Economy News: September 2014

30.9.14

Mish's Global Economic Trend Analysis

Draghi Pressures ECB to Buy "Junk-Rated" Loan Bundles of Greece and Cyprus
"Come Hell or High Water" Promise Morphs Into "Infinity and Beyond"
Reader Question on a Credit-Based Society: Can Interest Ever Be Repaid?

Draghi Pressures ECB to Buy "Junk-Rated" Loan Bundles of Greece and Cyprus

Posted: 30 Sep 2014 07:00 PM PDT

On September 4, ECB President pulled out a financial bazooka including a pledge to build up the ECB's balance sheet by another €1 trillion.

Draghi confirmed the asset purchases would "include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy," but only "the senior tranches, and the mezzanine tranches only if there is a guarantee."

Now, just three weeks later, he wants to buy outright junk, presumably without guarantees.

Please consider Mario Draghi pushes for ECB to accept Greek and Cypriot 'junk' loan bundles.

Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with "junk" ratings, in a move that is set to exacerbate tensions between Germany and the bank.

The ECB's executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone's monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.

However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone's largest economy.

Bundesbank president Jens Weidmann, who also sits on the ECB's policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank's balance sheet too exposed to risks.

Wolfgang Schäuble, Germany's finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB's role as monetary policy maker and bank supervisor.

While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe's securitisation market, it would free up billions in liquidity for banks in two of the eurozone's weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area's periphery.

Free Up Liquidity?

The idea that swapping money for junk will free up liquidity is as ridiculous as moving a rotting fish from your pantry to the living room in hopes the stench will go away.

In this case, the stench on Greek bank balance sheets will not go away. Instead, stench will also appear on the balance sheet of the ECB.

And it will not do a thing to spur lending for the same reasons as noted in ECB's €1 Trillion Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?

Here's the key snip.

Will this Stimulate Lending?

Everyone wonders if this will work. Let me ask a different set of questions:

Why should it?
Does the announcement fix any structural problems with the euro?
Does the announcement fix any fiscal issues in any European country?
Does the announcement fix any competitive disadvantages of France vs. Germany?
Does this provide any impetus for structural reforms in France or Italy?
If -0.1% rates for funds parked with the ECB did not stimulate lending, why should -0.2% rates?
Draghi Creates Bond Bubble

All Drahghi really accomplished with LTRO is to make Europe the biggest bond bubble in the world.

Well bubbles can always get bigger, until they pop.

Meanwhile none of these can-kicking efforts have fixed a single structural problem. Instead, they made it easy for governments to delay needed reforms.

Forcing Banks to Lend a Huge Mistake

These attempts to force banks to lend is a huge mistake. Banks lend if and only if ...

Banks are not capital impaired
Banks believe they have credit-worthy borrowers
Credit-worthy borrowers want credit

If banks lend in other circumstances, they will incur losses. They also incur losses if they believe they have credit-worthy customers but they don't.

The problem should be obvious. European banks lack credit-worthy borrowers who want loans, or the banks are capital impaired.

I suggest both.

And if this move by Draghi does spur more lending to small uncreditworthy businesses, the ECB will have done nothing but compound Eurozone problems greatly.

In response to the above post, a director at a global financial company pinged me with ...

"Hello Mish,

Mario Draghi is an idiot. Banks create money when they lend. The loans create a requirement for reserves which ultimately reverts back as deposits at the ECB. The negative interest rate is therefore a tax on capital and a tax on lending. This not rocket science.

I'd start a charity whereby every newly appointed central bank board member is sent a free copy of Rothbard's Mystery of Banking except I am beginning to doubt their ability to read.

These actions by Draghi prove he is clueless about how the system even works.

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

"Come Hell or High Water" Promise Morphs Into "Infinity and Beyond"

Posted: 30 Sep 2014 02:13 PM PDT

In 2010, vice-president Joe Biden publicly vowed the US would be "totally out" of Afghanistan "come hell or high water, by 2014."

In a few short months, 2014 will be gone. Are US troops out of Afghanistan? Nope. Iraq? Nope. Instead, we have troops in Syria.

Political Promises

Political promises should never be believed.

Today the US signed an extension allowing US forces to remain in Afghanistan until "at least" 2024.

At Least Until 2024

The Guardian reports a new Afghanistan pact means America's Longest War Will Last Until at Least 2024.

The longest war in American history will last at least another decade, according to the terms of a garrisoning deal for US forces signed by the new Afghanistan government on Tuesday.

Long awaited and much desired by an anxious US military, the deal guarantees that US and Nato troops will not have to withdraw by year's end, and permits their stay "until the end of 2024 and beyond."

The entry into force of the deal ensures that Barack Obama, elected president in 2008 on a wave of anti-war sentiment, will pass off both the Afghanistan war and his new war in Iraq and Syria to his successor. In 2010, his vice-president, Joe Biden, publicly vowed the US would be "totally out" of Afghanistan "come hell or high water, by 2014."

Under the Bilateral Security Agreement's annexes, the US military will have access to nine major land and airbases, to include the massive airfields at Bagram, Jalalabad and Kandahar, staging areas not only for air operations in Afghanistan but the US drone strikes that continue across the border in tribal Pakistan.

The additional bases – in Kabul, Mazar-i-Sharif, Herat, Helmand, Gardez and Shindand – ensure the reach of the US military throughout Afghanistan.

US defense leaders greeted the signing of the accord with enthusiasm.

Enthusiasm of Defense Leaders Soars

Opium Connection

To help highlight the absurdity of US policy in Afghanistan, please consider U.S. Turns a Blind Eye to Opium in Afghan Town

KABUL, Afghanistan — The effort to win over Afghans on former Taliban turf in Marja has put American and NATO commanders in the unusual position of arguing against opium eradication, pitting them against some Afghan officials who are pushing to destroy the harvest.

From Gen. Stanley A. McChrystal on down, the military's position is clear: "U.S. forces no longer eradicate," as one NATO official put it. Opium is the main livelihood of 60 to 70 percent of the farmers in Marja, which was seized from Taliban rebels in a major offensive last month. American Marines occupying the area are under orders to leave the farmers' fields alone.

Opium Production at Record High

That story was from 2010. An article from January of 2014 highlights the "success" of US opium strategy: Afghan opium production on the rise despite U.S. troops, inspector says

Citing the United Nations Office of Drugs and Crime, Sopkp said the cultivation of poppy plants — used to make opium and its derivative drugs such as heroin — is greater today than in 2001 when the United States invaded Afghanistan.

Indeed, he said it's the highest in modern history.

Afghanistan Absurdities

US troops protect the Afghanistan poppy harvest to aid local farmers in the battle against the Taliban.
That battle has been so "successful" that the Taliban Storms Afghanistan and is on the march towards the capital.
Meanwhile, drug agents attempt to intercept heroin before it hits the US.
The effort to stop smuggling pushes up the price of heroin to the explicit benefit of drug lords who do get some of it through.
Those drug lords are apt to be the Taliban.
Drug money goes to buy weapons for the Taliban.
To counteract the rise of the Taliban, we train "moderates" to fight the Taliban.
We also give weapons to "moderates" to fight the Taliban.
Unfortunately, we cannot successfully identify moderates. Many US weapons fall into the hands of the Taliban.
Ultimately US weapons as well as weapons purchased with drug money are used to kill US soldiers and fight the puppet regime the US seeks to protect.

The above process necessitates keeping US troops in Afghanistan to 2024, if not infinity and beyond.
Thus, the Battle for Perpetual War is Won.

Is it any wonder the process has garnered rabid enthusiasm of the defense industry?

The only missing ingredient of the warmonger's ultimate fantasy is multiple wars on multiple fronts with a large power like Russia.

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

Reader Question on a Credit-Based Society: Can Interest Ever Be Repaid?

