Steve H. Hanke
While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus’ banks, the country ultimately faces a choice between Brussels’ bitter pill…and bankruptcy. Cyprus’ newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:
“A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation.”
Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output – to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term “bail-in” has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called “haircut”.
Still, the question lingers: Why now? The sorry state of Cyprus’ banking system is certainly no secret. What’s more, the IMF has supported a “bail-in” solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?
One reason can be found by taking a look at the composition of Cyprus’ bank deposits (see the accompanying chart).
There are two main take-aways from this chart:
- European depositors’ money began to flow out of Cyprus’ banks back in 2010. Indeed, most European depositors have already found the exit door.
- Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure. If the proposed haircut goes through, Russian depositors could lose up to $3 billion. No wonder Valdimir Putin is up in arms about the bail-in.
Perhaps a different “red telephone” from Moscow will be ringing in Brussels soon.
View full post on Cato @ Liberty
Themes for 2013
January 11, 2013
Eight trends to follow in 2013 and beyond.
Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends.
In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.
Trend #1: Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention
Intervention in the stock market may successfully keep the markets in an uptrend or a narrow trading range for 2013, but this would only increase the odds of a dislocation/crash in 2014 or 2015. Temporary success does not imply permanent success or even continued success of intervention. Why is this so?
Virtually all Central Planning intervention—fiscal and monetary stimulus, subsidies and market manipulations—suppresses market pricing of risk and volatility. In a healthy, transparent market, millions of participants openly price risk, volatility, assets, and capital. This creates low-intensity volatility and resilience. When transparent markets reprice risk, assets, and capital in a panic, the recovery is equally dramatic as participants quickly adjust to the repricing. Confidence is based on transparent pricing by participants, not officially sanctioned manipulation.
The purpose of Central Planning intervention is perception management. Central Planners want to restore confidence; not with transparent repricing, which would hurt holders of assets and banks, but by engineering a steady rise in asset prices and reversing any declines with indirect buying.
This instills confidence via participants’ "Don’t fight the Fed" belief that Central Planners will never let the market go down.
History rather unkindly finds that Central Planning elevation of markets and suppression of risk is impermanent: Intervention leads to crashes. Why is this so? Risk cannot be eliminated; it can only be transferred or suppressed. When it is suppressed, it eventually bursts out. The greater the suppression, the greater the eventual dislocation. There are various analogies for this; for instance, the stick-slip hypothesis of seismic faults and earthquakes. While the surface appears stable, pressure invisibly builds far below and is eventually released in an earthquake.
In our financial example, sudden repricing of risk and assets is the equivalent of an earthquake.
Many commentators have observed that the positive effects of the Federal Reserve’s Quantitative Easing programs are diminishing both in duration and market pricing. The market soared for months on end after QE1, but the rally quickly fizzled after QE4.
This reveals the decay factor in intervention: Each intervention must be larger as its efficacy decays.
The policy consequence of this decay is that Central Planners must “double down” their bets to keep the perception-management “recovery” and market on track. As I explained in my book, Why Things Are Falling Apart and What We Can Do About It, the analogy is a gambler who is using borrowed money to make ever-larger bets in a casino. His first few bets are wins, prompting confidence in his skills and in his lenders. Eventually the gambler loses his entire stake in one enormous bet, and the loss is so monumental that it brings down the casino and his lenders.
The markets’ ability to transparently price risk, capital, and assets has been fatally compromised. A systemic increase in brittleness and fragility is the inevitable result when low-intensity volatility and risk are both suppressed by constant intervention.
The widening credibility gap between official pronouncements of recovery and less manipulated metrics also forces Central Planners to double down on their interventions. This is evident globally, as Europe, Japan, and China are all doubling down on interventions that are yielding increasingly marginal returns.
