Tag: economics

Strangling the golden goose

The US economy will continue to decline even after the credit bust because it is actively disincentivizing entrepreneurs and driving them out of the country:

The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

Just look at my family. The USA has already have lost over 50 jobs, and based on past taxes paid, more than $100 million in state and federal taxes after jailing my father for 11 years for his failure to pay around $2 million in taxes it claimed he owed. It also lost the benefit of any new businesses he would have started in the last ten years. And it has lost whatever benefit it would have gained from several opportunities in the USA I would have pursued in the past, but instead elected to leave fallow because the regulatory and compliance headaches were too high when piled on top of the usual risks and time commitments involved. I was never as successful as my father, of course, but my business did reach a respectable size and employed a dozen people.

It’s so bad these days that the USA is not only disincentivizing both its resident and expatriate entrepreneurs, but is even causing the latter to give up their citizenships in record numbers. Eduardo Saverin, one of the Facebook co-founders, is far from the only U.S. citizen to renounce his citizenship over tax-related business matters. For years, the American instinct has been to say “good riddance” to such renunciates, but the country is past the point where it can afford to do so, especially when most other countries are very actively courting the small minority of people who are capable of creating new businesses that will provide new job opportunities for their citizens. At this point, foreign entrepreneurs would have to be either stupid or very short-sighted to pursue a green card that will serve as a financial anchor for the rest of their lives.

The tragic thing is that the USA is no longer the land of opportunity for entrepreneurs. It was only 20 years ago that the young guys who started id Software moved from Wisconsin to Texas because the opportunities were better there. But the ids of tomorrow are now leaving the USA for other countries, and are increasingly starting them in places like Eastern Europe, the Nordic countries, and Israel. The last five big game startups have come out of Russia, Finland and Sweden; one of the biggest mobile game successes is in Serbia. This means that even aside from its macroeconomic problems, the USA is very unlikely to possess the long-term potential for growth it once took for granted anymore.

The effects of these negative developments concerning entrepreneurial activity are somewhat obscured by the fact that New York is still the financial capital of the world; four of the six game companies mentioned either went public in the USA or were acquired by US companies. But it doesn’t change the fact that innovation is increasingly taking place outside the USA.

Boom!

The Euro dropped from 1.20 to .85 against the Swiss Franc last night. That was nearly a 30 percent move overnight! It’s now down to 1.16 against the US Dollar. This is the result of the Swiss central bank giving up its attempt to peg the Franc at 1.20.

These wild currency swings are great if you can time them correctly, but it’s also a good way to lose your shirt. As usual, I was too early and missed out on the big move. Be careful out there.

This kind of monetary volatility is a strong indicator that deflation is defeating the central banks. They simply can’t print enough borrowers.

Negative interest rates

One more check in the ICE box. Zerohedge cites Goldman Sachs concerning the surprise announcement of NIRP from the Swiss:

The Governing Board of the SNB surprisingly announced this morning that it will introduce a negative rate of -0.25% on sight deposit account balances at the SNB. The SNB’s target range for the three-month Libor was also widened from 0.0% – +0.25% to -0.75% – +0.25%. In our view, today’s rate decision simply underlines the determination of the SNB to enforce the minimum exchange rate target for the CHF against the Euro.

1. This morning, the SNB surprisingly announced that, on January 22, it will introduce a negative interest rate of -25bp on reserve holdings from banks at the SNB, above a threshold of 20 times the minimum reserve requirement. The SNB’s target range for the three-month Libor was also widened from 0.0% – +0.25% to -0.75% – +0.25%. Over the last couple of days, the CHF has traded very close to the 1.20 level on the back of rising market volatility. The subsequent demand for safe investments attracted large capital inflows into Switzerland, eventually prompting the SNB to react.

2. According to the SNB, the measure is aimed at making investments into CHF less attractive. Although it is only banks that will have to pay the negative deposit rate, banks will pass on, to some extent at least, the negative rates to customers. It is noteworthy in that respect that some German banks – in response to the ECB’s negative rates – have also started charging some clients negative deposit rates.

3. It remains to be seen how effective this measure will be and the SNB will continue to rely on FX interventions to defend the minimum exchange rate. But the measure in any case shows the determination of the SNB to maintain the lower bound for the CHF against the Euro.