Posted: 30 Sep 2014 10:35 AM PDT

Reader Mike wonders how interest can ever be repaid in a credit-based economy.

Hi Mish,

I wonder if you would be able to comment on this from Bill Gross in For Wonks Only:

"A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression.

Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest."

This seems to correlate to reality 100% but the implications are stunning. It means that assets must increase in value at the rate of the original loan plus all interest payments ever made. It also means there will be a very major reversal at some point as there will be a moment when the last loan that someone will actually pay gets written and the system will not be able to expand. I always assumed that debt levels would just reach a very high plateau and stay there but Gross is saying that is not possible.

If the system we have requires the interest to be created every year (in the form of new loans) to survive that seems like the very definition of a ponzi scheme.

Do you know the mechanical reason why the interest payments need to be created by issuing new debt? It is possible, of course, that you disagree with Bill Gross but he probably knows more about how debt works than any man alive so my assumption is that you agree with his viewpoint.

I'm sure you get endless requests for articles but this is such a fundamental question I would be extremely grateful (as I'm sure would many other people) if you are able to write a reply as an article.

Mike

Exponential Math

We are in this mess precisely because of fractional reserve lending and never-ending policy of inflation by central banks that do not seem to understand the long-term ramifications of exponential math.

I have covered the exponential math aspect before. For details, please see Money as Communication: A Purposely "Non-Educational" Fallacious Video by the Atlanta Fed.

Credit in a Gold-Backed World

There is nothing wrong with credit expansion used for productive purposes. If we had a 100% gold-backed dollar without FDIC, bad debts would be extinguished automatically.

Interest rates would be low for low-risk ventures and high for high-risk ventures, with lenders (depositors willing to lend money) taking the risk.

On high risk ventures, some projects would lose and some win, as it should be.

Importantly, no money held for safe keeping (checking deposits), would ever be at risk in 100% gold-backed system. Nor would there be any mathematical need for credit to expand exponentially forever and ever without end.

30-year mortgages might not even exist, but that would not cause any problems.

Deflation (a natural state of affairs because of rising productivity) would provide price stability central bankers now claim they want.

But that is not the world we live in.

Fiat World Math

Unfortunately, we live in a fiat world, not a 100% gold-backed dollar world. We have fractional reserve lending, and a huge mismatch in duration. Banks borrow short and lend long. It's a recipe for disaster.

Thanks to central bank encouragement and unnaturally low rates for a fiat scheme, credit is out of hand. Loans that have been made cannot possibly be paid back. Unproductive zombie companies survive only because they can roll over debt while expanding it. Covenant-lite debt now accounts for 50% of new debt issuance.

Worse yet, real wages are falling because of central bank inflationary policies in a productivity-driven world increasingly dependent on robots, not human labor.

Minimum wage laws, Obamacare, Congressional fiscal policies, Fed interest rate policies, public unions, and inflationary policies in every phase of government make it likely that companies use robots at a far faster pace than they would otherwise.

Something has to give and it will.

Debtberg Malinvestments and the Zero-Bound Problem

I asked my friend Pater Tenebrarum at the Acting Man blog to chime in on this situation. Pater writes ...

Interest is basically nothing but the discount of future goods vs. present goods. At its root, interest is actually a non-monetary phenomenon. In the modern-day fractionally reserved fiat money system, it has become possible to expand money and credit at immense rates. The reason why the debtberg was able to grow to such immense proportions is that interest rates fell for over 30 years. But now we have arrived at a critical juncture, because interest rates can no longer go any lower. The possibility to refinance existing debt again and again to lower its cost has come to an end.

The size of a debt is immaterial if the debt has been used for productive purposes and is so to speak 'self-liquidating'. Imagine you are a company that borrows $200 million at 3%. If you employ this money to produce goods that have a net profit margin of 6%, the repayment of the debt plus interest poses no problem.

But a lot of debt in the system today is a "dead weight" that will produce nothing. All extant government debt is only a reflection of past spending, and the funds have been 100% consumed. The same obviously holds for consumer debt, but consumers at least have an income based on production (i.e., their work will create value in the future). The government's income relies on the production of others, which is coercively appropriated.

In the realm of corporate debt, which may be considered productive in principle, there is the problem that many of the investments that have been undertaken are really malinvestments, as economic calculation has been falsified by monetary pumping. Debt that has funded capital malinvestment is a dead weight as well, although this may only become obvious at a later stage.

So the situation is now this: debt service will now grow with every new addition to existing debt, as interest rates have arrived at their absolute lows. Given total credit market debt of $60 trillion in the US alone, it will become more and more difficult to actually produce the added value required to service this debt. There is indeed an incentive for many to play a kind of Ponzi scheme that is very similar to the government debt Ponzi. Many companies, especially the junk credits, can only survive by rolling over their debt when it comes due.

Nevertheless, Gross' calculation may be a bit too simplistic. After all, if you are a creditor and get paid interest and principal, money is only moving from A to B. It is still there, only its ownership has changed hands. The problem is that central banks believe in inflating debt away and keeping prices "stable".

In a free market economy, prices would not be stable, they would in fact decline. Thus, interest would be quite low to begin with, and every dollar would be doing more work over time (i.e., could be exchanged for more real wealth/goods/services as time passes).

So we currently have a systemic bias toward more and more debt expansion. Obviously, debt service costs in this system are slated to rise, while an offsetting creation of wealth is no longer guaranteed. You can see this from the fact that more and more new debt is added per dollar of GDP growth. So Gross is quite correct that there is a problem - the problem is the ongoing bubble. Such a bubble does indeed require a constant acceleration in debt and money supply to keep going.

Seems to me that it is a system that is coming ever closer to a cliff.

On the Edge of a Cliff

Japan is on the edge of a cliff
Europe is on the edge of a cliff.
China is approaching the cliff, if not already on the edge.
US is approaching the cliff.

No one can be sure when some country is going to fall off that cliff, but exponential finance, Ponzi financing schemes, and zero-bound interest limitations suggest the outcome is sooner rather than later. As I have stated before, a global currency crisis awaits.

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

29.9.14

Mish's Global Economic Trend Analysis

Schoolgirls Aged 14-16 Leave France, UK, Germany for Syria to Join ISIS Jihad
US Bombed Wrong Refineries in Syria; Iran Seeks to Stop Oil Price Slide; Sanctions Won't Impede Arctic Drilling
Spain Manufacturers Warn of Another Slowdown; Consumption Recovery Ends, Retail Sales Contract, Price Deflation Sets In

Schoolgirls Aged 14-16 Leave France, UK, Germany for Syria to Join ISIS Jihad

Posted: 29 Sep 2014 07:12 PM PDT

As many as 63 seriously misguided teenaged girls from France, 40 from Germany, and 50 in the UK have left their countries to join ISIS in Syria.

The Guardian has a fascinating report on Schoolgirl jihadis: the female Islamists leaving home to join Isis fighters.

Hundreds of young women and girls are leaving their homes in western countries to join Islamic fighters in the Middle East, causing increasing concern among counter-terrorism investigators.

Girls as young as 14 or 15 are travelling mainly to Syria to marry jihadis, bear their children and join communities of fighters, with a small number taking up arms. Many are recruited via social media.

Women and girls appear to make up about 10% of those leaving Europe, North America and Australia to link up with jihadi groups, including Islamic State (Isis). France has the highest number of female jihadi recruits, with 63 in the region – about 25% of the total – and at least another 60 believed to be considering the move.

In most cases, women and girls appear to have left home to marry jihadis, drawn to the idea of supporting their "brother fighters" and having "jihadist children to continue the spread of Islam", said Louis Caprioli, former head of the French security agency Direction de la Surveillance du Territoire. "If their husband dies, they will be given adulation as the wife of a martyr."