Trend #2: The omnipotence of the Federal Reserve will suffer a fatal erosion of confidence as recession voids Fed policy and pronouncements of “recovery”
Though the Fed is nominally independent, like every other arm of Central Planning, it swims in a political sea. The initial success of QE1, 2, and 3 and ZIRP (zero-interest rate policy) boosted the political capital of the Fed. Faith in the implied omnipotence of “Don’t fight the Fed” has been rewarded for four years.
The failure of its policies to engineer a durable recovery will erode that faith and the Fed’s political capital, restraining its freedom of movement. We can already discern rising doubt in infinite QE and permanent ZIRP in the Fed’s minutes. Outside the Fed, what can only be characterized as distain of the Fed and its destructive policies is increasingly visible.
The decay factor of its monetary-stimulus policies and the decline of its political capital will increasingly render the Fed impotent. By 2015 we may well be dumbstruck that everyone once hung on the Fed’s every word as if the Fed resided on Mount Olympus.
Trend #3: The Mainstream Media (MSM) will continue to lose credibility as it parrots Central Planners’ perception management
The credibility gap between MSM stories of recovery—higher GDP, auto and home sales, lower unemployment rate, etc.—and what is visible on the ground will widen, eroding MSM credibility.
With the Internet providing distribution of alternative metrics, Central Planning and the Mainstream Media will increasingly be revealed as propaganda organs rather than servants of the citizenry.
Trend #4: The failure of what is effectively the “State religion,” Keynesianism, will leave policy makers in the Central State and Bank bereft of policy alternatives
Now that all Keynesian policies have been pushed to the maximum, there is essentially nothing left to deploy.
This chart of money velocity reflects the endgame of Keynesian stimulus. Money is being printed and dumped into the financial system in size, yet the velocity of that money is trending toward zero.
Trend #5: Economic Stagnation will fuel the rise of Permanent Adolescence
The social consequences of economic stagnation will attract more attention. Japan is the lab experiment for what happens to a nation’s youth when opportunity declines and many young people are unable to earn enough money to buy homes and support families. They withdraw into a state of permanent adolescence, living at home, staying in college for extended periods, delaying marriage and children, working part time, surrendering long-term goals, and in some cases indulging in a lifestyle centered around video-gaming and pop-culture hobbies.
Consequences of Permanent Adolescence include lower birth and marriage rates, depressed rates of household formation, lower auto and home sales, declining tax receipts, and what might be called “social depression,” as expectations and goals stagnate along with opportunity.
Soaring student debt has turned the current generation of university students into debt serfs. This will continue as alternatives to a conventional college education remain on the margins.
Trend #6: Income is the foundation of real economic growth and wealth-distribution stability
Income will continue declining in real terms. Nominally, income appears to have grown 24% since 2000. Adjusted for inflation, it has declined by almost 10%.
Trend #7: Small business—the engine of growth—will continue to decline for structural reasons
Uncertainty, globalization, recession, and higher taxes and regulatory fees have eroded the incentives to risk capital and time in starting or expanding a small business.
Trend #8: Territorial disputes will continue to be invoked to distract domestic audiences from domestic instability and inequality
The Senkaku Islands are one such flashpoint where compromise appears impossible since the domestic populations of Japan and China have been persuaded by nationalistic hyperbole that a "line in the sand" has been drawn.
It is already abundantly clear that trade will be trumped by domestic politics in territorial conflicts. This creates the potential for serious economic dislocations in global trade and capital flows.
Earthquakes are notoriously difficult to predict. So are market dislocations. Risk is inevitably mispriced when unprecedented intervention suppresses risk.
Statistics: Posted by yoda — Fri Jan 11, 2013 11:42 am
View full post on opinions.caduceusx.com
Four years ago, employees of New York-based Goldman Sachs Group gave three-fourths of their campaign donations to Democratic candidates and committees, including presidential nominee Barack Obama. This time, they’re showering 70 percent of their contributions on Republicans. Photographer: Chip Somodevilla/Getty Images
Four years ago, employees of New York-based Goldman gave three-fourths of their campaign donations to Democratic candidates and committees, including presidential nominee Barack Obama. This time, they’re showering 70 percent of their contributions on Republicans.
