I have read an article in Wall Street Journal about IPO, it said that because of low IPO, investment banks earn much less. I am a guy interested economics recently, so it is hard for me to understand in what way IPO is related with investment banks. I hope there are experts who can offer a better explanation.
“NEOCONICA” – Fatherland for the New Millennium December 16, 2014 Now that's heavy stuff I recently wrote an piece on the comprehensive breakdown of America. In it I laid out, from an analytical perspective, the things that are leading America to an economic collapse. But itmight be interesting to take a look at a broader view of American life today. Policy and economic discussions are useful but in them we can lose the tangibility ofwhat it all comes back to, which is the well being of Americans. Whether or not the national budget is 190% of GDP and whetherinterest rates will rise or not are important issues but only so far as they will impact the quality of life of the people. And so let’s have a look at the lives of the American people. Have the policies over the past 15 to 50 years led to substantial improvements in the day to day real lives of Americans? Let’s have a look. And while we’ve seen a couple of these more economic charts think about them in context of the other charts or other sides of life. The above charts inform us that thebottom 80% of income households are making less than they did in the early 1980′s, and remember the number of two income households today is far greater than it was in 1980 making this a staggering reality. However the top 20% and especially the top 1% have seen incredible income gains since the early 1980′s. Total net worth for the bottom 80% of Americans has also been crushed. Since 2001 median net worth for the bottom 80% is down some 30% and this is during a period where stocks have reached all time highs. How could this be you ask?? Well this is not happenstance or simple unexplainablemarket forces. Those things do not exist in today’s world. These results are by design. I get frustrated hearing, even from the most intelligent of people that the Fed is doing its best and that given enough time this will work out for everyone. And that everyone is better off today than they used to be because this is America and that’s just the way America works. But when we let the empirical data drive our perspective rather than our blind loyalty we see a very different story. The data tells a story of a political class that has been implementing programs and policies that are making the working class sick. We are given all sorts of medicines in the form of social programs and infinite debt to mask the symptoms but when we look at the actual medical test results we are not getting any better. In fact, our condition continues to worsen. Yet so many of us continue to listen to our political and economic shaman’s. We have such faith. And it is that faith that people like Ayn Rand recognized would be the death of America. So let’s continue on our journey through the life of the working class American today. What’s interesting here is to note that the significant increase in incarceration rates of black men began just as LB Johnson’s ‘Great Society’ program went into effect in the late 1960′s. Do you think there is relationship between taking an entire demographic’s sense of purpose and ambition away by handing them money each month and the degradation of that demographic? This is not conjecture, look at the chart. Black men, specifically inner city black mean where high school drop out rates are the highest, have been decimated since the mid 1960′s. Our leaders have failed to acknowledge let alone implement policiesto improve this situation. One needs to ask why? When a large portion of society is so obviously spiraling out of control, why is it that our policymakers have been either absent on the issue or incapable of developing policies to improve the situation? Behaviour is logical. If it appears illogical one of your premises is invalid or unsound. What I mean by that is if policymakers fail to change a policy that is leading towhat we assume is an unwanted result then we must consider if it is truly unwanted. Politicians are very quick to change things that don’t benefit them. And so if a policy is not changing it is likely because it is seen as serving their own interests in some way. And let’s not miss the fact that it isn’t just blacks that are being incarcerated at much higher rates. It seems the trend is higher incarceration rates for all. That seems to conflict with the idea of a vastly improving quality of life in the land of the free. In fact, have a look at the following figures. Considering China’s population is 5x that of the US, our prison population relative to other countries is pure insanity. How can this be?? Either our society is failing to appropriately raise it’s children or our incarceration policies are completely out of line with the world. Interesting that the private prison industry spent $45 million on lobbying efforts last year while the Correction Corp of America (CCA), which is the correction officers union, spent an additional $14 million. Remember they lobby for legislation that keeps vacancy rates low. One has to wonder, do our policymakers actually intentionally skew laws to ensure higher numbers of society lose their freedom? Why why else would $60 million be spent on lobbying?? But let’s carry on with our journey through the life of the American working class. With all of the technological breakthroughs and improvements in nutrition how is it that obesity and cancer have gone to full blown epidemic status in this country? Somebody understands this problem. Someone has the answer. I believe most would agree the ideal environment for a child is in a well functioning two parent home. Not to say good kids cannot come