Over the past months (and particularly in the last weeks), we have increasingly read negative comments on the ongoing zero-interest rate policy (ZIRP) and in some instances, negative-interest rate policy (NIRP). Today, we want to examine the origins of the idea that ultra-low rates of interest can exist, how this idea came about, why it was flawed and how it leads to an informal economic system. It was a fallacy based on misunderstanding of the rate of interest and human action. Another way of examining this is the following: The zero interest rate indicates that time is free. And as anything that is free is wasted, time will also be wasted. It should be clear that there is an inconsistency in simultaneously believing that investment demand and savings are mainly driven by income but that it is necessary to lower the interest rate to boost investment, as the Fed does... and the Fed is Keynesian! Finally, we note one last thing: As productivity, employment and production decrease, even a steady and low rate of inflation has the potential to morph into hyperinflation.
Poison the country's well.
To use the analogy offered by Senor Cervantes we would say that Rodrigo, as representing Spain, is about to be devoured by the snakes. The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not. We are now at the virtual epicenter of the European Crisis where decisions will have to be made; avoidance is no longer possible. We have reached the end of the road where there is no more path left for can kicking.
Today's ZH articles in audio summary! “Listen babe, you're hot. But do you think I can fondle your Silver necklace instead?” Everyday, 8pm New York time!
While the general level of unemployment in Europe is rising in a scary enough way (more detail here), the one really concerning data point has gone from bad to worse. When we last looked at youth unemployment in Europe, things were stabilizing a little, though at extremely lofty levels. With the release of July's data, the situation has deteriorated rapidly; Euro-Zone youth unemployment hs now ticked back up to its euro-era record-high of 22.6% (18-year highs). Only Portugal saw an improvement is the rate of unemployment among the Under-25 age group (from 37.6% to 36.4%) though it remains anarchically high. Italy was the hardest hit, back above 35% with its largest rise in youth joblessness in 5 months, Ireland rose back above 30% for its biggest rise in 11 months as France jumped to two-year highs and Spain and Greece are practically deadlocked with ~53% of their younger-generation out of work - new all-time records. Why do we worry? Why is this so scary? Two reasons - this and this.
Upcoming calls from Ben and Mario to the governments?
Get your act together, there’s just so much that can be done.
Odd and contradictory ROn / ROff close
Ben's prepared remarks went off embargo at 10:00 am Eastern. The text (just the body, excluding appendices) had 4,549 words, 254 commas and 173 periods. It took Goldman 40 minutes to read it, write a 579 word response, proofread, get it through compliance, and shoot it to all clients. The title? "Bernanke Makes Case for Effectiveness of Unconventional Easing" of course, even though the real shocker in the speech was that Bernanke for the first time as far as we recall admitted that the sentiment that QE is not working may result in a Catch 22 where every incremental and larger QE episode has diminishing returns (just as we have been warning for years).
Bernanke takes the wind out of the market's euphoric sails: "Substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability."
Yesterday, when the market was plunging (by less than a whopping 1%, yet magically defending the 13K "retirement off" threshold in the DJIA), we wondered: where is the Fed's favorite messageboard: WSJ "journalist" Jon Hilsenrath. We found out at 3 am, when instead of releasing another soon to be refuted rumor of more easing, we discovered that the scribe was busy doing something very different: discussing the pros and cons of the Chairsatan's legacy.
- Romney Promises to 'Restore' U.S. (WSJ)
- Dirty Harry Makes Surprise Appearance (WSJ)
- It has always been about the gold: Time for eurozone to reach for the gold reserves? (FT)
- EU Plan Said to Give ECB Sole Power to Grant Bank Licenses (Bloomberg)
- More attempts to marginalize Germanty: Brussels pushes for wide ECB powers (FT)
- Justice may be blind but it has geographic limits: Apple Loses Patent Lawsuit Against Samsung in Japan (BBG)
- ECB Said to Use Greek Myth for Security on New Euro Banknotes (Bloomberg)
- Alberta deficit set to triple on slumping oil prices (Globe and Mail)
- Reid's ties to China-Nevada solar plan draw ire (Reuters)
- Bernanke may hint at QE without boxing Fed in (Reuters)
- Berezovsky loses against Abramovich (FT)
- Spain Considers Bankia Re-Capitalization Without EU Money (Bloomberg)
Following a series of bad economic news (Eurozone unemployment, rising inflation, plunging retail sales in Germany, Spain and Greece) out of Europe, and the usual sound and fury out of the ECB signifying nothing (was there finally news that Weidmann and/or the Buba are endorsing anything Draghi is doing - instead of seeking to potentially quit his post leaving the ECB in limbo? No? Then stop flashing red headlines which are completely irrelevant), the EURUSD has decided to go on its usual countersensical stop hunt higher in hopes an algo or two will push it even higher on nothing but momentum, with has one purpose only: to allow the pair enough of a buffer so that when it does fall after the J-Hole disappointment, it has more room to drop. And as European newsflow fades into the periphery, everyone is once again focusing on Wyoming where Bernanke is now broadly expected to do absolutely nothing. What else are market participants focusing on? Here is the full ist courtesy of Bloomberg daybook.
