDP in 2012 to 6.62% of GDP last year.

The budget goal was far less ambitious than previous, but still did not met the commitment to Brussels. The Government has published today the first official public deficit figure for the end of 2013, there will be new reviews in the coming months and a year, but Spain has deviated from the intended target.

Specifically, the government recorded a hole of 6.62% of GDP in 2013 (67.755 billion euros), one tenth of a percentage point above the limit of 6.5% agreed with the European Commission, according to Finance Minister Cristobal Montoro, in a press conference after the Council of Ministers. However, the announced figure does not include the cost of financial aid reported last year (0.46%), so that the actual deficit stood at 7.08% of GDP.

So Much Pain for Virtually No Reward

Via translation from Guru's blog, paraphrasing a bit because of a difficult translation, please consider So Much Pain for Virtually No Reward, Fire the CEO.

Happy and content as a lark, Montoro proudly announcing that Spain "almost" met the deficit target.

The Spanish public deficit closed at 6.62% of GDP in 2013, slightly more than a tenth above the target of 6.5% agreed with the European Commission (well the first we agreed if I remember correctly was 4.5%)

Are you telling me that this is all we get for so much pain? Well, boys and girls, something has gone badly wrong.

I can tell you this: If I focus on the cold numbers, the deficit fell only 2 billion euros with a gap of almost 68 billion (excluding aid to banks). Please fired the CEO of this company.

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

Teaching Revolution: Online, Accredited, Free; Start Learning Now!

Posted: 29 Mar 2014 10:14 AM PDT

One of the things I staunchly believe is that the cost of education will drop sharply. It has to. The current path of graduating student loan zombies is simply not sustainable.

Eventually, online education will be both inexpensive and accredited. In turn that will drive down costs at brick-and-mortar colleges.

MOOCS Pick Up Steam

The Financial Times reports Teaching Revolution Gathers Pace.

Regina Herzlinger is a bit of a superstar. She was the first woman to be a tenured professor at Harvard Business School, and is now leading its march into Moocs – massive open online courses – which promise to revolutionise the world of higher education.

Professor Herzlinger, whose 11-week course on Innovating in Healthcare will start this month, is an advocate of this model of free online education. "I believe Moocs can democratise education," she says. "It's fantastic to reach so many people."

Harvard, MIT Sloan, the University of Virginia's Darden school and several other big-brand US business schools are experimenting with Moocs. The Wharton school at the University of Pennsylvania has gone so far as to put 10 per cent of its MBA core courses online for free access. Like Prof Herzlinger, Wharton's vice-dean of innovation Karl Ulrich believes the social impact of these programmes is a central reason for promoting Moocs. He cites the example of one Wharton Mooc that enrolled more than 130,000 students. "There's just a huge, huge take-up."

In Europe, business schools such as IE in Spain and Warwick in the UK have taught online MBA programmes alongside their highly ranked full-time programmes.

Now, top schools in the US, such as Kenan-Flagler at the University of North Carolina with its MBA@UNC, are validating the online mode of delivery.

Prof Anandalingam, formerly dean at the Smith school at the University of Maryland, says the technology is "state of the art compared with anything I have seen in the US. Students get a rich learning environment".

Khan Academy

Reader Philip writes ...

Mish,

I discovered your blog through the Khan Academy. Sal quotes you in some of the financial videos, and I have been a loyal daily reader ever since. I think his efforts are truly revolutionary in education-and thought it might be worth your time to create a link on your site or maybe do a posting or two so folks can get involved. His financial videos are top notch and cover most aspects of monetary policy, the federal reserve, banking, etc., but the real impact will be if he can truly affect change in the world education system. Read his book for more details on his plan for education reform-great stuff.

You hold a lot of eyeballs and influence, and any help you can direct to Sal and the Khan Academy, in my opinion, would be a direct extension of the values you promote.

Thanks! Keep up the great work,
Philip

It All Started With a 12-Year-Old Cousin

Phillip is talking about Salman Khan, the founder of the Khan Academy. The New York Times explains how Salman Khan Turned Family Tutoring Into Khan Academy.

