Tag: economics

A failure to grasp price elasticity

To say nothing of the psychopathic nature of trolls. I cannot imagine this policy of charging for comments will work very well.

As a number of news sites eliminate their comments sections altogether, Tablet, a daily online magazine of Jewish news and culture, is introducing a new policy charging its readers to comment on articles.

As of today, a reader visiting the nonprofit site that is otherwise paywall-free will have to pay at least $2 to leave a comment at the foot of any story. The move is not part of a plan to generate any significant revenue, but rather to try and change the tone of its comments section.

Tablet has set up commenting charges of $2 a day, $18 a month and $180 a year, because “the Internet, for all of its wonders, poses challenges to civilized and constructive discussion, allowing vocal—and, often, anonymous—minorities to drag it down with invective (and worse),” editor in chief Alana Newhouse wrote in a post published today.

Charging for comments might work at a truly elite site like the New York Times. The level of exposure and the ability to associate one’s opinion right underneath a Paul Krugman column would be valuable to certain parties; I would have paid for such a comment-ad back when RGD came out myself.

But even at a site of modest popularity such as this one, the proposal would make no sense except as a roundabout way of banning comments without being seen to do so. This is one of the more prolifically commented sites in the blogosphere, but how many people here would pay $180 per year to comment here? I’d guess around ten or 20 people; Nate might pay that just to eliminate all the commenters from AG.

The problem is that the discourse would then be strictly limited to the same small group of people, it would become an insulated and repetitious conversation with an audience; it would become a form of conspicuous performance art. And does anyone doubt that trolls like Andrew Marston would even hesitate to cough up whatever it cost in order to buy a captive audience for his delusional meanderings?

As is the case with writers who calculate their lost sales by counting pirated copies, Tablet clearly fails to realize that someone who is willing to comment for free is not synonymous with someone who is willing to pay to comment. The latter tend to be a very small subset of the former.

The end of monetarism

Keynesian economics is a failure. So, too, is the Keynesian heresy known as Friedmanite monetarism:

The entire theory of monetarism is coming undone in spectacular and empirical fashion, which leaves the entire status quo exposed. All that is left in defense is the same old refrain of “it wasn’t big enough.” That’s great for those in the ivory towers blinding themselves to the reality of a lost generation of Italians, Spaniards, French and now even Germans; a listing to which even the FOMC is worried may yet add Americans.

Why anyone ever expected a different outcome is due solely to unrepentant ideology, since these central banks are following almost exactly the Japanese “model.” The global economy is just following along as money dies. Though Greece will be blamed as contagion, it will ultimately be proved as Japanification by monetary proxy.

For those who don’t understand the significance of the graph, both Germany and Italy are subject to the same monetary policy of the European Central Bank. The chart clearly shows that the very low interest rate policy presently being maintained by the ECB is not capable of producing full employment in Italy, contra monetarist theory, thereby indicating that other factors are, as it happens, more significant than the supposedly all-important interest rate.

As I’ve mentioned in the past, the ironic thing about the economist Milton Friedman is that he was much more sensible with regards to politics than economics.

Greco-German chicken

I have the impression that the Greeks are not bluffing here:

As Deutsche Bank’s George Saravelos politely puts it, “Developments since the Greek election on Sunday have moved very fast.” And indeed, so far the new Tsipras cabinet, and here we focus on the words and deeds of the new finance minister Yanis Varoufakis, has shown that the market’s greatest hope – that the status quo in Greece will continue – has been crushed into a pulp (and so have Greek stock and bond prices) especially following yesterday’s most recent comments by the finmin in which he said that Greece “does not want the $7 billion” from the Troika agreement and that it wants to “rethink the whole program”, culminating with an epic exchange with Eurogroup chief Jeroen Dijsselbloem in which Greece made it clear that the “constructive talks” are over.

And suddenly the Eurozone is stunned, because what had until now been its greatest carrot when it comes to dealing with Greece, has become completely useless when the impoverished, insolvent nation itself says it no longer needs a bailout, seemingly blissfully unaware of the consequences.

So earlier today the ECB’s Erikki Liikanen, tired of pleasantries and dealing with what to Europe is a completely incomprehensible and illogical stance, one which is essentially a massive defection by Greece in the European “prisoner’s dilemma”, and which while leading to a Greek financial collapse and Grexit – both prerequisites to a subsequent Greek economic recovery unburdened by the shackles of the Euro – would also unleash a European depression, came out and directly threatened Greece that it now has 1 month until the end of February to reach a deal with the Troika, or else the ECB would cut off lending to Greek banks, in the process destroying the otherwise insolvent Greek banking sector.

And since only the ECB backstop has prevented a banking sector panic, the ECB is essentially betting the house, and the sanctity of the Eurozone (because after a Grexit all bets are off which peripheral leaves next) that the threat, and soon reality, of a bank run (at last check Greece had about €145 billion in deposits still left in its bank after JPM’s latest estimate of €15 billion in outflows in January) will finally force Varoufakis and Tsipras to sit at the negotiating table with the understanding that not they but the Troika has all the leverage.

 Meanwhile, Germany has already ruled out any debt cancellation: “German Chancellor Angela Merkel ruled out any cancellation of Greece’s debt and said the country has already received substantial cuts from banks and creditors.”

The challenge that the EU faces is that they have nothing. Their only argument is that of a coven of vampires arguing with their victim: “you need to keep letting us bleed you, because if we die, you die.” But that argument means nothing to a dying man.


Once it’s clear that they can’t get any more out of the EU, it costs Greece nothing to allow the entire Euro edifice to collapse. They are already bankrupt, and it is no longer in their interest to permit the EU to continue concealing that simple fact.

The real fear of the Eurocrats

Daniel Hannan observes that it isn’t a Greek bankruptcy that would be the real catastrophe as far as the EU is concerned:

A default and devaluation would offer a fresh start. Although the economy has been pummelled by six years of Euro-austerity, some of the fundamentals have improved. The bureaucracy has been slimmed, taxes are now collected and, if debt repayments were taken out of it, the budget would be in balance. In truth, this is what EU leaders fear. Not that Greece will leave the euro and collapse, but that Greece will leave the euro and prosper.

A competitive Greek economy, exporting its way back to growth, might inspire Spaniards and Italians, who have also been paying the price of the euro, to follow. For those Eurocrats who see the single currency as a component of political integration, that prospect is too horrible to contemplate.

We’ve been here before. Two years ago, when it looked as if Cyprus might leave the euro, Brussels went so far as to lift money directly out of private bank accounts to pay off the country’s creditors.

The extreme measure was necessary, the European Central Bank admitted, ‘to prevent worries over the reversibility of the euro resurfacing’.

I observe that Iceland, which rejected the EU’s bank-first dictates, is doing considerably better than Italy, Ireland, Spain, and Portugal, which obediently followed the EU’s instructions. I tend to doubt this observation has escaped the new Greek government.

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.