In July European unemployment rose to 11.3% - a record post-Euro rate, and the highest since 1990 for the constituent countries. While this was in line with estimates, what surprised the market, and has sent the EUR paradoxically higher (paradoxically, because all a continent in stagflation, which Europe by now most certainly is, is to have its currency rise just when it needs to export more goods, in the process entrentching its economic plight even further) is that inflation in August picked up from 2.4% to 2.6%, beating expectations of a 2.5% increase, allowing the European misery index to stand head and shoulders above the rest of the world.
Bundesbank's Weidmann Wanted To Resign Last Week, Bild Reports; Is Goldman's "Ambassador" To Germany In Play?Submitted by Tyler Durden on 08/31/2012 03:36 -0400
Confirming that the ECB soap opera must go on, German Bild reports overnight that Bundesbank head, and most vocal critic of Goldman's pro-inflationary European policy, conducted by the firm's Italian alum Mario Draghi, last week considered joining other such German luminaires as Axel Weber and Jurgen Stark in following the red Egress signs at the Bundesbank headquarters, ironically located in downtown Frankfurt. From Bild: "In recent weeks, Bundesbank President Jens Weidmann has repeatedly seriously considered his resignation." Citing unnamed sources, which is merely a polite way of denying the other side's just as credible "unnamed sources", Bild says Weidmann discussed the possible resignation with the Bundesbank's board. Bild condludes that Weidmann has decided against resignation for now because hwants to fight against the ECB’s bond-purchasing program at next week’s meeting, and that the German government has urged Weidmann to remain in post. In other words, just as has been expected all along Merkel may say this, or that, but in the end she will adamantly fight Goldman and its inflation spreading tentacles in Europe as long as she has to (with recent German data of accelerating inflation and unemployment merely helping her cause).
With a price hovering around $1,600 an ounce and the prospect of "additional monetary accommodation" hinted to in the latest meeting of the FOMC, gold is once again becoming a hot topic of discussion. Krugman, praising 'The Atlantic's recent blustering anti-Gold-standard riff, points to gold's volatility, its relationship with interest rates (and general levels of asset prices - which we discussed here), and the number of 'financial panics' that occurred during gold-standards. These criticisms, while containing empirical data, are grossly deceptive. The information provided doesn’t support Krugman’s assertions whatsoever. Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims. Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money. The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard. Keynes himself was contemptuous of the middle class throughout his professional career. This is perhaps why he held such disdain for gold.
In November 2008, President Barack Obama won the popular election for President by 9.5 million votes. A burgeoning financial crisis and weakening economy helped his candidacy at the time, but four years on the sluggish pace of economic recovery is a headwind to his re-election. Consider, for example, that there are currently 12.8 million people unemployed in the U.S., or that an estimated 8 million adults entered the SNAP (Food Stamp) program since November 2008 (total increase in enrollment: 15.6 million). Presidential elections are won in the Electoral College, of course, so in today’s note ConvergEx's Nick Colas parses out this employment/food security economic stress for the key “Battleground” states.
Seven of the 8 swing states this election year are more economically stressed than the national average in terms of unemployment and/or food stamps, while 2 of the 3 states “leaning” toward Obama are worse off than the national average. Romney, behind in the electoral vote count by most analysts’ figures, theoretically stands to gain from a weak national economy, but he’ll have to earn the vote of an estimated 4 million Americans in 14 key battleground states to have a shot at the White House.