In 2008, Salman Khan, then a young hedge-fund analyst with a master's in computer science from M.I.T., started the Khan Academy, offering free online courses mainly in the STEM subjects — science, technology, engineering and mathematics.

Today the free electronic schoolhouse reaches more than 10 million users around the world, with more than 5,000 courses, and the approach has been widely admired and copied. I spoke with Mr. Khan, 37, for more than two hours, in person and by telephone. What follows is a condensed and edited version of our conversations.

Q. How did the Kahn Academy begin?

A. In 2004, my 12-year-old cousin Nadia visited with my wife and me in Boston. She's from New Orleans, where I grew up.

It turned out Nadia was having trouble in math. She was getting tracked into a slower math class. I don't think she or her parents realized the repercussions if she'd stayed on the slower track. I said, "I want to work with you, if you are willing." When Nadia went home, we began tutoring by telephone.

Did you have background as a math educator?

No, though I've had a passion for math my whole life. It got me to M.I.T. and enabled me to get multiple degrees in math and engineering. Long story shortened: Nadia got through what she thought she couldn't. Soon word got around the family that "free tutoring" was going on, and I found myself working on the phone with about 15 cousins.

To make it manageable, I hacked together a website where my cousins could go to practice problems and I could suggest things for them to work on. When I'd tutor them over the telephone, I'd use Yahoo Doodle, a program that was part of Yahoo Messenger, so they could visualize the calculations on their computers while we talked.

The Internet videos started two years later when a friend asked, "How are you scaling your lessons?" I said, "I'm not." He said, "Why don't you make some videos of the tutorials and post them on YouTube?" I said, "That's a horrible idea. YouTube is for cats playing piano."
Continue reading the main story

Still, I gave it try. Soon my cousins said they liked me more on YouTube than in person. They were really saying that they found my explanations more valuable when they could have them on demand and where no one would judge them. And soon many people who were not my cousins were watching. By 2008, I was reaching tens of thousands every month. ....

Start Learning Now!

The mission page of the Kahn Academy says "Start learning now. Completely free, forever".

Those are words sure to soothe any deflationist's heart, while striking fear into the hearts of central bankers and misguided inflationists who think prices "need" to go up.

For further discussion of who benefits from central bank sponsored inflation, here is my own free refresher course.

Sal, if you catch this drop me a note. I would like to chat.

For everyone in school, or with kids in school, do yourself a favor and check out the academy.

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

28.3.14

Mish's Global Economic Trend Analysis

Reader Question on Banking System Insolvency, QE, and "Necessity"
McCain Wants More Weapons Delivered to Al Qaeda Rebels; How Do Warmongers Get Elected?
Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry
Are You Minding the Curves? Sweet Spot is Likely Not Where You Think

Reader Question on Banking System Insolvency, QE, and "Necessity"

Posted: 28 Mar 2014 08:26 PM PDT

In response to Will Prices Rise Significantly When Velocity of Money Picks Up? reader Dave, a friend, noted that as the Fed jacked up its balance sheet, velocity has mirrored the curve to the downside.

Dave asks "Can't an argument be made that since much of the banking system is really insolvent, that the Fed increasing its balance sheet is necessary?"

"Necessity"

This depends on what you mean by "necessary" and more importantly, who gets to decide.

I am one of those who staunchly believes that banks should fail. More precisely: Banks did fail, but taxpayers bailed them out.

Was the last bailout "necessary"?

No - not to me. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders? In general, the wealthy own most of the assets, including bonds.

However, if "necessary" means in the eyes of central bankers, then yes – it was deemed "necessary".

It's all part of the moral hazard tactics of central banks that tells the "too big to fail banks" that no matter what they do, they will be bailed out, again and again and again.

Privatize the Gains, Socialize the Losses

Last time, Tim Geithner preached to Congress that financial Armageddon was right around the corner if Congress failed to pass a resuce package. Congress did pass a packages on the second attempt. Then Geithner promptly changed the terms of it to do what he wanted with the money.