Five people, including a sister and brother, were arrested in France earlier this month suspected of belonging to a ring in central France that specialised in recruiting young French women, according to Bernard Cazeneuve, the interior minister.

At least 40 women have left Germany to join Isis in Syria and Iraq in what appears to be a growing trend of teenagers becoming radicalised and travelling to the Middle East without their parents' permission.

"The youngest was 13-years-old," Hans-Georg Maassen, president of the Federal Office for the Protection of the Constitution, told the Rheinische Post. "Four underage women left with a romantic idea of jihad marriage and married young male fighters who they had got to know via the internet."

Karim Pakzad, of the French Institute of International and Strategic Relations, said some young women had "an almost romantic idea of war and warriors.

"There's a certain fascination even with the head and throat-cutting. It's an adventure."

Some British women and girls have posted pictures of themselves carrying AK-47s, grenades and in one case a severed head, as they pledge allegiance to Isis. But they are also tweeting pictures of food, restaurants and sunsets to present a positive picture of the life awaiting young women in an attempt to lure more from the UK.

Women already living amid Isis fighters used social media adeptly to portray Syria as a utopia and to attract foreign women to join their "sisterhood in the caliphate", she said. "The idea of living in the caliphate is a very positive and powerful one that these women hold dear to their heart."

But the reality was very different, she said. Both Bloom and Rolf Tophoven, director of Germany's Institute for Terrorism Research and Security Policy, said reports indicated that women had been raped, abused, sold into slavery or forced to marry. "[Isis] is a strictly Islamist, brutal movement ... the power, the leadership structure, are clearly a male domain," said Tophoven.

Meet Jihadist Samra Kesinovic

Samra Kesinovic is 16. Her school said she had been speaking out for 'holy war', writing 'I love al-Qaida' around the building. Photograph: Interpol

This is an amazing story by the Guardian, complete with eight pictures and numerous stories of what family members try to do to get their kids back.

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

US Bombed Wrong Refineries in Syria; Iran Seeks to Stop Oil Price Slide; Sanctions Won't Impede Arctic Drilling

Posted: 29 Sep 2014 12:55 PM PDT

US Bombed Wrong Refineries in Syria

Oil is in the news in many countries in many ways. Let's take a look starting with a couple of paragraphs buried in the Financial Times report Barack Obama Admits US Underestimated Isis.

Allied aircraft on Sunday struck three makeshift oil refineries in an area controlled by Isis in an expansion of attacks intended to damage the militant Islamist group's financial infrastructure.

Oil has proved crucial to financing Isis's operations, netting several million dollars a day. But the observatory said the refineries struck early on Sunday, in and around Raqqa, were owned by civilians and not Isis. A separate air strike on a plastics factory on the outskirts of Raqqa resulted in the death of a civilian, the group said.

So, we blow up refineries owned and operated by civilians and it is buried in the news, with no hint of an apology or restitution offered to the refinery owners or to Syria.

Russia Discovers Vast Pool of Oil

Two days ago, Russia announced Arctic Well Drilled With Exxon Strikes Oil.

Russia's state-run OAO Rosneft said a well drilled in the Kara Sea region of the Arctic Ocean with Exxon Mobil Corp. struck oil, showing the region has the potential to become one of the world's most important crude-producing areas.

The announcement was made by Igor Sechin, Rosneft's chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today. The well found about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said.

The discovery sharpens the dispute between Russia and the U.S. over President Vladimir Putin's actions in Ukraine. The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia's Arctic offshore. Rosneft and Exxon won't be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today.

Output from the Kara Sea field could begin within five to seven years, Sechin said, adding the field discovered today would be named "Victory."

Exxon was given until October 10 when other companies had to comply with sanctions immediately. Regardless of why that happened, sanctions are ridiculous.

Instead of complaining that Exxon got favoritism, we should simply kill all the sanctions.

Sanctions Won't Impede Arctic Drilling

Bloomberg reports Russia Oil Chief Says Sanctions No Bar to Arctic Drilling.

The most powerful man in Russia's oil industry says U.S. sanctions won't prevent the development of discoveries in the Arctic Ocean.

Igor Sechin, chief executive officer of state oil producer OAO Rosneft (ROSN) and a long-time ally of President Vladimir Putin, spent two days traveling by plane, ship and helicopter last week to announce a billion-barrel crude strike in the iceberg-prone Kara Sea region of Russia's Arctic Ocean.

"We will continue working no matter what," Sechin said in an interview on board a polar research vessel as he prepared to unveil the find he named Victory. "We will plan the work for next season. As I said, now we've drilled only the first structure -- at Universitetskaya. There are more than 30."

The development of Arctic oil reserves is one of President Putin's grandest ambitions. As Russia's existing fields in Siberia run dry, the country needs to find new reserves as it vies with the U.S. to be the world's largest oil and gas producer.

Sechin said the opportunity offered by today's oil discovery meant Rosneft would have no problem attracting investors and technology providers. Something he said was possible while respecting the company's existing agreement with Irving, Texas-based Exxon.

If Exxon is forced to leave the project, "of course we'll do it on our own and attract the necessary technologies and different partners who don't have limitations on cooperation," said Sechin, who featured in Bloomberg Markets 50 Most Influential list this year.

The well drilled in the Kara Sea found about 1 billion barrels of oil, Rosneft said. The crude is "super-light," the company said, meaning when it's refined it will produce a high proportion of gasoline and diesel. That's likely to make it more valuable than Russia's existing export grade, Urals.

The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia's Arctic offshore.

US Poised to Become World's Leading Liquid Petroleum Producer

Back in the States, the Financial Times reports US Poised to Become World's Leading Liquid Petroleum Producer.

The US is overtaking Saudi Arabia to become the world's largest producer of liquid petroleum, in a sign of how its booming oil production has reshaped the energy sector.

US production of oil and related liquids such as ethane and propane was neck-and-neck with Saudi Arabia in June and again in August at about 11.5m barrels a day, according to the International Energy Agency, the watchdog backed by rich countries.

With US production continuing to boom, its output is set to exceed Saudi Arabia's this month or next for the first time since 1991.

Riyadh has stressed that the rise of the US should not detract from its own critical role in oil markets. It says it has the ability to increase its output by 2.5m b/d if needed to balance supply and demand.

Prince Abdulaziz Bin Salman Bin Abdulaziz, Saudi Arabia's deputy oil minister, said earlier this month that the kingdom was the "only country with usable spare oil production capacity".

However, even Saudi officials do not deny that the rise of the US to become the world's largest petroleum producer – with an even greater lead if its biofuel output of about 1m b/d is included – has played a vital role in stabilising markets.

Brent crude hit its lowest level in more than two years last week at about $95.60 a barrel, down from a peak of over $125 a barrel early in 2012.

Over that period, the growth in US production of more than 3.5m b/d has almost equalled the entire increase in world oil supplies.

The US industry has been transformed by the shale revolution, with advances in the techniques of hydraulic fracturing and horizontal drilling enabling the exploitation of oilfields, particularly in Texas and North Dakota, that were long considered uncommercial.

Iran Urges Opec to Halt Oil Price Slide

In spite of turmoil in the Mideast and sanctions on Russia, oil prices are the lowest in two years. Mideast oil producers are not pleased with that outcome and Iran Urges Opec to Halt Oil Price Slide.

Iran's oil minister called on Opec nations to work together to prevent a further slide in crude prices, highlighting the split among members of the cartel over how to react to the sharp drop in oil to two-year lows in recent weeks.

"Opec members should make efforts to offset their production to keep the prices from further instability," said Bijan Namdar Zanganeh on Friday, according to the Iranian oil ministry website, Shana.

Oversupply in the North Sea and Atlantic Basin has coincided with greater North American production.

Meanwhile, sustained output from Iraq and rising Libyan production – despite bloodshed in both countries – has weighed on the Brent price as has weaker demand from Europe and China.