When currencies are getting too strong and interest rates are going negative, this is a sign that the central banks are fighting against deflationary pressures. To fight inflation, you raise the interest rate, thereby encouraging people to save. To fight deflation, you lower it, thereby encouraging people to borrow and spend. Or, in this case, since the negative interest rate is only being applied to banks, it is to encourage them to lend. That points to the fundamental difference between fiat money and credit money. You can print paper, but you can’t print borrowers.

The Swiss are trying to weaken their currency, which is strong against the Euro and the dollar, so they are trying to make it less attractive to investors in order to protect their domestic exporters. Russia, on the other hand, isn’t trying to export, but is instead attempting to bring in capital that is frustrated at earning so little interest in the low-interest Western economies.

Widespread NIRP will dictate the eventual end of the credit money system as well as the banks. If you’re being charged to save your credit money, you might as well pay someone to securely hold something more tangible.

Counterparty risk

Robert Prechter warned of this. It doesn’t matter if you traded right, if you can’t cash in your nominal winnings:

Dear Client,

Please be advised that that most Western Banks have stopped pricing USD/RUB. As such, FXCM can no longer offer this instrument to our clients and will begin closing any existing client trades in USD/RUB effective at Noon EST today, December 16th, 2014, 

So for those curious why there appears to be a collapse in Ruble volatility in the past few hours which in turn has sent both stocks and crude soaring, the answer is simple: nobody is trading it! 

And this is what happened following the post: as soon as all those
short the RUB (long USDRUB) realized they have to take profits, the USDRUB tumbled some 500 pips (!) in the process sending stocks surging.

We appear to have a full-blown financial war underway. I wonder how long it will take Putin to put the ruble on the gold standard. That’s always been his trump card; it eliminates Russia’s ability to play the money multiplication game, but in the end, will provide Russia with a sounder currency than the so-called currency of last resort.

Debt hole is bigger than advertised

The state pensions are going to run out a lot faster than reported:

America’s red ink runs much deeper than you think. Aside from the nearly $18 trillion national debt, many state governments are looking at future budgets that are trillions of dollars in the red. And they’ve hidden the numbers by dramatically under-reporting that debt, according to a new report by the think tank State Budget Solutions.

The group looked at what are known as “unfunded liabilities” — or debt states will owe down the road. It found a number of states are fudging their numbers — big-time — using tricks like assuming their stock investments will soar.

The book-cooking could mean bad news for public pensions and other programs that rely on these budgets. The report finds that, nationwide, states have unfunded liabilities of nearly $5 trillion, or $15,000 per American.

It’s impossible to say when governments are going to stop making interest payments or finally writing off debts. But the date will almost certainly be sooner than those who work off the official statistics estimate.

Of course, the Neo-Keynesians will probably use this as an explanation for why their stimulus plans keep falling. See, they totally would have worked if only they had known the actual size of the problem, but because they didn’t have accurate information, the stimulus was too small to be effective.

Keynesian shock tactics still don’t work

Abenomics has, as predicted, conclusively failed:

Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.

The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.

Rising sales taxes have been blamed for triggering the downturn by deterring consumer spending, and with Japan having now slipped into a technical recession, the chances that Mr. Abe will seek a new mandate from voters to alter the government’s tax program appear to have increased significantly.

The preliminary economic report, issued by the Cabinet Office, showed that gross domestic product fell at an annualized pace of 1.6 percent in the quarter through September. That added to the previous quarter’s much larger decline, which the government now puts at 7.3 percent, a slightly worse figure than in its last estimate of 7.1 percent.

The surprise recession underscores the difficulties faced by Mr. Abe, who won power two years ago on a pledge to reinvigorate the economy and end his country’s long streak of wage and consumer-price declines. His agenda, dubbed Abenomics, has focused largely on stimulus measures, in particular an expanded program of government bond purchases by the central bank.

When the Obama stimulus plan failed, Neo-Keynesians like Paul Krugman claimed it was because the stimulus wasn’t big enough even though it was BIGGER than Neo-Keynesians like Paul Krugman had claimed was necessary to jump-start the economy.

Then Japanese Prime Minister Abe launched the Abenomics program, which consisted of  “monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act.”

The total fiscal stimulus was ¥20.2 trillion, and yet even in combination with all the aggressively easy monetary policy pursued by the Bank of Japan, it hasn’t been able to grow the economy at all. The plain and simple economic fact is this: you cannot print or borrow your way out of an economic depression that is a consequence of excessive debt. No matter how many Nobel-prize winners assure you that you can.