Speaking before Congress, Bernanke said the collapse of Lehman was his biggest mistake. I suggest it was his only success. Over-leveraged financial institutions should pay the price for their folly, not overburdened taxpayers in general.

The poor bailed out the wealthy. The poor continue to pay the price in two ways.

Excessively low interest rates on deposits
Fed actions to drive up inflation when real wages do not keep up

Not only is that unnecessary, it's middle-class destructive. It's also conveniently disguised theft.

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

McCain Wants More Weapons Delivered to Al Qaeda Rebels; How Do Warmongers Get Elected?

Posted: 28 Mar 2014 10:53 AM PDT

Lawmakers Bash Obama's Delusional Syria Policy

In a recent post I noted Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting. As a followup, please see Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry.

Meanwhile, back in the US Lawmakers Bash Obama's "Delusional" Syria Policy.

U.S. lawmakers lashed out at the Obama administration's handling of Syria's civil war on Wednesday, demanding a stronger American response to the conflict and better communication from the White House about its plans.

Senator Robert Menendez, chairman of the Senate Foreign Relations Committee, expressed deep frustration after Anne Patterson, the assistant secretary of state for Near Eastern affairs, declined to answer a question about strategy in a public setting.

"I have a problem with a generic answer to a generic question that I can't believe is classified," Menendez, a New Jersey Democrat, said during a committee hearing.

Members of the Foreign Relations panel in particular are frustrated by the administration's failure to do more in Syria, where 140,000 people have been killed, millions have become refugees and thousands of foreign militant fighters have been trained as rebels have fought to oust President Bashar al-Assad.

Arizona Republican John McCain, a frequent critic of Obama's foreign policy, called U.S. Syria policy "a colossal failure."

Secret Deals and the Failure to "Do More"

Once again McCain proves he is little more than a war-mongering puppet for the military "offense" industry. "Defense" has nothing to do with involvement in Syria.

Late January, Reuters reported Congress secretly approves U.S. weapons flow to 'moderate' Syrian rebels.

It seems that was about as secret as Turkey's secret discussion on intervention in Syria.

Rebel Infighting

And what are the rebels doing with the weapons the US sent?

Here is the answer: Syrian Rebels Fighting Each Other: Al Qaeda Clash with Rival Islamists.

The Al Qaeda-affiliated Al Nusra Front have sent an ultimatum to the rival Islamic State of Iraq and Syria (ISIS) to cease killing fellow rebels or face "expulsion" from Syria.

ISIS have waged a bloody campaign against fellow rebels, whom they regard as being insufficiently devout, and are widely suspected to be responsible for the killing of Suri. They have become known for the brutal enforcement of their extreme interpretation of Islamic law in the territory they control.

While Julani admitted that some Syrian rebel groups were guilty of "takfir" (unbelief), he accused ISIS of indiscriminately killing rebels and labelling them all as takfir.

Infighting between the Syrian rebel groups has intensified in recent months, with ISIS and Al Nusra severing links and fighting one another for territory. While Al Nusra have tried to build links with other rebel groups, including more secular ones, ISIS have focused on religious purity and stamping out more moderate voices.

US Backing Al Qaeda "Moderates"

That's right. McCain wants more US weapons for Syria, perhaps even a US invasion (when dealing with war-mongers it is usually correct to assume war is the real goal).

Yet, those weapons either go straight into the hands of Al Qaeda or eventually end up in Al Qaeda hands anyway.

This is precisely the idiocy of the policy "The enemy of my enemy is my friend". Supporting the overthrow of one corrupt regime for another corrupt regime typically makes matters worse.

Clear Policy Statement

The US needs a clear, consistent, easily explained policy on Syria.

And I can sum it up in two words "stay out".

If we supply arms and the Syrian government falls, the next government is likely to be run by Al Qaeda or militant extremists, and McCain and his ilk will be back at it, hoping to overthrow the next government, or worse yet, invade Syria to impose our will.