This month, both the International Energy Agency – the wealthy nations' energy watchdog – and Opec lowered projections of crude demand next year.

This has fostered speculation of a cut in the oil cartel's output targets, in defence of the key $100 a barrel price level.

Estimates of fiscal breakeven oil prices for this year – the price at which the budget is balanced – vary across Gulf nations.

Iran's stands at about $130 a barrel while Saudi Arabia is at $89 and the UAE at $74, according to data compiled by Citigroup

That oil prices are generally trending lower in spite of global turmoil says more about declining demand especially in China and Europe than it does about any increased production in the US.

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

Spain Manufacturers Warn of Another Slowdown; Consumption Recovery Ends, Retail Sales Contract, Price Deflation Sets In

Posted: 29 Sep 2014 11:06 AM PDT

The alleged recovery in Spain is already over. Retail sales are down month-over-month and year-over-year in July. August and September are both projected to be weak.

Vial translation from El Economista, Manufacturers and Retailers Warn of Another Consumption Slowdown.

After a slight recovery in the first months of the year, stagnation set in since June, according to almost all employers and associations of producers and distributors. The retail index INE already pointed to stagnation in June and a drop of 0.5% in July from a year earlier.

Although the decline in July from the previous month is a somewhat lower 0.2%, the situation appears to be worsening. August data will be released this week and forecast for both August and September are not positive.

Aurelio del Pino, president of Aces, the association of supermarket chains such as Carrefour, Eroski, Lidl Supercor or says in this line that "the data already published and forecasts that we confirm our claim that any increase in VAT would been disastrous for consumption."

It's something you notice the trade, but also the major manufacturers. "The recovery we have had in the first few months has been very weak," says Ignacio Larracoetxea president Promarca, an association that encompasses most of the brands leading food, beverage, household and healthcare.

And the sector is not the only well that is alerting the break. Last week, the Bank of Spain and warned that the latest information regarding the third quarter shows a "somewhat less expansive behavior of private demand" and domestic consumption, as recorded in his newsletter this September. In the case of household consumption, says survey indicators of households and retailers were in the average July and August at a lower level than the second quarter.

Reducing prices

To try to curb this stagnant consumption, or falling in recent months, large retail chains have not hesitated to continue lowering prices, even if it had to reduce their margins and also lower their figures fracturing.

Price Deflation Sets In

On September 5, Dow Jones Business News reported Spanish Prices Firmly In Negative Territory, Deflation Beckons.

INE, as the statistics institute is known, said Spain's consumer price index fell by 0.5% on the year in August, the biggest percentage decline since the country experienced a dip in prices in October last year. In July, prices had dropped by 0.3% after a few months of small increases.

Spain's European Union-harmonized consumer-price index, which is a slightly different measure than Spain's own, was also down 0.5%. That compares with a 0.4% decrease in July.

Spain emerged from more than two years of recession last summer, and is currently growing at one of the fastest rates in the eurozone--0.6% between March and June, and 1.2% over a 12-month period.

Expect Slower Growth

It's safe to say Spain's growth has slowed if retail sales slowed.

A September 25th report shows Illegal Activities Boost Spain's GDP by $11 Bln.

Spain's National Statistics Institute says money generated by drug trafficking, prostitution, smuggling and illegal gambling contributed some 9 billion euros ($11.4 billion) to the national economy last year.

The institute said Thursday that the country's gross domestic product is 26.2 billion euros larger — at 1.05 trillion euros — when estimates for illegal economic activities as well as money spent on investigation and research and military armament are included. Illegal activities represented 0.9 percent of total economic activity.

So Spain GDP is up 1.2% and 0.9% of that growth is due to an accounting change that allows counting drugs, prostitution, and illegal activities as part of GDP.

Debt and Deficits

Back in April, I noted Public Debt Threatens to Exceed 100% of GDP in 2014. And take a peek at headlines for Spain Misses budget Deficit Targets.

Spain Unemployment Rate

Youth Unemployment

On the whole, there has not been much of a recovery, and what recovery there was, now appears to be over.

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

28.9.14

Mish's Global Economic Trend Analysis

Elephant in the Room Minsky Moment

Posted: 28 Sep 2014 06:02 PM PDT

The "elephant in the room" is debt. Try as they might, central bankers have not been able to spur credit, hiring, or much business expansion because of the elephant. Things are even worse in Europe.

Via email, this is a guest post from Steen Jakobsen, chief economist of Saxo bank.

Debt - The Elephant in the Room

'Interest on debt grows without rain' – Yiddish proverb

This proverb explains most of what goes on in policy circles these days. We are now watching Extend-and-Pretend, Episode VI: Promises for improvement amid ever growing debt levels.

Short put, we're still working with the same dog-eared script we were introduced to all of five years ago, when markets had stabilized in the wake of the financial crisis: maintain sufficiently low interest rates to service the debt burden. Pretend to have credible plan, but never address the structural problem and simply buy more time. But while we were able to get away with this theme for an awfully long time, the dynamic is now changing as the risk of low inflation (and even deflation) is a brick wall for the extend-and-pretend meme. Yes, interest does grow without rain, and the cost of maintaining and servicing debt grows especially fast in a deflationary regime.

Mads Koefoed, Saxo Bank's macro economist projects US growth at around 2.0% for all of 2014. That will be the sixth year with US growth near 2.0% - so despite lower unemployment, despite a record high S&P500, the economy has a hard time escaping that 2.0% level. Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than expected in January or as recently as July, for that matter. It seems everyone has forgotten that even the US is a part of the global economy.

The fourth quarter is always the most politically interesting time of year. Countries need to get their new budgets in order. The EU, IMF and World Bank will need to pretend they agree or accept the weaker data, which has to mean bigger deficits. It's a tiresome exercise to watch denial-in-action as EU governments and other policymakers try to make something so obviously unpalatable go down easy in their internal reporting. It's obvious that buying more time (extending) is always the number one priority, followed by projecting (pretending) the forward looking growth will reach an ever higher trajectory in order to make the budget fit within the supposed constraints. Or in France's case, the recent unilateral abandonment of meeting budget targets for the next two years is already a fait accompli.

Who's next?

Such behavior would cost you your job in the private sector, but in the economic model of 2014, which reminds us more of Soviet Union than a market based economy, its par for the course. But, many would protest, it would be even worse if we hadn't done so much to "save the system", right?

Well maybe, except for the fact that those economies where belief in State Capitalism is strongest: Russia, China and France, are all at the end of the line. Time has caught up. Negative productivity, capital flight and a system built on protecting the elite is failing. France is now moving from recession to depression. China is moving quickly from denial towards a mandate for change, Russia's future has not looked this bleak since the late 1990's. Meanwhile the US continues on sluggish 2.0% growth. Investors and pundits seem to have forgotten that we were promised 2014 would be the end of the crisis. Instead, we are speeding towards the inflection point at which debt becomes harder to service because pretend-and-extend policy making have created a depression in investment and consumption.

The public debt loads continue to inflate across Europe: Portugal's public debt has ramped to a staggering 130% of GDP – up from about 70% in 2007. Greece's public debt load, even after the restructuring of Greek debt a few years ago, has swelled to 175% of GDP. The EU now has far more systemic risk than at the beginning of the crisis. With zero growth or as our economist Mads sees it, 0.6% with the arrow pointing down, debt levels continue to rise relative to GDP. And most importantly, the current flirt with deflation will make servicing the growing debt even more expensive. The nightmare for ECB and world is deflation as it's a tax on debtors and a boon to net savers. The new reality is that we currently stand face-to-face with the very deflation risk that just about everyone denied could ever happen when Q1 outlooks were written.