Aristocratic tiger-riders

In the introduction to the third edition of FA von Hayek’s A Tiger by the Tail, Austrian economist Joseph Salerno observes:

Inflating aggregate money expenditure leads to a short-run increase in employment that causes an inappropriate distribution of resources whose inevitable correction ensures another depression. Such a correction can be postponed, but never obviated, only by repeatedly neutralizing relative price changes through accelerating inflation.

Those who deny Hayek’s analysis—as all contemporary mainstream macroeconomists and policymakers do—and promote ever-increasing spending as the panacea for our present crisis live in the simplistic Keynesian fantasy land from which scarcity of real resources has been banished and in which the scarcity of money and credit is the only constraint on economic activity. As Hayek pointed out, such people do not merit the name “economist”:

“I cannot help regarding the increasing concentration on short-run effects—which in this context amounts to the same thing as a concentration on purely monetary factors—not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization.”

Of course, as we were reminded in 2008, and again in 2014, not only does the postponed correction always eventually arrive, but the nominally palliative measures become increasingly ineffective. The Left is not entirely wrong to focus on the evils of income and financial inequality, because today they are not the result of capitalism and free enterprise, but the neo-feudal largesse distributed by the federal government to the financial aristocracy through the central bank.

I had always wonder why the Ciceronian cycle predicted the rise of aristocracy rather than the conventional expectations of post-democratic dictatorship. But in light of the post-2008 crisis events, it makes a good deal more sense.

ISIS drops the gold bomb

The Islamic State has barely been around for a year and already it has a stronger, more stable currency than either the USA or the European Union:

Islamic State is set to become the only ‘state’ to back its currency with gold (silver and copper) as it unveils the new coins that will be used in an attempt to solidify its makeshift caliphate. ISIS says the new currency will take the group  out of “the oppressors’ money system.” As Zaid Benjamin notes, ISIS releases details of its new currancy with golden 1 & 5 dinar, silver 1, 5, 10 dirham and copper 10 & 20 fils

They don’t permit usury and they back their currency with gold. In the long term, Osama bin Laden may have been right about who was the strong horse and who was not. The fact that an ideologically weakened, demographically dying West, which is no longer Christian nor ethnically homogenous, nor nationalistic, still has a technological edge, is not likely to make the difference in the long run.

To paraphrase Tom Kratman: always bring a gun to a gunfight and always bring a religion to a religious war.

This move by ISIS may be particularly effective now that the USA has all but destroyed the international banking system with FATCA and the SWIFT sanctions. Look for Russia and China to follow suit before too long.

Mailvox: Vee have vays

Uff making you borrow, hein? JD asks about the prospective new Attorney General:

Wikipedia reports that the Black woman being considered to replace Eric Holder as Attorney General spent seven years on the Board of Directors of the Federal Reserve Bank for New York. Fed alum as Attorney General.  Is that ominous?

It depends. If she’s a black woman of the sort you see at the DMV, everything should be fine. I would absolutely approve of such an appointment; that sort of AG isn’t about order children burned to death or automatic weaponry sold to Mexican cartels. All she’ll demand is to be left alone in the near vicinity of a well-stocked vending machine. If, on the other hand, she’s a true-believing freshwater Chicago School monetarist, Americans may soon find themselves being prosecuted for the federal crime of Willful Failure to Borrow.

That would be one way to boost L1, anyhow.

Two more checks in the deflation box

Check one. When banks are charging their depositors to hold their money, this is strongly indicative of deflation:

Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory. Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.

On November 1st, the first European bank has passed along these negative interest rates to its retail customers. So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.And large investors are paying European governments negative interest on certain bonds.

Check two: When debtor nations are finding it harder and harder to pay interest on their outstanding loans despite historically low interest rates, this is also indicative of deflation.  Ambrose Evans-Pritchard describes the battle between the ECB and the Bundesbank over continuing the European version of quantitative easing:

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem. 

We have been seeing some inflationary artifacts during the last five years of credit disinflation, but that is the result of the massive credit money pumping. According to mainstream economic theory, there should have been 10x or more inflation, but instead, all those efforts to monetarily refuel the global economy have uselessly run off, like gasoline poured over a stone. There has been some asset inflation, as can be seen in the stock market, but when the crash comes – and it will come – that will put a conclusive end to the inflation/deflation debate.