Clearly, the only winning option is to not get involved.

How Do Warmongers Get Elected?

Given that it's crystal clear that involvement is a losing option, some might wonder: "How Do Warmongers Get Elected?"

Here's the easy to understand explanation: The "offense" industry supports any and every candidate that supports war. If you are a candidate against war, the "offense" industry will label you "weak on defense", then toss massive amounts of campaign money at your opponent.

Democrat-sponsored pro-union advocates get elected the same way. In fact, it is difficult to get elected if you do not take campaign bribes.

This explains why those on the outside want campaign finance reform. But, once elected, bribes come in from every corner. The newly-elected want to stay in power so they too take bribes. Campaign finance reform dies in the process every time.

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

Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry

Posted: 28 Mar 2014 10:03 AM PDT

Normally I stay far away from the rumor mill. Typically, most rumors turn out to be false.

However, actions in Turkey suggest at least some substance to this rumor. Moreover, it's entirely believable. First let's tune in to what Bloomberg reports (which I also commented on yesterday).

Please consider Turkey Blocks YouTube After Syria Incursion Plans Leaked

Turkey defended its decision to block YouTube after a leaked recording of a meeting where top officials discussed a possible military incursion into Syria appeared on the site.

Foreign Minister Ahmet Davutoglu today equated the leak to an "attack on Turkey's borders" in an interview with NTV television. Davutoglu said he had chaired the meeting with the head of national intelligence and other military and diplomatic officials to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were "doctored," the foreign ministry said in a statement yesterday.

The leaked tape is the latest in a series of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Prime Minister Recep Tayyip Erdogan in a corruption scandal and led to the departure of four cabinet ministers. It comes before weekend local elections, where Erdogan is seeking a victory that he says will lay to rest the allegations of graft.

Under fire since the corruption investigation burst into the open in December, he has purged dozens of prosecutors and thousands of police, as well as imposing media curbs. Yesterday's YouTube shutdown follows similar measures against Twitter last week. The government says some of the recordings were assembled by montage.

What We Know

The above is what is claimed by Erdogan and discussed by Bloomberg. We do know that Erdogan tried to shut down Twitter (but failed), and he did shut down YouTube.

He also called the leak an act of treason and refused to let media even discuss the allegation. What follows is the rumor.

Turkey Transcript

Here is the alleged Turkey Transcript involving a plot to invade Syria.

Select Quotes

Hakan FİDAN: But hear me out, we know how to put two and to together. Now, we know that what happens there has no real strategic value for us, besides the political outward appearance and whatever. Now, if we are going to enter a war, let us plan this beforehand and do it. Now, I..

Yaşar GÜLER: That's what we've been saying since the beginning.

THE FIFTH SCREEN

Hakan FİDAN: Now, what I can't accept is this: we are accepting the risk of using weapons for the sake of the Tomb of Suleiman Shah. It's 10 acres of our country's land and we are accepting to risk a war for it, for the *thing* of our 22-28 soldiers over there, for God's sake, how many kilometers of this country's land lie on the Syrian border? And we don't risk a war for for thousands of kilometers of land and the lives of millions of people? That's not logical! If we are going to use weapons, let's do it from the beginning. If these guys pose a threat..

THE SIXTH SCREEN

Ahmet DAVUTOĞLU: Keep this between us, but the Prime Minister told me on the phone that in this conjuncture, we count this (the proposed false flag attack on the Tomb of Suleiman Shah) amongst our options.

Hakan FİDAN: Commander, if we really need a reason, I'll send 4 guys to the other side, I'll get them to launch 8 rockets at empty places. That's no problem! If we need a reason, we can produce it. The thing is to show a mutual will for that. We are exerting a will for war here, and nevertheless we are making the same mistake as we always do, the mistake of not being able to think properly.

Feridun SİNİRLİOĞLU: I'll tell you this, it's 10 acres of land. 10 acres of land is a very strong casus belli in the international jurisprudence, also for justification if we do this operation against the ISIL, we'll have the entire world behind us. Have no worries about that.