That’s the biggest switch among the 25 companies whose employees have given the most to candidates and parties since 1989, according to data through June 30 compiled by Bloomberg from the Center for Responsive Politics, a Washington-based research group that tracks campaign donations. Goldman isn’t alone; 13 of the companies’ employees are now giving more to Republicans after backing Democrats four years ago.
“A switch in party preference of this magnitude is virtually unheard of among major companies with an established presence in Washington,” said Rogan Kersh, provost at Wake Forest University in Winston-Salem, North Carolina.
Dallas-based AT&T Inc. (T) employees, who divided their contributions evenly between the parties in 2008, are now giving almost two-thirds of them to Republicans. Chairman Randall Stephenson gave $30,800 to the Republican National Committee in February — his biggest donation in more than two decades — six weeks after the Obama administration rejected a proposed merger with T-Mobile USA Inc.
“We don’t comment on personal contributions,” said Claudia Jones, AT&T’s spokeswoman.
Employees of General Electric Co. (GE) are giving 63 percent of their contributions to Republicans this year, almost a mirror image of their distribution in 2008 when Democrats received 66 percent of their donations.
“GE employees contribute personal funds to any candidate they choose,” said Lindsay Lorraine, a company spokeswoman.
Employees of just four of the top 25 companies, Time Warner Inc. (TWX), Pfizer Inc. (PFE), Comcast Corp. (CMCSA), and Microsoft Corp. (MSFT), continued to give a majority of their donations to Democrats. Redmond, Washington-based Microsoft workers and their families are the biggest source of contributions to Obama’s re-election campaign, giving him $418,845. Philadelphia-based Comcast employees and their families are eighth, at $216,156, and Time Warner employees and families are 10th at $191,834.
The business bets are being made even as an Aug. 5 ABC News-Washington Post poll found Romney’s unfavorability rating ticked higher to 49 percent, with 40 holding a favorable view of him. Obama’s favorability rating stands at 53 percent, while 43 percent view him unfavorably.
Nowhere is the change in financial fortunes more pronounced than on Wall Street.
The banking industry, blamed for triggering the worst economic downturn since the Great Depression, opposed new regulations and oversight that a Democratic Congress enacted and Obama signed into law over Republican opposition. The presumptive Republican presidential nominee, Mitt Romney, co- founder of the Boston-based private-equity firm Bain Capital LLC, has pledged to repeal the new rules.
Six of the 13 corporations whose employees reversed their political giving are financial institutions, including four of the top five. They are: Goldman, Bank of America Corp., Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) The other two are Citigroup Inc. (C) and UBS AG. (UBSN)
Much of their money went to Romney’s presidential campaign and the joint fundraising committee set up with the Republican National Committee. Of the 10 companies whose employees gave the most money to Romney Victory, nine were Wall Street firms, according to a computer-assisted analysis by Bloomberg of Federal Election Commission data.
Goldman’s giving showcases the change in loyalties. The company’s employees gave $6.1 million in 2008, 75 percent to Democrats. The amount topped the 25 companies; the percentage trailed only Time Warner. This year, Goldman employees have given $4.9 million, also more than anyone else, with 70 percent going to Republicans. David Wells, a Goldman Sachs spokesman, declined to comment.
Romney “is one of their own, and Obama has been attacking the way they make money,” said Linda Fowler, a professor of government at Dartmouth College in Hanover, New Hampshire. “Throw in legislation to rein in the large banks, and it’s pretty clear that they would switch.”
Four years ago, 15 of the 25 companies, including all six financial institutions, saw a majority of their employees backing Democrats, especially Obama, during the 2008 elections. Then-UBS Americas Chairman Robert Wolf raised more than $500,000 for the Democratic nominee.