Two other global threats, or time bombs, if you will, outside of the EU are risks from the growing costs of servicing debt in China and the USA. In China, the governments national and local have piled up considerable debt, but it is the overall debt service costs in all of China that are the real concern, which have only grown so large with the dangerous assumption by Chinese banks, companies and citizens that they can count on a public bailout. According to a Societe Generale analyst, total debt service costs (including maturing debt and roll overs) in China area at nearly 39% of GDP. Compare that with the closer to 25% of GDP for the USA in 2007.

In the US, interest on US government debt cost over 6% of budget outlays in 2013. This is relatively down from its worst levels when interest rates were much higher, but only because FOMC has so drastically lowered the costs for the US government to issue debt with a zero interest rate policy. And now the debt load is vastly larger than it was before the financial crisis – at 80% of GDP (net debt according to IMF) versus 45% of GDP a mere 10 years ago. So are we actually to believe that the Fed can lift the entire front-end of the curve from 0-1% (current rates out to three years) to 2-4% over the next two years without massive further stress on the deficit and only adding to the debt? Servicing 2% interest when growth is 2% means you are doing worse than standing in place if you also have a budget deficit.

Whatever the timing, the USA, China and Europe are all headed for another Minsky moment: the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset. The US productivity growth last year was +0.36%. The real growth per capita was about 1.5%. Anything which is not productivity is consumption of capital. So, the only way to grow an economy without productivity growth is temporarily with the use of debt – about 75% debt and 25% productivity growth in this case.

Since the 1970s, US productivity growth rates have fallen 81% - the move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the US GDP would have been 55% higher and the outstanding debt to GDP would be easily fundable.

I just returned from Singapore on business – Singapore, to me, used to be the most rational business model around. Its founder Lee Kuan Yew was one of the greatest statesmen in history. Now, productivity is collapsing in Singapore. They are, like us, becoming the Monaco of the world, an economy based on consumption and not on productivity and growth. The developed economies are growing old in demographic terms, but we're still not wise enough to realize that our current model is a Ponzi scheme rushing toward its inevitable Minsky moment. No serious policymaker or central banker is talking about the truth told by simple maths and hoping that things turn out well. Hope is not good policy and it belongs in church, not in the real economy.

Steen

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

Reflections on Catalonia, Crimea, Iraq, California, Nation Building

Posted: 28 Sep 2014 11:09 AM PDT

Catalonia Independence Vote to Proceed on Schedule

Arthur Mas, president of Catalonia declared today that the vote for independence of that region will go as scheduled on November 9. Spain contends the vote is illegal and vows to stop it.

El Economista reports Arthur Mas Calls for Vote on Independence of Catalonia.

President of Catalonia, Artur Mas nationalist, officially called for a vote on the independence of this rich region of Spain for the November 9, challenging the Spanish government began the process to prevent it.

In a ceremony at the gallery Gothic Palace of the Generalitat, the seat of regional government in Barcelona, Artur Mas, supported by his executive and representatives of other nationalist parties, signed the decree of convocation of this non-binding referendum.

"This is the way democracies are expressed and political projects are born. Voting it is the responsibility of the Democrats do not circumvent it," then said in a brief speech.

"Catalonia wants to talk, want to be heard, want to vote," he said Mas, who continues to ask Madrid to allow the query as London did in Scotland, where the "no" won Sept. 18 in a referendum with broad participation.

The proposal flew like a lead balloon in Madrid. Prime Minister, Mariano Rajoy Initiated a Process to Suspend the Referendum.

Reflections on Catalonia, Crimea, California

There is a lot of puffery in Spain given the resolution is nonbinding, unlike the vote for Scottish independence.

In the US, if California wanted to cede from the union and form its own country, look on the bright side: California independence would be a huge upside for the rest of us.

Such a referendum, if allowed to stand, would take a lot of socialist votes out of the US House of Representatives. That would be a good thing. Unfortunately, there will never be support in California to cede from the union.

Crimea Votes Overwhelming to Join Russia

In Crimea, citizens voted 96.77% for integration of the region into the Russian Federation. Some claim the vote was rigged. Perhaps so, but by how much?

A Gallup Poll in Crimea following the referendum shows overwhelming support.

More than eight in 10 (82.8%) say the referendum reflects most Crimeans' views.
About three-fourths of Crimeans (73.9%) say Crimea's becoming part of Russia will make life better for themselves and their families, just 5.5% disagree.
Crimeans are overwhelmingly likely to view Russia's role in the crisis as positive (71.3%) rather than negative (8.8%).
Outside of Crimea, responses are practically reversed (66.4% see Russia's role as negative, 15.6% positive).
Though Ukrainians outside of Crimea are somewhat ambivalent about the United States' role in the crisis (39.0% say it has been positive, 27.7% negative, and 21.6% neutral), Crimeans are far more unified in their view that the U.S. has played a negative (76.2%) rather than a positive (2.8%) role.

Justice was served in Crimea. The people clearly got what they wanted, and they did so in a peaceful, democratic process, undoing a haphazardly pieced together nation that simply did not belong together as configured.

Who am I (or anyone in Kiev) to question what an overwhelming percentage of the Crimeans want?

Nonetheless, arrogant outsiders with zero legitimate interest insist "the vote must not stand" and Russia must return Crimea to the Ukraine.

Instead, I propose, the US ought to consider outcomes like the Crimea vote and the Ukrainian civil war before it goes poking sticks at bears and stirring up geopolitical trouble.

Reflections on Nation Building

Nation building by outsiders does not work, ever. Results are especially bad when outside forces haphazardly piece together nations to suit political whims.

Iraq and Ukraine are proof enough.

In Iraq, the Kurds want their own nation. The US is against the idea.

But why shouldn't the Kurds have the right of self-determination?

I seem to recall at least one great nation got its start that way. Anyone else remember? And isn't the voting booth preferable to war?

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

27.9.14

Mish's Global Economic Trend Analysis

Sick Man of Europe is Europe; Blame the Socialists, Progressives, Greens, and the Euro Itself

Posted: 27 Sep 2014 05:48 PM PDT

Joel Kotkin writing for New Geography hits the nail smack on the head with his assessment Sick Man of Europe is Europe.

Throughout the continent, public support for a united Europe fell sharply last year. Opposition to greater integration has emerged, with anti-EU parties gaining support in countries as diverse as the United Kingdom, Greece, Germany and France.

The new reality is epitomized by France's ascendant far-right political figure, Marine Le Pen, who is now leading in many polls to win the next presidential election.

These attitudes suggest that the EU could be devolving from a nascent super-state to something that increasingly resembles the Holy Roman Empire, a fragmented landscape of small, unimportant states wrapped in a unitary, but ephemeral crepe. This challenges the view of some Americans, particularly but not only on the left, who see Europe as a role model for the U.S.

Some pundits, such as Paul Krugman, routinely describe Europe's approach to economic, environment and social policy as more enlightened than America's. Wherever possible, progressives push for European-style action in areas such as curbing carbon emissions and rapidly converting to "green" energy.

Several years ago Germany and the Netherlands were exemplars as opposed to the much-disdained PIGS (Portugal, Italy, Greece and Spain). But German growth rates have plummeted, going negative in the last quarter, along with France and Italy. More stagnation is likely as energy costs surge and key export markets, notably in Russia and China, begin to contract. Today, the "sick man" of Europe is not any one country, or collection of countries; the "sick man of Europe" is Europe.

Europe's poor economy stems in large part from policy. The strong welfare state so admired by progressives here has also made Europe a very expensive place to do business. High taxes and welfare costs, long tolerable in an efficient economy like Germany, have a way of catching up with companies and countries. This has been particularly notable after the financial crisis; since 2008 the unemployment rate has shot up 5 percentage points while dropping steadily in the Untied States.

All this suggests that Americans would do better than look to Europe for future solutions to our own problems. However attractive the European model may seem to our pundit class, the reality on the ground shows something more to be avoided than embraced.