from single parent households, they can, however, the ideal is a healthy two parent household. As such,the above trends are disturbing. How couldsuch ugly longterm trends be taking place in an improving society if we know the ideal is the opposite? This means we are moving, at an accelerating rate, away from the ideal. This does not appear to be a relatively new phenomenon either. Yet it continues to worsen a quickening pace. With the rise in GDP and total earnings over the past 50 years why is thatpoverty is as high as it’s been since the mid 1960′s? In terms of number of poor, we are actually setting records every year. Why is it that while the wealthy have gotten so filthy rich the working class has been devastated as the above charts highlight? Should we not look to make a change in our policies? Clearly the policymakers are idiots or assholes for if bothwere untrue the policies would change. So while they could be both, they cannot be neither. One cannot argue against that proposition whilst looking at the above charts. Yet we the people still refuse to force our political classto answer for these realities!! The above charts lead to the following penury…. Financial stress is a killer. Just google “effects of financial stress” and see what you find. It’s ugly and as the above charts so clearly depict, financial stress is rampant in our country. That said, if you believe the folks on television, andif you’re an American you probably do, then be happy because they have assured us everything is fine and they have theUS stock markets at all time highs to prove it. These TV talking heads will even tout piss poor economic indicators as good. But it’s like touting stage 3 cancer because it’s better than stage 4 cancer. Yet if we hear it enough times in combination with a completely manipulated but all time high stock market we begin to believe the lies. But what about our future? Perhaps we’re just setting up for a big acceleration of good times ahead. Does it look like our coming generations are going to hit it out of the park? Well thecosts for educating our children has doubled but our kids are not any smarter. When compared to the rest of the world we have fallen way behind. In fact, we just fell belowIran. I’d love to hear the spin on that one. Well this is not looking great for our future generations…. What about that nation’s fiscal statethough I’m sure we’re wiser to the woes of overspending right?? That does not seem to depict sound financial management. In fact, that looks ridiculously irresponsible. How is it that we can forecast spending more than we take in, forever? Ah yes the magical money machine and the wonderful world of debt monetization. At least it’s a plan eh? Thing is, if your budgets simply forecast an ever increasing deficit meaning the plan is simply to print money going forward then, 1. why have a budget? 2. why are any of us paying taxes? 3. why are any of us working?. You see if we can print infinite amounts of money with no expected consequence then just print a little extra and we can all spend our days at the mall. Think about how much bigger the economy would be if we had all day to go shopping, not just on weekends. I think we’re on to something. Leading cause of bankruptcies in America is healthcare you say, eh? Can’t see why that would be. $1.5 trillion in student loans outstanding. Well 60% of those are currently in arrears so very likely won’t be paid back. That said, students’ losses are gains for someone. So maybe we needn’t worry about this one. Ah yes, war. War is one thing we do very well here in America. Well we start wars very well. But we seem to have a very difficult time ending wars. Perhaps because we fight concepts. We have wars on drugs, terrorism, obesity, etc. And well wars on bad things just sound so good during election campaigns. The obvious downside being fighting something that is not an animate enemy means itcannot be defeated, making it incredibly tough to end such a war. This then results in endless amounts of money being put toward the war effort. I wonder if these policymakers understand that such things require very large budgets that end up going to just a few companies thattend to donate very generously to both parties. Oh and then there’s the ubiquitous fear mongering to sustain public support not that public support is required to fight wars anymore but it sure is useful in superseding the Constitution with legislation like the Patriot Act . I feel this kind of represents how happy and well adjusted our children are today. Very cheery chart that one is particularly wouldn’t you say? Incident rates having doubled since the 1980′s. Here’s our well adjusted healthy households. Again this is likely a factor of day to day difficulties overwhelming any sense of peace in the home. The above 3 charts show just how much input the will of the American people has on American policy. Our legislators and policymakers have absolutely no regardfor the will of the people. We are 100% irrelevant in terms of legislating. They use our money and our young veteransto throw their weight around the world to serve their own interests while, it is becoming apparent, not serving the interests of the American people. And so with all of this great progression and improvement in the day to day lives of the American people surely we see a trend towardembracing life, looking forward to each new day and all of the joy it will bring, no? The charts above are intended to ascertain whether or not things are improving in America these days. From finances to health to education to family, the above charts attempt to present a picture of an improving nation. A nation that is continually striving to improve the lives of its citizens. What we find is a nation decaying with each new year. A nation surviving on debt and government handouts with costs of imperative