THE SEVENTH SCREEN

Feridun SİNİRLİOĞLU: We need justification, justification.

Hakan FİDAN: I told you, I can produce justification if need be. Justification is no problem.

THE EIGHTH SCREEN

Ahmet DAVUTOĞLU: Many a times I've had amicable conversations with Kerry, he asked me precisely about whether we've agreed on a final decision on this strike..
....
This is translated by Doğukan Piyale. I am probably putting my life at risk, but the State never runs out of assassins, so if I'm going to die, I'm going to die anyway. I just wanted to serve the international community and my people by letting everyone know about these warmongering bastards.

Entirely Believable

I do not know whether that is an accurate translation of a real tape or not. But the fact is, it is entirely believable.

Moreover, shutting down YouTube, and then banning media discussion of the tape, while calling its release an act of treason, lends further credence to the rumor.

True or not, that something of this nature could be so easily believable says a ton about the corrupt state of global politics.

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

Are You Minding the Curves? Sweet Spot is Likely Not Where You Think

Posted: 28 Mar 2014 12:16 AM PDT

Curve Watcher's Anonymous has its eye on the yield curve again.

Over the course of the last year, and except for the close front-end, US treasury yields have risen across the board, and in some cases dramatically. This is what one would expect from a tapering Fed that is also discussing rate hikes.

However, the action in the last three months is not what one would expect.

click on any chart for sharper image

In the past year, 5-year treasuries have been hit the hardest (sharpest yield increase). That is not what one might expect from a strong recovery. And certainly a drop in the 30-year long bond is not what one would typically expect either.

Typically, when the Fed starts hiking or announces intention to hike, the long end of the curve changes the most. It did, until the beginning of the year. The following charts will help put things in perspective.

Yield Curve as of 2014-03-28 Monthly

The above chart shows monthly "closes" where the yield was at the end of the month. The current month shows the present value.

Yield Curve as of 2014-03-28 Weekly

The above chart shows weekly "closes" where the yield was at the end of each week. The current week shows the present value.

Symbols

$TYX: 30-Year Green
$TNX: 10-Year Orange
$FVX: 05-Year Blue
$IEX: 03-Month Brown

Since the beginning of the year, the middle and long portion of the yield curve has flattened dramatically.

The "sweet spot" for investors has been the long end of the curve. Those hiding in 5-year treasuries have been hit the hardest.

Given the Fed is holding the low end of the curve near zero, the typical inversion one sees in the yield curve preceding a recession is not going to happen. We could see the 5-10 spread invert but that would take some doing.

Regardless, this flattening of the curve is certainly not a sign of a strong recovery. Given blatant Fed yield curve manipulation, this may be as close to a recession warning that we get.

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

27.3.14

Mish's Global Economic Trend Analysis

Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting
Ukraine "On Verge of Financial Bankruptcy" Reaches $27 Billion "Kamikaze" Deal With IMF
Recommendation on Bitcoin
Can Inflation be Too Low?

Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting

Posted: 27 Mar 2014 04:34 PM PDT

Turkey is threatening military intervention in Syria. A leaked recording proves it. In response, an angry Turkish Government Banned YouTube.

The Foreign Ministry called the leak a "despicable attack" on national security, in a statement e-mailed from Ankara yesterday. It said the meeting, attended by Foreign Minister Ahmet Davutoglu, the head of national intelligence and other military and diplomatic officials, was held to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were "doctored," the ministry said.

Turkey's telecommunications authority said it has blocked access to YouTube, where the recording was posted. The government imposed a temporary ban on news about the recording, according to Turkey's broadcasting watchdog.

The recording included Davutoglu discussing an attack against Islamist militants who have threatened the tomb of Suleyman Shah, a monument that's on Turkish territory inside Syria under international agreements. It comes three days before local elections, where Prime Minister Recep Tayyip Erdogan is seeking a victory that he says will lay to rest allegations of corruption that surfaced in earlier Internet leaks.