Blame the Socialists, Progressives, Greens, and the Euro

The socialists ruined France and Italy. And the Euro which was supposed to be a uniter has been anything but.

There is more bickering than ever before on what constitutes sound fiscal policy. Germany wants one thing, France and Italy another. Some countries want something in between and others waver back and forth.

More importantly, what the people want, is not what the politicians want. The result has been the rise of Marine Le Pen in France, Beppe Grillo in Italy, and Golden Dawn in Greece. Unstable governments and alliances exist in several countries.

Energy costs have soared in Germany thanks to Green policies. German businesses pay twice as much for energy as US counterparts.

For example, a typical medium-sized German industrial company pays 9.14 euro cents per kilowatt hour compared with 4.82 cents/kWh in Texas, according to research carried out by Ecofys, a consultancy, and the Fraunhofer Institute for Systems and Innovation Research.

The founders of the Euro project thought fiscal matters would unify over time. Instead, politics and policies diverged.

The fact remains: No currency union in history that did not also have a fiscal union has ever survived.

With horrendous demographics in most of Europe, impossible to untangle socialist promises in the "Club-Med" countries and France, and no hope for a sensible fiscal union, the situation is bleak.

My take: A Disruptive Eurozone Breakup Awaits.

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

Wasted Money: Delegation of Governors Make Surprise Trip to Afghanistan

Posted: 27 Sep 2014 11:23 AM PDT

Ways to waste money in Afghanistan are endless. Here's another case in point: Cuomo Makes Surprise Trip to Afghanistan.

Gov. Andrew M. Cuomo of New York arrived in Afghanistan on Saturday as part of a delegation of governors and Defense Department officials to visit troops and receive briefings on counterterrorism and security issues, the governor's office said.

Also among the group were Gov. Bill Haslam of Tennessee, Gov. Jay Nixon of Missouri and Gov. Brian Sandoval of Nevada.

This is the second trip abroad for Mr. Cuomo in recent weeks. He traveled to Israel in August in what his office called an effort to show support for the country in its conflict with Hamas.

Are Missouri and Tennessee prime terrorist targets? Even if any of those states are terrorist targets, is there anything any of the governors can learn in Afghanistan that they cannot learn right here?

Of course not.

This is a political grandstanding stunt for all involved.

In the grand scheme of things, this trip wastes a trivial amount compared to the trillions of dollars we have already wasted.

Curiously, the boondoggle does have one useful aspect: It highlights the massive over-inflated egos of the three of them. Then again, we probably did not need to waste money to figure that out.

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

26.9.14

Mish's Global Economic Trend Analysis

Taliban Storm Afghanistan, Beheadings Galore

Posted: 26 Sep 2014 12:48 PM PDT

Having spent well over $3 trillion dollars in Iraq and Afghanistan what do we have to show for it?

Shias aligned with Iran rule Baghdad
ISIS took over parts of over Iraq
ISIS threatens to take over Syria
The average Pakistani hates the US for drone policy
Taliban threatens to take over Afghanistan

Taliban Storm Afghanistan

Please consider Taliban Storm Afghan District Southwest of Capital, 100 Killed

Hundreds of Taliban fighters have stormed a strategic district in an Afghan province southwest of the capital and are on the verge of capturing it after killing dozens of people and beheading some in days of fighting, officials said on Friday.

The Ghazni provincial government has lost contact with police in the province's western district of Ajrestan, said Asadullah Safi, deputy police chief of the area. An army unit reported that fighting was raging late on Friday afternoon, another provincial official said.

"If there is no urgent help from the central government, the district will collapse," Safi said earlier.

No longer pinned down by U.S. air cover, Taliban fighters are attacking Afghan military posts in large numbers with the aim of taking and holding ground.

The attack by an estimated 700 Taliban fighters began about five days ago and early reports were that more than 100 people had been killed, including 15 who were beheaded by the militants, said provincial deputy governor Ahmadullah Ahmadi.

"Without international support it will be hard to provide security ... The example of Ajrestan district shows that without international commitment of troops, it will be difficult to handle the Taliban."

War on Multiple Fronts

Every instance of US meddling has made matters worse. Tens of thousands of innocent civilians are dead and the economy of Iraq is destroyed.

Our policy is now so tangled we are bombing our friends and protecting those we seek to depose.

Can it get still more convoluted? Of course it can. Just add Israel, Pakistan, or Russia to the mix.

Perpetual war on multiple fronts simultaneously is the warmonger's ultimate wet dream. "Success" is nearly at hand.

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

PIMCO About to Fire Gross for "Erratic Behavior"; Janus Picks up Gross, Shares Jump 40%

Posted: 26 Sep 2014 09:10 AM PDT

Global macro news this is not, but here's an interesting story.

Bond Guru and PIMCO co-founder Bill Gross Was Going to Be Fired for 'Erratic Behavior,' Says CNBC.

Barron's reports Gross Leaves Pimco for Janus; Knew He Was Being Shown the Door.

CNBC's Andrew Ross Sorkin said on air, the fund world was experiencing "shock and surprise" at Gross's move, which was highly unexpected to most.

Dow Jones is running headlines that "Gross's move pre-empted his dismissal," citing an unnamed source.

Sorkin's colleagues Jim Cramer and David Faber joked on the channel about how Gross will be giving up the trillions of fixed income investments he controlled at Pimco Total Return for a mere $12 billion or so invested by Janus in fixed income.

Sorkin reported that one factor may have been that Janus's CEO, Richard Weil, used to be COO of Pimco, and that he left on a not-so-happy note from Pimco, which may mean there's something personal for him in luring away Gross.

Gross is quoted as saying "I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization."

Janus Intraday

Shares of Janus (JNS) soared from 11 to as high as 15.58 on the announcement. That's a 41.68% move. How much of that gain holds remains to be seen. Janus is currently up about 31.50%.

Anyone pick up any cheap options yesterday?

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

25.9.14

Mish's Global Economic Trend Analysis

Grossly Distorted Procedures: Mish Proposal to Raise GDP Calculation
Legal Basis for War in Syria? Amazing Three-Point Logic!
Blue Ribbon for Sanction Craziness: Italy Seizes Hotel of Putin Ally; Russia Threatens Law Allowing Seizure of Foreign Assets
Housing Early Warning Stress Indicator On Rise

Grossly Distorted Procedures: Mish Proposal to Raise GDP Calculation

Posted: 25 Sep 2014 10:15 PM PDT

Here's the question of the day: Does GDP stand for Gross Domestic Product or Grossly Distorted Procedures?

One of the reasons I ask is the latest push by countries to include prostitution and drugs sales in GDP calculations.

Italy: Cocaine Sales to Boost Italian GDP in Boon for Budget.
USA: The Fiscal Times reports How Hookers and Drug Dealers Could Boost US GDP.
Spain: economists estimate that prostitution, illegal drugs, and adjustments will increase GDP since 2010 by 2.42%. That's cumulative, not additive. Methodological changes, such as counting weapons as an "investment" represents 1.55 percentage points of the change.
France: Here's a shocker ... France says No Sex, Please, We're French. In short, France will not include sex or illegal drugs in its measure of GDP.
UK, Ireland, Italy: The WSJ mentions the UK, Ireland, Italy, and even the United Nations in its report Sex, Drugs and GDP: the Challenge of Measuring the Shadow Economy.

From the preceding link, the WSJ reports ...

The U.K. could add as much as $9 billion to the value of its GDP by including prostitution and about $7.4 billion by adding illegal drugs, by one estimate, enough to boost the size of its economy by 0.7%. Not to be outdone, Italy will include smuggling as well as drugs and prostitution.

Other nations in Europe are also poised to fall in line with a European Union call to standardize and broaden GDPs. The EU is following a "best practices" directive laid out in 2008 by the United Nations.