services rising faster each year while incomes continue to decline each year. Health of our bodies and our families is fading while the number of wars we start accelerates. And so it would seem that life is not improving in America. Quite the opposite when one looks at a broad overview of American life. But perhaps the charts are missing some intangible variable that gets lost in empirical data. So perhaps Americans will provide us a different conclusion. Perhaps Americans would tell us that despite all that we’ve shown above their lives actually have been getting better over the years. I think it’s worth a shot and really it’s our last hope of making an argument that America is not sliding down the slope of its denouement but still a country on the rise. Let’s have a look at what Americans are saying aboutthe direction of the nation. What we find is exactly what one would expect having looked through the many charts above. Not sure it could beany clearer than all of that above. While the political class continue to serenadeus with songs of rainbows and butterflies the real world is kickingAmericans square in the ass. Despite all of this evidence to suggest a deteriorating nation the prominent message from the political class and their media muppets is that things are great. We’re always just a few months from Utopiabut beware because, at the same time, there are evildoers out to kill us. Our policymakers are both liars and criminals. That’s just afact. They perpetually lie to us (all of us could provide and endless list of lies just over the past 10 years) and they breach the constitution every day whileattempting to sell us that they have the authority to do so when we know nothing trumps the Constitution. Yet we refuse to challenge them. And so wemust ask ourselveswhy. Why is it that despite knowing our politicians lie to us as the norm and break the law as part of their daily legislatingthat we the people do nothing about it? One theory I have is that people honestly do not know what to do. In fact, I hear this a lot. I am often asked what we can actually do to materially change the way politicians behave? And regrettably I do not have a good answer. But I am certain that doing nothing will result in even more grotesque behavior by this political class. Now when the constitution was followed the majority of legislative power was at the state level and because of that people had the power of propinquity. That is when you can get in the face of your representative you can hold him accountable. Also, citizens used to get very involved in the primary elections because it is where most of the individual’s voting power rests. It is in the primary round that citizens can affect the end result by affectingwho makes itto the final running. Further whenmedia was not just a tool of government as it is today given the mass amount of campaign money that ends up on the income statement of major mainstream media, public could drive the media message rather than the media message driving the people. You see these are just the tip of the iceberg in terms of how the system has been slowly redesignedso as to avoid an impact by the will of the people. The political class do not want our involvement. There is a tremendous amount of power and money on the line. Far too much to leave it to the will of the American people as toooften our will conflicts with the objectives of our ‘representatives’ and their benefactors. And so it is very true that it is much more difficult to affect change to the system today becauseit has been redesigned as such. I don’t have a good solution but perhaps if enough people begin acknowledging the problem then American ingenuity and innovation will rise to the occasion and an equally powerful concentrating force for the will of the people will be created. Then the American people can impose its will onto our policies that will then once again benefit we, the people rather than we, the slaves. I say that in the technical sense, for the working class is being used to generate profits and to act as soldiers for the ruling class. If we refuse to pay our hard earned profits we go to prison. The vast majority of our armed forces come from very deprived socio-economic communities with essentially no other option but to sign up to soldier for a living. While our lives continue to spiral downward, as evident in the charts above, this ruling class throws trillions of dollars around to facilitate their own interests. Iraq, Syria and now Russia are all wars to satisfy the unrelenting thirst for power and money of this small group of horrible men. They pay for such personal conquests by sacrificingthe children of our nation’s poorest families and by suffocating our future generations in debt before they’re even out of the womb. Yet we are told it is for our own good and despite our calls not to get involved in such things, these men do as they please. However, so many of us still maintain that America is the greatest nation in the world. Weswear that Americarepresents all that is good; freedom, democracy, merit based capitalism and the rights of the individual. That is true America does represent such things. However, I’ve made the suggestion many times that it is fraudulent to consider our current nation America. America was a concept that promoted all that is good. And so it would seem that the nation in which we find ourselves cannot be America. Our nation today represents the will of the political class at all costs, period. Their sole motivation is themselves. Very different from America. And so perhaps we need a renaming of our nation, at least until or if we the people decide to take it back and reintroduce the world to the concept that is America for as we discussed above you cannot destroy a concept and so there is hope to bring her back. But until then we need a name for this geographic region and its new societal system. I expectNeoconica is a fitting name. But I’d certainly be interested to hear some other suggestions. Share this: 12