Heart v. Head
“Wall Street fell in love with Obama in 2008,” said Stephen Hess, a professor of media and public affairs at George Washington University in Washington. “It had more to do with the heart than the head. And love affairs, at least of the political variety, usually end in disappointment or disillusion. So Wall Street has now returned to its own reality — as well as one of its own.”
The top company source of funding for Obama in 2008 was Goldman, where employees gave him more than $1 million in campaign cash. JPMorgan and Citigroup employees were also in Obama’s top 10.
This time, Goldman employees are the biggest source of donations to Romney, giving $636,080. In fact, employees of financial firms account for eight of Romney’s top 10 sources of campaign cash. None are among Obama’s top 10 givers.
“Many of the biggest corporations are angry at the Obama administration and the Democrats for their new regulatory policies,” said Craig Holman, a lobbyist for the Washington- based advocacy group Public Citizen, which supported those new laws. “This is ideological giving. These companies are investing heavily against Obama in 2012.”
The Goldman shift could be attributed to both the company’s opposition to the new banking law and its relationship with Romney, said Kersh.
“As Bain CEO, Romney hired Goldman bankers to underwrite Bain-managed IPOs, and Goldman investment managers supervise tens of millions of dollars of Romney’s personal wealth,” he said. “That type of close personal link to a particular industry or company has aided presidential candidates in the past and is paying off handsomely for Romney now.”
Statistics: Posted by yoda — Sun Aug 12, 2012 8:56 am
View full post on opinions.caduceusx.com
Gold for Iran oil? Govt declines any comment
A reputed Israeli intelligence website has claimed that India is opting for gold to repay crude oil supplies from Iran.The author has posted comments on this articleTNN | Jan 26, 2012, 02.28AM ISTNEW DELHI: A reputed Israeli intelligence website has claimed that India is opting for gold to repay crude oil supplies from Iran. Given the US and EU embargo on Iran, payment in hard currency, such as the US dollar or euro, is very difficult; hence, this barter.
The website, Debkafile, said the transaction will be routed through UCO Bank, the Kolkata-based public sector lender. However, when contacted, a senior bank executive said he had not heard of any plans to settle oil payments in gold. A senior finance ministry official said he did not wish to comment on the issue. When reached over the phone, economic affairs secretary R Gopalan, who has been leading the talks with Iran, said he was busy in a meeting and did not respond to a text message.
The report on the Israeli website coincides with the visit of an Indian official delegation to Tehran last week to find ways to continue the bilateral trade between Iran and India in spite of the sanctions imposed for forcing Iran to forsake its alleged plans for developing nuclear weapons.
While the use of gold as currency may help India get around the proposed freeze on Iranian central bank’s assets and the oil embargo that the EU foreign ministers have agreed to impose on Monday, any outflow of sovereign gold will not go undetected, bringing in the political consequences of flouting the West-imposed embargo.
Keeping the Iran crude oil tap running is crucial for India which depends on imports to meet around 80% of its oil requirements. Iranian crude accounts for a 12% share in India’s total oil imports and any threat to this would have grave implications for the Indian economy.
On Wednesday, petroleum minister S Jaipal Reddy made clear India’s stance on the sanctions and said that New Delhi would continue to explore "options" for paying oil from Iran. He added that India would abide only by UN sanctions, and not those imposed by a group of countries.
Officials said another option that the government was looking at was to pay with the Indian currency (India has had a rupee-rouble agreement with Russia). According to the mechanism discussed with Iran, the exports and imports will be netted out and India will pay in rupees through Uco Bank. India is a net importer due to crude from Iran.
India and Iran have been negotiating a payment settlement mechanism for over a year but a stable tool is yet to emerge. Under the last deal, payments by Indian oil firms were routed through Union Bank of India which transferred funds to a Turkish bank.
Statistics: Posted by DIGGER DAN — Thu Jan 26, 2012 2:00 am
View full post on opinions.caduceusx.com