Best Practices Directive

The "best practices" push is on to count sex, except in France (where perhaps it would send GDP soaring to unbelievable heights).

Yet, no one counts people raising their own vegetables, a genuine product.

Teen Sex

As long as we are counting prostitution, why not count consensual sex? What about sex between husbands and wives? What about teen sex?

Isn't the product the same? Are we counting products and services or not?

If husbands did not get sex from their wives, wouldn't some of them pay to get sex elsewhere?

Is or isn't sex a service?

Some might argue that prostitution is a service because it's paid for, but teenage sex is not a service because it isn't paid for.

OK, but that leads to a discussion on imputations.

Imputations

The average person has heard of GDP. The average person has not heard of the imputations that go into calculating GDP.

Q: What are GDP imputations?
A: They are an assumed value of goods and services that trade at no price.

The biggest example of imputed GDP is the alleged value derived from living in your own home.

The government figures that if you did not own your own home, you would pay someone rent. It adds the presumed amount of rent you would pay to rent your home from yourself to GDP.

Another US GDP imputation is the "value" of "free" checking accounts. Government assumes that since you do not pay for your free checking account GDP is underestimated by the value of the "free" account.

Never mind that banks take your checking account deposit, lend it out overnight, earn interest on it, and your money really isn't there at all.

Government imputes a value on the practice.

Imputation Totals

Inquiring minds may be wondering how much imputations add to US GDP. The following figures are from 2013. They calculate these things in arrears to allow for any needed GDP smoothing.

GDP: $16.7681 trillion.
Imputations: $2.6935 trillion
GDP Minus Imputations: $14.0746

Imputation Contribution to GDP = $2.6935 / $16.7681 = 16.06%

Here are a few specifics.

Owner-occupied housing

The imputed valued of people renting houses from themselves is $1.21 trillion.

Imputed Interest

If I loan you $100 and you pay me back a month later and I don't report it, that's a no-no. Perhaps the government also factors in credit card purchases paid off each month on which no interest is paid.

However, it's calculated, the total in this category is $932 billion.

The Fed provides numerous Imputation Charts including imputed interest paid to the rest of the world, imputed health and life insurance, and imputed personal savings.

Mish Proposal

As long as we are imputing the above, why not impute the value of free sex, mowing your own lawn, and scratching someone's back?

Seriously, if I scratch your back and you scratch mine, why doesn't that add to GDP just as prostitution, free checking accounts, and paid massages add to GDP?

Think how much we can raise GDP calculations if we just get each other to scratch each other's backs 15 minutes a day! Add in some extra sex and drugs and the economy will be booming in short order.

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

Legal Basis for War in Syria? Amazing Three-Point Logic!

Posted: 25 Sep 2014 02:30 PM PDT

The hypocrisy of the US is on full display. We have imposed preposterous sanctions on Russia following its takeover of Crimea.

Given that Crimea actually had a vote, and the vote was overwhelming, one can legitimately argue the Crimea takeover was democracy in action. Rigged or not, it's 100% certain the vote would have gone in favor of Russia.

Votes? Constitutions? Who Gives a Damn?

Who gives a damn about votes?

Some claim the vote was illegal by Ukraine's constitution. But what good are constitutions anyway?

The US doesn't give a damn about the US constitution let alone the constitution of any other nations (unless of course it serves our purpose).

Legal Basis for Troops in Iraq?

On September 5th, the Guardian commented on the legality of US troops in Iraq: Legal basis for Iraq troop deployment called into question as days wear on.

The legal basis for the recent introduction of more than 1,000 US ground troops in Iraq was called into question on Friday, after the White House confirmed that it does not consider itself bound by time limits that usually constrain such deployments.

Under the terms of the 1973 War Powers Resolution, troop deployments into war zones may not last longer than 60 days, unless Congress explicitly authorises military force.

As no congressional authorisation yet exists – Congress returns from its August recess next week – lawyers have wondered about the solidity of the legal grounding for the latest US war in Iraq.

Obama's ISIS Plan Legal?

On September 12, Salon asked: Is Obama's ISIS plan legal?.

President Obama's legal basis for "destroying ISIS" is a stretch. But who's going to stop him? Congress? Ha!

"Moderate" Collateral Damage

It's tough distinguishing friends from enemies, especially when allies don't agree who the enemies are, and our enemies have the same primary goal as us!

For example, the Financial Times note Syria Rebels Dismayed by US Air Attacks on Non-Isis Groups.

In the course of Syria's nearly four-year civil war, Ahmed Hamadi an anti-regime rebel, often hoped western intervention would help his cause. But when it finally came, it killed his neighbours and their children.

Door Number One or Door Number Two?

When you go about killing moderates and their kids, do you think the remaining moderates and kids will love us for our freedom-fighting ways?
Or do you think we created more extremists?

Hitting Oil Targets

Today the Financial Times reports US took out Syria's Oil Refineries.

US-led coalition strikes targeted at least six oil refineries held by militants from the Islamic State of Iraq and the Levant (Isis) in eastern Syria overnight, hitting at one of the group's main sources of financing.

Did Blasting Oil Refineries Help?

"This was a really important strike because of oil's significance to Isis," said an activist who uses the nom de guerre Thaer al-Khalidiya. "But unfortunately its impact is diminished by how unpopular the strikes are becoming, and by how little it seems to be affecting the group's military operations in Syria."

Strikes Becoming Unpopular

Civilian casualties were also reported in strikes on southeastern Hassaka countryside, which could increase the negative popular sentiment. According to the Syrian Observatory for Human Rights, around seven non-Isis fighters and civilians were killed, including one child and several women. It said 15 Isis militants were killed. It is impossible to independently verify the figures.

Gee - Who coulda thunk that killing innocent kids might become unpopular? Besides, why aren't these ingrates happy with our fantastic hit ratio? We killed 15 ISIS members and only 7 innocent victims.

The cost of hundreds of tomahawk missiles and bombs per ISIS member killed is clearly irrelevant. The US Has plenty of money. If we run out, we can always print more.

What about ISIS weapons?

Inquiring minds may be asking "What about ISIS weapons?" That's a good question given nearly all of them are US made, confiscated by ISIS in Iraq.

Here's the answer:

Redur Xelil, a spokesman for Syria's main Kurdish force, known as the People's Protection Units (YPG), said some coalition strikes had hit the area but targeted Isis bases far from the front lines, many of which had already evacuated. He pleaded for more strikes near the front to help the YPG win the battle.

"The bases of ISIL and all their heavy weapons, vehicles and equipment are in the open air and visible to everyone," he said, using an alternative acronym for Isis. "But they have not yet been targeted by the air strikes."

There you have it. We don't target weapons, instead we cripple Syria's infrastructure.

Mistakes Bound to Happen

Unfortunately, such mistakes happen when you Drop a Month of Bombs in Two Days on Syria. Strikes.

Rationale for Fighting ISIS

One rationale for the bombings is that an ISIS cell threatened the US.

Exactly how credible was that? The Guardian reports US officials unclear on threat posed by obscure al-Qaida cell in Syria.

Three days after the United States unexpectedly launched air strikes against an al-Qaida cell in Syria, officials are offering varied and conflicting explanations on the precise nature of the threat posed by the group.

Hours after Tomahawk missiles slammed into buildings near Aleppo believed to be used by Khorasan, an obscure group said to be focused on exporting terrorism from Syria, the US military described it as involved in "imminent attack plotting" against western targets.

Yet it is unclear what Khorasan was planning, how far that planning advanced, and whether the US itself was a target. Nor is the US confident as yet that it has either killed Khorasan's leaders or significantly degraded any threat Khorasan may pose.