WHEN Vladimir Putin plays host to Barack Obama and other world leaders at the G20 summit in St Petersburg next week, mutual resentment and dislike will be ill-concealed. The American president recently likened the Russian leader’s body language to that of a “bored kid in the back of the classroom” . Mr Obama has cancelled a planned bilateral meeting in Moscow, choosing to visit Sweden instead. The last straw was Russia’s sheltering of Edward Snowden, a fugitive American spook. But the spat over that only crystallised something apparent since Mr Putin returned to the Kremlin in 2012: that the “reset”, launched with much fanfare in 2009, is not just dying, but dead. http://www.economist.com/news/europe/21584339-relations-europe-and-america-freeze-over-vladimir-putin-looks-china-cold-climate
How To Arbitrage The People's Bank Of China Submitted by Tyler Durden on 05/21/2013 18:39 -0400 China Hong Kong LIBOR Since there are now numerous hard proofs that China’s export data (and to some extent import data as well) were significantly distorted recently , we naturally wonder the incentives behind the distortion and the detailed mechanism of these manipulations. As BofAML notes, there are four reasons why the distortions have risen so sharply since Q4 2012 but the various arbitrages (described in actionable detail below) between onshore and offshore currencies and interest rate differentials (and the role of gold in this) remain in place to make judging China's real trade growth as much art as science. Via BofAML, In the starting period of using RMB for trade settlement (2010-2011), people might not learn the trick on how to benefit from the differential between CNH and CNY exchange rates. And the differential was quite small before October 2012 when markets perceived a significant RMB/USD depreciation. Only since 4Q12 several preconditions were ripe for massively manipulating trade data. First, RMB/USD started appreciating again. Second, the China’s economic growth started rebounding. These two preconditions made it attractive to bring in hot money via over-reporting exports. Third, the differentials between CNH/USD and CNY/USD got widened in 4Q12 with CNH/USD becoming more expensive than CNY/USD, making it’s profitable to do arbitrage (more details below). Fourth, people were experienced enough to use RMB trade settlement to carry out relatively complicated arbitrage. Arbitrage the CNY-CNH exchange rate differentials Demand for RMB assets in offshore markets has picked up since 4Q12 on a better growth outlook and the introduction of new investment tools such as RQFII, causing CNH/USD (RMB traded offshore) to be more expensive than CNY/USD (RMB traded onshore). At the peak in January, CNH was 0.6% more expensive than CNY. Consequently, arbitrage opportunities between CNY and CNH arise if people can manage to bring CNY to offshore RMB centers like Hong Kong. The trick is seemingly complicated, but actually the arbitrage is quite simple. Let’s use an example to reveal the mechanism of this arbitrage. 1. In mainland China, an arbitrager could borrow US$1.0mn and convert to CNY at exchange rate 6.20 (so he gets RMB6.2mn); 2. He could import something with minimum transportation costs such as gold from Hong Kong and settle the imports with the borrowed RMB6.2mn. In this way, this RMB6.2mn flows to Hong Kong and becomes CNH; 3. He then instructs his business partners (or his Hong Kong subsidiaries) to converts the RMB6.2mn to USD in HK. Assuming USD/CNH is 6.15, he gets US$1,008,130; 4. Finally he exports the previously imported gold which is settled in USD. In this way, US$1,008,130 flows into mainland China and the arbitrager completes the whole deal with a profit at US$8130 (perhaps less than that due to some transport and custom fees). Arbitrage the differentials between CNH and CNY interest rates Another arbitrage can gain purely from the interest rate differentials between CNH and CNY. Note interest rates for RMB are different onshore and off-shore. An arbitrager can gain by borrowing CNH at low rates, converting CNH to CNY and depositing CNY at higher rates. Currently the spread could be around 70bp. Here is an example on how to carry out this arbitrage. 1. In mainland China, an arbitrager borrows RMB1.0mn at a rate of 6% for two weeks (the time needed for getting CNH loans in Hong Kong), he then deposits RMB1.0mn in a bank with deposit rate at 3% and ask the bank to issue L/C for him; 2. With the L/C, his Hong Kong partners could get RMB1.0mn loans from HK bank for one year. The arbitrager then export something with minimum transportation costs to Hong Kong and the RMB1.0mn is sent to mainland China. He repays the RMB1.0mn. 3. His profit is calculated as follows. The revenue is the differential between the onshore RMB deposit rate and the offshore RMB financing costs. Currently the spread is around 70bp after deducting related costs, so the revenue is RMB7000. His cost for borrowing RMB1.0mn for one month is 2500. So his risk-free net return is RMB4500. Arbitrage on interest rates differential and RMB appreciation The most complicated arbitrage can gain from RMB appreciation, the interest rate differentials between onshore RMB and offshore USD, and the differential between CNH/USD and CNY/USD. Note that 1yr RMB deposit rate in China is now 3.0% but 1yr dollar lending rate in HK is lower than 2% (LIBOR +100bp). Here is an example on how to carry out this arbitrage. 