Erdogan attacked the leak of the recording at an election rally in Diyarbakir, calling it "unethical, sordid and contemptible." He vowed to bring the perpetrators to justice, saying: "We'll go after them in their lairs."

The leaked tape is the latest in a slew of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Erdogan in a corruption scandal and led to the departure of four cabinet ministers.

First Twitter, Now YouTube

The ineptitude, cowardice, corruption, and foolishness of Prime Minister Recep Tayyip Erdogan is stunning. Last week Erdogan banned Twitter, proclaiming "The international community can say this or that – I don't care. They will see the power of the Turkish Republic."

The next day a "digital coup" occurred and Twitter Use in Turkey Jumped to New High.

In response, I proposed the Law of Social Media.

Law of Social Media: Arrogant fools who think they can control social media quickly discover social media controls them.

Today's YouTube episode is yet another lesson for Erdogan.

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

Ukraine "On Verge of Financial Bankruptcy" Reaches $27 Billion "Kamikaze" Deal With IMF

Posted: 27 Mar 2014 12:41 PM PDT

Ukraine and the IMF have agreed to an aid package that will no doubt prove to be as beneficial to Ukraine as the Troika bailout (plunder) of Greece.

Bloomberg reports Ukraine Unlocks $27 Billion International Aid Deal.

Ukraine reached a preliminary deal with the International Monetary Fund to unlock $27 billion in international aid as U.S. lawmakers passed bills imposing more sanctions on Russians linked to Crimea's annexation.

The government in Kiev reached a staff-level accord with the IMF for a two-year loan of $14 billion to $18 billion, the lender said today in an e-mailed statement. The IMF's board must still sign off on the package, Ukraine's third since 2008, and the cabinet must complete "prior actions" to receive the first installment as early as April.

Ukraine's government, which came to power after an uprising ousted President Viktor Yanukovych last month, is grappling with an economy threatening to slide into a third recession in six years, dwindling reserves and a weakening currency. Ukrainian asset prices have also suffered as Russia's takeover of the Black Sea Crimean peninsula sparked European and U.S. sanctions and rekindled memories of the Cold War.

"The IMF package should be sufficient to prevent the country falling into a full-blown balance-of-payments crisis," London-based Capital Economics Ltd. said in an e-mailed note. "But the volatile political situation and Ukraine's poor track record in implementing reforms demanded by the fund mean that there will still be many doubts about whether politicians will be able to push substantial changes through."

As part of the IMF agreement, Ukraine agreed to narrow the budget deficit to 2.5 percent of gross domestic product by 2016 and to raise retail energy tariffs toward their full cost, according to the Washington-based lender. The central bank will shift to a flexible exchange rate and inflation targeting, while the nation will tackle bad debts at banks, it said.

Lawmakers in Kiev approved budget changes and a tax bill today needed for the IMF loan deal.

'Very Unpopular'

"The country is on the edge of economic and financial bankruptcy," Prime Minister Arseniy Yatsenyuk said today in Kiev. "This package of laws is very unpopular, very difficult, very tough. Reforms that should have been done in the past 20 years."

After being voted in by lawmakers last month, Yatsenyuk described his task as a "kamikaze" mission, saying Ukraine is in a "great mess" with an empty treasury and foreign-currency reserves that have been "robbed." GDP will shrink 3 percent in 2014 and inflation may be as high as 14 percent, he said today.

"Kamikaze" Mission

Kamikaze mission is an apt description. As with Greece, this bailout deal will not help Ukraine much. Of course, the goal is not really to help the country receiving the alleged "aid", but rather to help creditors get their money back, regardless of how much the aid recipient suffers in the process.

Hryvnia vs. US Dollar

It will be interesting to see what happens to the Ukrainian hryvnia, once again nearing a record low. The hryvnia fell from 8.2 to the dollar, to 11.2 to the dollar. That's a decline of 26.8% this year.

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

Recommendation on Bitcoin

Posted: 27 Mar 2014 11:39 AM PDT

I have a recommendation to make on bitcoin but it's not to buy or sell or even to hold bitcoins.