Bomb First, Ask Questions Later

A senior US official briefing reporters the day after the strike said that Khorasan was "nearing the execution phase" for an attack "in Europe or the homeland". Hours before the strike, however, a different senior official had told the Guardian there was no indication of an imminent domestic threat from the group.

Yet on Thursday, the Pentagon's chief spokesman dismissed questions about how mature any attack planning was, saying it was "near the end stages of planning an attack a western target".

"I don't know that we can pin that down to a day or a week or a month or six months. Doesn't matter. Far better to be the left of a boom than the right of it," said Rear Adm John Kirby, using military jargon about periods before and after an attack.

Aspirations vs. Reality

Leaks to the New York Times and the Washington Post cast doubt on the maturity of an attack emerging from Khorasan.

Anonymous officials were cited as saying it was unclear if Khorasan had picked out targets, deployed operatives to execute them or otherwise set a specific plan in motion, with one describing Khorasan's planning as "aspirational".

Perpetual War

Is the US war on Syria constitutional according to Syria's constitution? Better yet, is the US war on Syria constitutional even according to ours?

On September 13, the Guardian reported Obama's legally dubious Isis campaign is just a way to continue perpetual war.

Authot Trevor Tim wrote "The question isn't whether this is war. It is. The question is how long until we're clamouring for ground troops in Iraq again."

I am in complete agreement.

Following a Pentagon statement that this was the "beginning of a sustained campaign" that could last years, I penned Battle for Perpetual War is Won.

Undeclared War

"We did not request the regime's permission. We did not co-ordinate our actions with the Syrian government. We did not provide advance notification to the Syrians at a military level, or give any indication of our timing on specific targets," said Jen Psaki, the state department spokeswoman."

Interestingly, Syria's Deputy Foreign Minister called the US a "Natural Ally" stating We're 'Fighting the Same Enemy.

"When it comes to terrorism, we should forget our differences… and forget all about the past," said deputy foreign minister Faisal Mekdad. "It takes two to tango...We are ready to talk."

Talk? Who wants that? Why talk when the battle for perpetual war has been won?

Legal Knots

Let's return to the question of legalities, this time specifically in regards to Syria. The Guardian reports US ties itself in legal knots to cover shifting rationale for Syria strikes.

US government lawyers have invoked Iraq's right to self-defence and the weakness of the Assad regime as twin justifications for US bombing in Syria, in a feat of legal acrobatics that may reopen questions over its right to intervene in the bitter civil war.

In a letter to the United Nations secretary general, Ban Ki-moon, released near 24 hours after attacks began, US ambassador Samantha Power argued that the threat to Iraq from Islamic State, known as Isis or Isil, gave the US and its allies in the region an automatic right to attack on its behalf.

The brief letter did not mention the US invasion of Iraq in 2003, which rested on erroneous claims of weapons of mass destruction and arguably contributed to its current instability, but stresses instead the country's right to self-defence in the face of this new threat.

The US also argued that there was legal right to pursue Isis inside Syria due to the weakness of that country's government – a regime the US has been actively urging be undermined by rebel groups for much of the past two years.

Amazing Three-Point Logic!

States must be able to defend themselves and Syria cannot.
One reason Syria cannot defend itself is the US actively supports those who attempt to topple Syrian president Assad.
Because Assad is struggling to defend himself (from us), we allegedly have a legal basis to defend Syria.

For purpose of crippling another country, oil refineries are "prime targets". By taking out Syrian refineries, Syria is even less likely to defend itself from those who wish to topple the Syrian government.

Meanwhile, the US is in yet another undeclared war with Congress sitting on its ass, unwilling to do anything with elections coming up.

Bright Side

Please look on the bright side!

US GDP goes up every time we drop a bomb and the bomb is replaced with more bombs.
The more innocent kids we kill, the more enemies we make.
The more enemies we make, the more bombs we drop.
The more bombs we drop the more US GDP goes up and the more money the CEOs of defense companies make.

As an alternative, I offer my own sure-fire solution: The Moderate's Prayer.

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

Blue Ribbon for Sanction Craziness: Italy Seizes Hotel of Putin Ally; Russia Threatens Law Allowing Seizure of Foreign Assets

Posted: 25 Sep 2014 11:16 AM PDT

What's Russia to do? Stand back and let the US and Europe escalate sanction after sanction, or respond in kind?

Either way, Russia loses. I believe Europe has the worst of it, but both suffer.

Hope for Sanity Appears to Be Lost Cause

By responding in kind, Russia hopes to put some sanity in the heads of US and EU officials. But with brains as dense as Obama, McCain, and various EU officials, hope for sanity appears to be a lost cause.

Sanction Madness Escalates: Italy Seizes Hotel of Putin Ally

Two days ago sanction madness hit a new extreme: Italy seizes Putin ally Arkady Rotenberg's property assets.

The Italian tax police have seized €30m in assets, including a luxury hotel in Rome and two villas in Sardinia, controlled by Arkady Rotenberg, a longtime ally of Russian president Vladimir Putin targeted by US and EU sanctions.

The move comes amid continued tensions between Russia and the EU over Ukraine, and ahead of a possible visit by Mr Putin to Milan next month for a summit with European and Asian leaders that could offer a chance to rebuild some bridges.

Speaking to Russian newswire Interfax, Mr Rotenberg said: "I have been subject to sanctions for several months. Nothing surprises me anymore. But what puzzles me is that the current situation involves real estate to which the sanctions do not apply. Sanctions only apply to accounts and assets which I do not have in Italy."

Russia Threatens Law Allowing Seizure of Foreign Assets

Response from Russia was swift. Moscow Times reports Draft Law Allows Russia to Seize Foreign Assets in Response to Sanctions.

Russian courts could get the green light to seize foreign assets on Russian territory under a draft law intended as a response to Western sanctions over the Ukraine crisis.

The draft, which was submitted to parliament on Wednesday by a pro-Kremlin deputy, would also allow state compensation for an individual whose property is seized in foreign jurisdictions.

Italian authorities this week seized property worth about 30 million euros ($40 million) belonging to companies controlled by Arkady Rotenberg, an ally of President Vladimir Putin targeted by the U.S. and European Union sanctions.

The draft law, published on a parliamentary database, would allow for compensation for Russian citizens who suffer because of an "unlawful court act" in a foreign jurisdiction and clear the way to foreign state assets in Russia being seized, even if they are subject to international immunity.

Russian laws require three readings in the lower house and the approval of the upper house before going to Putin to be signed into law.

Blue Ribbon for Sanction Craziness

What would happen if Russia were to act in kind, by seizing McDonald's Real Estate Empire in Russia, Starbucks, or Exxon?

Does Russia have more assets in the US (for the US to seize) or does the US have more assets in Russia (for Russia to seize)?

The question is moot.

Illegal seizure of assets under the guise of "sanctions" is not a good idea. Sanctions in general are crazy, but in the ever-escalating madness, Italy is now in the lead for the much-coveted blue ribbon for sanction craziness.

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

Housing Early Warning Stress Indicator On Rise

Posted: 25 Sep 2014 10:03 AM PDT

A chart in the latest Black Knight Mortgage Monitor Release caught my eye.

For five months, the number of properties and the percentage of properties 30-days delinquent has been on the rise (arrows added).

click on chart for sharper image

Key Indicators

The mortgage delinquency rate jumped nearly 5% in August, reaching its highest point since February.
The year-over-year change in 30-day delinquencies is a negative 4.8%. Another month like August would nearly reverse the year-over-year downtrend in delinquencies.
The inventory of 30-day delinquent homes rose by 146,000. Another month like August would reverse the year-over-year change.
90-day delinquencies do not show the same ominous trend as 3-day delinquencies, but 90-day delinquencies first require 30-day delinquency then 60-day delinquency.

So far, the 90-day stats have not rolled over, but with the 30-day uptrend this long, it likely will.

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