1. In mainland China, an arbitrager borrows RMB1.0mn at a rate of 6% for two weeks, he then put RMB1.0mn as 1yr time deposits in a bank at 3% and ask the bank to issue L/C for him; 2. Assume USD/CNH is 6.15. With the L/C, his Hong Kong partners could get 1yr dollar loans of US$162,602 (=1000,000/6.15) at 2% from a HK bank. 3. The arbitrager then exports something with minimum transportation costs to Hong Kong and the US$162,602 is sent to mainland China. Assuming USD/CNY is at 6.2, he can get RMB1,008,132. He repays the original RMB loan at the amount of RMB1002,500 (RMB2,500 is interest payment) and obtain an immediate profit at RMB5632 which he will also put in 1yr deposit. 4. One year later, his time deposits will be valued at RMB1,035,801 (with interest payment). Assuming CNY/USD appreciated 2%, he can convert his this to US$171,774. 5. He imports the goods from Hong Kong he exported a year ago by paying US$165854 (=162602*1.02). In this way he moves US$165854 to HK to repay his loans (principal plus interest payment). 6. His net profit (in one year) is US$5920. Outright hot money inflow In the above three cases of arbitrage, the person could even raise prices of exports which were previously imported to bring in hot money. When people believe the Chinese economy is safe (especially as growth recovers) and CNY/USD will appreciate, they have the incentive to take in hot money to benefit from higher interest rates in China (than USD rates) and CNY/USD appreciation. Average: 4 Your rating: None Average: 4 ( 3 votes)
Bank Balances And Gold Submitted by Tyler Durden on 05/20/2013 14:59 -0400 Central Banks China Counterparties Sovereign Debt Submitted by Alasdair Macleod via GoldMoney.com , There has been a growing shift in favour of assets relative to bank deposits. This was initially encouraged by zero interest rates, but more recently there is little doubt that Cyprus’s bail-in has accelerated the trend. This explains the bull markets in bonds and equities, which conveniently underwrites the entire banking system. It is however too early to offer evidence of falling deposit balances held by non-banks and the general public because depositors as a whole have been remarkably complacent, but there is ample evidence that liquidity from monetary expansion is inflating financial assets faster than bank deposits. This helps explain why, for example, Italian 10-year bonds are on a 4% yield. The reason, doubtless reaffirmed by the Cyprus bail-in, is that investors with cash balances think over-priced sovereign debt is less risky than adding to their euro deposits. However, the central banks are relaxed because weakness in deposits at any single bank is easily covered through the banking system, insulating individual banks from depositor-withdrawal systems. Presumably, banking counterparties are also complacent because they can be reasonably sure to be exempt from any bail-ins. They have the comfort of knowing the banking system is underwritten by all those complacent enough to leave money on deposit beyond the insured level. However, some of depositors’ cash balances post-Cyprus will have gone into physical gold and silver, which explains why the bullion banks operating in the futures markets and the central banks behind them are so keen to dissuade us that gold and silver is a safe haven. I recently interviewed Ronnie Stoerferle , the Vienna-based analyst, who put his finger on it: since Cyprus, there has been a sharp rise in European demand for physical gold, with the pressure being felt by the bullion banks unable to deliver bullion. At least one bank was recently reported to be only prepared to settle bullion liabilities in cash. Therefore the price knock-down in April was a logical response by the bullion banks, which had to defuse customer demand for physical delivery. But given that the driving factor was not speculation but a reluctance to add to deposits in the banking system, the jump in demand for bullion at lower prices was inevitable. Where does this leave things? The crisis in bullion markets is worse than it was before. A good example of how little physical stock there is can be gained by tracking bullion deliveries on the Shanghai Gold Exchange. In the last few weeks they have dwindled to virtually nothing, having been a truncated 190 tonnes in April and 297 tonnes in March. Yet we know from reports that retail demand in China has taken off; so it is only a matter of time before prices are bid up on the Shanghai Gold Exchange enough to replace lost inventory. It will be interesting to see how many more bullion banks are forced to admit the fiction behind their customer accounts in the coming weeks. For the moment the temporary solution amounts to rationing bullion supplies to the public. Average: 4.47059 Your rating: None Average: 4.5 ( 17 votes) Tweet - advertisements - VectorVest Stock Analysis. Find out Whether a Stock is a Buy, Sell or Hold. Get your Free Stock Analysis simply by clicking here! Login or register to post comments 10889 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: GoldCore Review of 2010 And Outlook For 2011 European Sovereign Debt Crisis Deepening - Risk of Contagion And Bond Market Crash, And Why Rising Rates Mean Gold Strength Morgan Stanley Deconstructs The Funding Crisis At The Heart Of The Recent Gold Sell Off, And Why The Gold Surge Can Resume Guest Post: On Risk Convergence, Over-Determined Systems, And Hyperinflation Central Banks Favour Gold As IMF Warns of “Collapse of Euro” and “Full Blown Panic in Financial Markets”