Before I get to my recommendation, I have to admit that I am quite surprised that bitcoins surged from less than a cent to over $1000 (now around $520).

Treasury, Wall Street Embrace of Bitcoin

Early on, I wondered if bitcoin would even survive. But it's pretty clear now that bitcoin will survive.

I arrived at that conclusion when Wall Street embraced bitcoins (see High Frequency Bitcoin Trading Coming Your Way). In response, I stated "bitcoin is here to stay".

On March 18, I reported Treasury Department Places "Real Value" on Digital Currencies, Sees No Widespread Criminal Bitcoin Use; Virtual Currency Rules Coming Later This Year.

To me, that Treasury discussion was further evidence bitcoin is here to stay. I strongly suspect the Treasury wants to study digital currencies, possibly in advance of making the US dollar digital, and in the process making every cent traceable to someone at all times. Unfortunately, I believe such controls are coming.

Money is Made by Being Early

Bitcoin is front-page news. But money is not made when things hit the front page of the Wall Street Journal. Money is to be made in items on the 20th page of the Wall Street Journal, if not before that.

In 2009, $1,000 invested in bitcoins would be worth a staggering $50,000,000 today. That is the effect of investing in something that goes from one cent to $500. I missed it, so did nearly everyone else I know.

Recommendation

So, where are bitcoins headed next? If I knew that, I would have bought in 2009. I do not know, nor does anyone else. Yet, I do have a recommendation.

In light of bitcoin theft at Mt. Gox, at Flexcoin, and at Poloniex (see Two More Exchanges Hacked: "Flexcoin" Robbed of All Online Coins; "Poloniex" Missing 12.3% of Assets), for those who hold bitcoins, please hold bitcoins at a secure site.

Specifically, I recommend Netagio.

Why Netagio? Simple. I trust their digital currency safety, just as I trust the safety of my holdings at Goldmoney. Goldmoney and Netagio are related (See GoldMoney group launches new Bitcoin‐focused company in the UK).

This of course makes me biased. I have a relationship with Goldmoney and by association with Netagio. Thus I struggled writing this post.

I do not make such recommendations lightly. I do now, not because of any current benefit (I have none), nor because of any expected future benefit (which there might be), but rather, because of multiple instances of fraud, at multiple places, people holding bitcoins need to hold them in a secure place.

Fees

Netagio currently has no storage fees. Some places like Xapo.com charge for bitcoin storage, whereas others like Coinbase.com do not.

I expect storage costs and/or transactions costs will eventually be the norm everywhere. I have no information regarding timeframe.

I can say, metal storage costs at Goldmoney are among the lowest in the industry for precious metal storage. If and when Netagio does charge storage fees, I would expect them to be among the lowest in the industry.

Financial Reporting

Given the IRS Clarifies Bitcoin as Property Not a Currency I asked Netagio if they handled financial transaction reporting and received this answer:

"We provide the same type of information like we currently do now in GoldMoney. We give a currency value to any Bitcoins on the date they were received. For those who buy and sell Bitcoins through our platform, we'll be able to map the value of them at the time of the trade execution."

Supported Currencies

Netagio supports bitcoin trading in US dollars, Euros, and British Pounds. I suspect, but cannot guarantee other currencies will be added. Currently, most bitcoin exchanges support one or two currencies, but that may easily change as well.

Gold to Digital Transactions Coming

My opinion is that once a wider population of people are comfortable transacting with Bitcoin online, transferring gold to bitcoins is not far off.

Indeed, a quick check of Netagio shows You can Buy and Sell Gold with Bitcoins. That is something other bitcoin exchanges do not offer.

Personally, I do not want my predominant store of wealth sitting in bitcoin. I prefer gold. Others might prefer bitcoin.

For those who do prefer bitcoin, my suggestion is to question the security procedures at your current site, and if at all in doubt, move some or all of that storage somewhere else.