Chinese Growth - Real Or Imagined? Submitted by Tyler Durden on 05/05/2013 16:15 -0400 China Hong Kong We toyed with titling this post "Lies, Damned Lies, And Chinese Statistics" but perhaps that is a little harsh, though one glance at the chart below and one instantly comprehends the efforts that are being undertaken to 'show' the world that China's transition is on target (and crumbling into collapse). As we recently noted , it is actually unlikely that China can complete this transition to organic (as opposed to investment-led) growth (with moderate growth the exception not the rule) , and China's recent trade data does not pass the smell test . As GREED Fear's Chris Wood notes, with the Hong Kong trade data being released last week, it is worth noting a growing discrepancy between the data on China’s exports to Hong Kong reported by mainland’s customs department and the corresponding data on Hong Kong’s imports from China reported by Hong Kong’s Census and Statistics Department in March. Such inconsistency in China’s export numbers relative to the imports data from its trading partners has generated growing speculation about the credibility of China’s trade figures . Various explanations have been put forward (below) but the divergence would seem far too large to be simply explained by "different statistical methods" as the Chinese government's official line notes. Via GREED Fear, ... Hong Kong’s reported imports from China rose by “only” 13.8%YoY to US$20.6bn in March and were up 10%YoY to US$56bn in 1Q13. By contrast, China reported that exports to Hong Kong surged by 93%YoY to US$48.4bn in March and were up 74%YoY to US$106bn in 1Q13. As a result, the ratio between China’s reported exports to Hong Kong and Hong Kong’s reported imports from China has surged to 2.35 times in March, up from 1.36x in 2012 and an average of 1.11x during the previous five years between 2007 and 2011. Such inconsistency in China’s export numbers relative to the imports data from its trading partners has generated growing speculation about the credibility of China’s trade figures. One suggestion, as noted by CLSA’s head of economic research Eric Fishwick, is that Chinese companies have been inflating their shipment data to take advantage of the government’s export tax rebates . Another explanation GREED fear has heard recently is that Chinese companies are over-invoicing their exports to evade capital controls to bring in money from abroad. GREED fear for now has no idea about the exact cause of such a huge discrepancy . But it is a point to be aware of. The divergence would seem too large to be simply explained by “different statistical methods” , as argued by the mainland’s General Administration of Customs spokesman, Zheng Yuesheng. Source: GREED Fear Average:
Guest Post: It's A Bit Early To Declare A Winner In The Economic Debate Submitted by Tyler Durden on 04/25/2013 22:27 -0400 Bond Capital Formation Deficit Spending Government Stimulus Greece Gross Domestic Product Guest Post Henry Blodget Japan Keynesian economics Krugman Monetary Policy Paul Krugman Paul Volker Reality Recession recovery Savings Rate Tax Revenue Unemployment Submitted by Lance Roberts of Street Talk Live , Recently, Henry Blodget wrote that "The Economic Argument Is Over - And Paul Krugman Won." The premise of the article is that the ongoing debate between economic schools of thought, since the financial crisis began, over what policies were necessary to get the domestic and international economies growing again has been resolved. "On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This 'stimulus' spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again. On the other side were economists and politicians who wanted to cut spending to reduce deficits and 'restore confidence.' Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and 'confidence' would return. This debate has not just been academic." He further states that: "Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called "Austerians" fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts. Over the course of this debate, evidence has gradually piled up that the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high. So the empirical evidence increasingly favored the Nobel-prize winning Paul Krugman and the other economists and politicians arguing that governments could continue to spend aggressively until economic health was restored." The article really revolves around the "calculation error" in the Reinhart/Rogoff study which showed that when debt-to-GDP ratios rose above 90% economic growth slowed. Blodget believes that since the study contained an error this is clear evidence that the premise is false and that governments can continue to spend with reckless abandon until, by some miracle, economic growth is restored. The problem, however, is that it is still way to soon to declare a winner in this debate for several reasons: 1) Reinhart/Rogoff May Not Necessarily Be Wrong. While there was a calculation error in their study which changes the dynamic of the 90% threshold of debt to GDP - there is clear and ample evidence that rising debt-to-GDP ratios slow economic growth. The chart below is the debt-to-GDP ratio of the United States on an annualized basis as compared to the annual growth rate of GDP. You don't have to hold a doctorate in economics to clearly see the problem. Rising debt to GDP ratios, even from low levels, retards economic growth. Conversely, falling debt--to-GDP ratios have been a boost to economic growth. This really isn't a hard concept to understand. Rising debt levels deter savings from productive investments into debt service. The larger the debt - the larger the amount of debt service that must be paid. This leaves less to reinvest back into the economy. This is the same for both the government and the private sector. The chart below shows the annual growth rate in GDP as compared to the personal savings rate and consumer debt levels. The problem with Henry's argument is that "more stimulus" has yet to translate into higher economic growth rates as expanding debt service is impeding the ability, and confidence, of the private sector from participating in the very activities needed to create growth. The reality is that it really doesn't matter whether it is specifically 90%, 120%, or more, of debt-to-GDP before an economy "implodes" but the inability to create economic growth that should be of real concern. 2) Deficits Do Impede Growth. A second problem with Henry's declaration of a winner in the economic debate is the belief that "deficits don't matter." Keynesian economics believes that during periods of economic weakness that government spending should be increased until private spending returns. In theory this correct. However, over the past 30 years Keynesian economics has been bastardized into "the more deficit spending the better." Since Reagan entered office and vowed, with Paul Volker, to break the back of inflation - the rise of the debt/credit driven economy was able to mask over the effects of rising deficits. Falling interest rates and inflation combined with easy access to credit allowed consumers to span the gap between incomes and living standards as economic growth was retarded. However, the "end game" of rising debt and deficit levels have now arrived where additional increases spending have a diminished rate of return on the economy. While deficit spending in the short term may stabilize an economy - running deficits over an extended period of time diverts money from productive investments into debt service. Deficit spending is HIGHLY destructive to economic growth as it directly impacts gross receipts and saved capital equally. Like a cancer – running deficits, along with continued deficit spending, continues to destroy saved capital and damages capital formation. The chart below shows the annualized rate of economic growth versus the deficit balance. See the problem here? 3) Unprecedented Monetary Experiment. The current combinations of stimulative programs from bailouts, financial supports and direct liquidity injections, both domestic and globally, are of a magnitude never before witnessed in economic history. The problem with declaring a victor in the "economic debate" is the same as claiming that "Professor Plum did it in the library with the lead pipe" halfway through the game. The evidence of success is not yet available to leap to such a conclusion. The current supporters of Keynesian economics cannot point to the tepid recovery in housing, employment or even economic growth as signs of success. The support from the massive monetary programs implemented to date have, like a life support system for a near comatose patient, kept growth from slipping into a recession or worse. For success, and ultimately a victor, to be proclaimed will only be possilbe once the global liquidity programs have ceased, central bank balance sheets have successfully delevered and the economy begins to grow organically. There has yet to be any sign that we are anywhere near that point. The Argument Isn't Over While Henry declared the argument is over between the Keynesian and Austrian economic theories - we are a long way from really knowing that answer. The discovery of the calculation error in the Reinhart/Rogoff study does little to change the overall premise the excessive debt levels impede economic growth and have, historically, led to the fall of economic empires. All one really has to do is pick up a history book and read of the Greeks, Romans, British, French, Russians and many others. Does fiscal responsibility lead to short term economic pain? Absolutely. Why would anyone ever imagine that cutting spending and reducing budgets would be pain free? However, what we do know is that the path of fiscal irresponsibility has long term negative consequences for the economy. It is absolutely true that the current dysfunction in government is economically harmful as it weighs on both consumer and business confidence. However, businesses are not sitting around just waiting for more stimulus to increase employment, expand production and increase wages. What they need is demand from consumers, clarity on taxation and reduction in government regulation. How do we know this? It is because these are the top three concerns as reported by businesses owners in the monthly surveys . The reality is that it will likely be many years before we are able to conclusively settle this argument. As far I am concerned the argument is irrelevant. What we need is an Austri-Keynesian policy mix that combines short-term deficit spending to help offset the drag of budgetary reform. There is little argument that entitlement programs must be reformed along with a balancing of the federal budget and reduction of the deficit. The problem, to date, has been how to do it with no one willing to make the sacrifices necessary to achieve the end result. An Austri-Keynesian policy mix would still result in short term economic pain as there is no "pain-free" solution to the global economic environment that we face today. It is the unwillingness, and shortsightedness, of those in power that keep hoping that Cental Banks can find the "magic bullet" that will solve all economic ills and keep them in office. Alas, even the Fed has admitted that monetary policy alone is not a panacea and that evenutally fiscal policy must eventually take the lead. Ultimately, there will be a conclusion. However, without real long term budgetary reforms, that conclusion is likely not to be a pleasant one - history alone tells us this will be the case. In the meantime we can continue to ignore the long term conseqences in exchange for short term bliss. However, as long as we do, we will continue to be plagued by lower levels of economic growth as continued monetary interventions strive to offset the inevitable drag of expanding debt. Average: 3 Your rating: None Average: 3 ( 5