Specifically, look for a site where security is rock solid, where there is financial transaction accounting, and where multiple currencies are supported.

There may be other similar services elsewhere. As always, please do your own due diligence.

This is similar to my recommendation to not hold money in excess of the FDIC deposit insurance at any one bank. In this case, there is no deposit insurance anywhere in the Bitcoin world, so that makes it all the more important that you pick a site you can trust, with financial accounting, and with other services.

Again, this is not a recommendation to buy, hold, or trade bitcoins. Rather, if you do, please pick a site you can trust. Netagio is one such place, for all the reasons given above.

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

Can Inflation be Too Low?

Posted: 27 Mar 2014 03:03 AM PDT

On Tuesday, Bundesbank chief Jens Weidmann opened the door to QE and negative interest rates.

European Central Bank governing council member and Bundesbank chief Jens Weidmann said negative interest rates would be more appropriate to use to counter a higher exchange rate.

Weidmann also added that it was not 'out of the question' for the ECB to buy bank assets to fight deflation, in a softening of the German central bank's strict stance on the issue.

Monks Recant

The above announcement had the monetarists led by Ambrose Evan-Pritchard preaching "Monks recant: Bundesbank opens the door to QE blitz".

Policy Shift or Just Extreme Verbal Intervention?

Others are scratching their heads. Is this a bluff of some sort or is it the real deal?

Comments yesterday and today on Eurointelligence are quite interesting.

Eurointelligence Today

Nobody we have talked to has the slightest clue what the ECB is doing right now. In one of the press conferences Mario Draghi is dovish, the next one he is hawkish. One day, Jens Weidmann says the QE is not right for the ECB, then he can live with it in principle. One day, they warned that negative interest rates would produce all sorts of distortions and risks, and now we are told that they have long ceased to be a subject of dispute. In the meantime, nothing happens. We have reached a point where nobody listens to verbal intervention any more. A Reuters news analysis by Eva Taylor observes: "While some economists said the Bundesbank president 'left the door open, although only slightly' for asset purchases, others saw it merely as a more precise statement of its position and an attempt to talk down the euro exchange rate."

Eurointelligence Yesterday

Substantively, what happened yesterday is that some central bankers acknowledge a risk we have known all along, that inflation can be too low, and that the ECB has policy tools at its disposal to fight this. None of this should be news. The most interesting bits were Liikanen's and Weidmann's statement about negative deposit rates - a route the ECB now appears less reluctant to take. It would address the dual problem of the overshooting exchange rate and the fall in excess liquidity. We find it harder to figure out Weidmann's much reported statement on QE. It seems to us that he is merely signalling that he opposes it for different reasons than usually stated - not out of a fundamental belief but because he does not think it to be appropriate now. So this seems just another form of verbal intervention? We thought his qualifier was more important, which suggests that if QE ever were to happen, it will probably occur on an insufficient scale. In our own analysis, inflation expectations have already decoupled in recently month, caused by ECB policy errors. The governing council has been persistently complacent and some of the members are now beginning to panic. We do not think that a further rate cut, a half-hearted QE programme, let alone verbal intervention, will be sufficient to re-anchor inflation expectations.

Can Inflation be Too Low?

There is nothing quite like making an economically illiterate statement backed up only by the supposition that another clueless party agrees.

Let's play a thought game.

Here is the question at hand: What if the price of everything fell to zero?

Certainly no one would go hungry. But it goes far beyond that. Everyone would have their own private jet, the biggest house that they could imagine, etc.

From a practical standpoint, nirvana cannot happen of course, but here are three points to consider.

Falling prices mean goods and services are more readily available and more affordable
Falling prices increase standards of living
Falling prices reduce wealth inequality (With everything priced at zero, income is irrelevant).

In light of the above, the notion that "inflation can be too low" is patently absurd.

Ironically, the myth we need inflation is widely held, even though the Fed's inflationary policies are the biggest cause of rising wealth inequality.

For further discussion, please see Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another

As to whether or not the announcement is a Bluff or Insanity, I suspect both.

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