The Emperor Has No Gold Romania has demanded for many years that Russia return its gold. Last year, Venezuela demanded the return of 90 tons of gold from the Bank of England. The German high court recently ruled that Germany must audit its gold reserves held in foreign countries such as the U.S., England and France. And German inspectors will actually travel to the New York Federal Reserve Bank’s gold depository and the Bank of England to inspect their gold. Germany will also repatriate 150 tons of gold in order to test it for purity. As Zero Hedge notes (quoting Bloomberg): Ecuador’s government wants the nation’s banks to repatriate about one third of their foreign holdings to support national growth, the head of the country’s tax agency said. Carlos Carrasco, director of the tax agency known as the SRI, said today that Ecuador’s lenders could repatriate about $1.7 billion and still fulfill obligations to international clients. Carrasco spoke at a congressional hearing in Quito on a government proposal to raise taxes on banks to finance cash subsidies to the South American nation’s poor. Four members of the Swiss Parliament want Switzerland to reclaim its gold . Some people in the Netherlands want their gold back as well. Cheviot Asset Management’s Ned Naylor-Leyland says that the Fed and Bank of England will never return gold to its foreign owners . Jim Willie says that the gold is gone. The fact that CNBC head editor John Carney is arguing that it doesn’t matter whether or not the Fed has the gold does not exactly inspire confidence. Gerald Celente notes : It’s not only Germany (who’s gold is missing), it’s the United Sates, it’s all of the countries. Nobody knows what’s in Fort Knox. They won’t let anybody in. Where’s the gold in the United States? How come we can’t go in and look in Fort Knox? *** How come the people can’t have a reading? How come we can’t look at it? How come politicians can’t get in there? How come no one can get in there? The gold does not exist. All this does is confirm what so many of us already know, “The Emperor has no gold.” Egon von Greyerz -founder and managing partner at Matterhorn Asset Management – agrees : There probably isn’t anywhere near the central bank gold (governments claim they possess). Ron Paul has called for an audit of Fort Knox, based upon the suspicion by many that the gold was sold off years ago: Others allege that the gold has not been sold outright, but has been leased or encumbered, so that the U.S. does not own it outright. $10 billion dollar fund manager Eric Sprott writes – in an article entitled “ Do Western Central Banks Have Any Gold Left??? “: If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “ reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.” 6 (Emphasis theirs). Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else. The fact that they do not differentiate between the two is astounding, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back. CHART B This may sound like a conspiracy theory. But the banks have already been caught raiding allocated accounts . And governments have repeatedly been caught manipulating gold prices . And financial companies have been caught pretending they have reserves which they don’t. And gold bars have been found to have been filled with cheaper metals . And at least one central bank – albeit a tiny one- has already been caught holding fake gold . And as Eric Sprott points out: We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. China Is Quietly Becoming Gold Superpower While Western central banks have frittered away their gold , China is quietly building up its reserves. China is the world’s largest gold producer . And yet – according to various sources – gold bullion brokers have not seen any gold coming from China . In other words, China is producing more gold than any other country, but isn’t exporting any of it. As such, China is quietly becoming a gold superpower. Note: China has a habit of being quiet for several years at a time, and then announcing big increases in gold holdings. So quoting old numbers will only mean that one is caught flat-footed as to China’s current holdings. Average: 4.69231 Your rating: None Average: 4.7 ( 13 votes) Tweet George Washington's blog Login or register to post comments 8805 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Eric Sprott: Do Western Central Banks Have Any Gold Left? It Begins: Ecuador Demands Repatriation Of One Third Of Its Gold Holdings Are Banks Raiding "Allocated" Gold Accounts? FLASH: German gold report reveals secret sales that likely were part of swaps Hong Kong Completing 1,000 Ton Gold Vault
This Is The Housing Bubble Beneath The "Recovery" Submitted by Tyler Durden on 10/19/2012 13:43 -0400 Housing Bubble recovery We want to 'believe', we really do; but anyone with any sense (and no skin in the game) can see through the data; the eon-like periods of foreclosure and the drastically reduced supply. No matter how 'bullish' homebuilders are, or how much they dream of a future pickup, calling the recovery (as Bob Shiller recently noted ) is just a fool's errand. The truth is, for the average citizen, housing is not recovering - and the wealth effect is not creating animal spirits - and we do indeed have more to fear than fear itself. The following 79 second clip from Bloomberg TV should perhaps clarify the 'difference' in demand for housing . Primary residence 'buyers' are down remarkably, while 'investors' are up dramatically - now at pre-crisis bubble levels! Perhaps, as we noted here , Och-Ziff's stepping away from the 'flip-that-house' or 'REO-to-Rental' game is as good an indicator of exuberance as any. Once again it seems the Fed's ZIRP (and QE) has done nothing but enable the elites to gather assets and front-run them, bidding prices up - as opposed to 'enable' an economic recovery Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 13080 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business A Glimpse Inside The Industry That Owns Everything When big money chases rentals So Much For "Housing Has Bottomed" - Shadow Housing Inventory Resumes Upward Climb The twin lost decades in housing and stocks
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