Economics

Discussion in 'Money & Finances' started by Harry Havens, Jun 29, 2017.

  1. Harry Havens

    Harry Havens Well-Known Member
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    Sorry for the delay in response.

    I presume you are referring to the ECB's -0.4% interest on excess reserves (IOER), it charges the banks... just to keep liquidity moving. If my memory serves, the ECB instituted this policy to keep money flowing between banks and into the EC economy. The upshot being that large bank depositors would face penalties on their saved money. This in turned (imo) forced money into global stock markets, U.S. Treasuries, etc. Is that presumption correct?

    The answer would be no to US bank depositors paying a penalty, as the FED pays 1.95% interest on both required reserves (IORR) and IOER. (Just bumped it up 0.2% as of today). However, none of that seems to be making it to savers, such as myself.

    By law, the FED cannot charge a negative interest rate and were prohibited paying any interest on IOER or IORR, prior to October 1st, 2008. The current result is still a very large excess in reserves. Something that really did not exist prior to 2008. The U.S. originally passed the aforementioned law in 2006, to be more like the ECB, which was originally not to take place until 2011.

    In a nutshell, the low interest rates still in place in the U.S. can continue, as the ECB avoided talking about IOER rates, which remain negative. In my opinion, not all is well within the EU banking sector and there are rumors of an increasing abundance of zombie companies. The U.S. has several as well, but would not harm the overall economy, such as would happen in the EU.

    Japan also has negative interest rates, which has flowed money into the same paths.

    Until the ECB lifts that negative interest policy, I am not too terribly worried. Frankly, I am not sure they could in the near term, without disastrous results within the EU.
     
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  2. Thomas Stearn

    Thomas Stearn Active Member
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    Thanks for your explanation.
    Is that presumption correct?
    Exactly right as regards large bank depositors - but I actually had private clients/savers in mind who are having to pay penalty (or negative nominal) interest starting from a certain amount of their savings. And I also meant negative real interest because all savers in Germany and other European countries have been suffering from interest below the inflation rate (the spread now being almost 2% ) for some years in addition which is de facto also negative interest and effectively a cold expropriation of savers. You are right, no light at the end of the tunnel for the next years(s) although the ECB is beginning to curb its easy-money policy.

    In my opinion, not all is well within the EU banking sector and there are rumors of an increasing abundance of zombie companies.
    This may be true and this fact is one of the reasons why banks need to have a higher rate of equity than prior to 2008. Thank goodness, some people say, because it's a reaction to the financial crisis of 2008 when the state had to bail out banks with taxpayers' money which mustn't happen again. It may be insufficient but far better than leaving the situation as it was before 2008. This crisis has shown very clearly that in the banking sector at least Smith's invisible hand was indeed not to be seen.
     
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  3. Harry Havens

    Harry Havens Well-Known Member
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    That would be true to a large extent in the U.S. as well. There are a few banks with interest on CDs above any of the current inflation gauges, but most are below that level. As you said, as much as 2%.

    I could be wrong, but I seem to recall an era when banks advertised how benevolent they could be if only you entrusted your savings with them. Even to the point of giving away toasters, advertising a myriad of ways you could be paid interest, etc. Although it was generally below the inflation rate, with the exception of CD's etc. Now it seems to be all about how they can help fulfill your dreams... if only you could stop by to see if you are qualified for a loan.
     
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  4. Harry Havens

    Harry Havens Well-Known Member
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    The 3rd estimate of 1st Quarter GDP is out and slid a bit. Current dollar GDP increased 4.73% since same period last year. The national debt increased 7.37%. In difficult times, such as a recession, debt levels rising faster than nominal or current dollar GDP is indicative of government stimulus. These aren't difficult times, so the reverse should be true.

    There is some modest hope the 2nd quarter will do much better, yet the national debt will likely have risen 8%+ yoy. The expectation of inflation running a bit above 3% for that same period and real growth estimates at 4.5% from the most optimistic. That is still 0.5% shy of holding serve.

    The trade imbalance is shaving 3.2% off growth, but has been so for quite awhile, although the total dollar impact has jumped 8.8% from year ago levels.

    Federal spending must be reduced.
    The trade deficit must be reduced.

    Each of which would create havoc while being corrected, so I have no illusion that Americans will be receptive of any meaningful actions to correct our slide into oblivion.
     
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  5. Frank Sanoica

    Frank Sanoica Veteran Member
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    In our present situation here in America, the traditionally accepted "reasonable fees" concept generally adhered-to by most financial institutions has been bastardaized to include fees of unbelievable origin. For example, "lack of use" fee. They gladly take your money, then charge you for not using their services, which include fees for use, for "non-use".

    Frank
     
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  6. Harry Havens

    Harry Havens Well-Known Member
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    Consider this a complaint post...

    Yesterday's release of jobs created was in line with expectations and even a bit of above, yet the unemployment rate edged up. Amazingly... it was due to more people entering the work force, which also is the reason given for "limited real wage growth". Real wage growth being that amount above inflation.

    This is where I start my complaint. For years, the labor force participation rate has been falling. It was rightly attributed to more and more teens delaying work for education. That was all reasonable and could be supported by data. After the great recession, it started falling rapidly. The reason being given was boomers are starting to retire. No government agency data truly supported this theory, but it became widely accepted. Generally speaking those agencies went along with the talking point by saying it could possibly be due to boomer retirements or other such language.

    The first graph is the labor force participation rate (Thanks to the BLS)...
    upload_2018-7-7_11-47-56.png
    Apparently all the boomers have now retired!! But wait...
    upload_2018-7-7_11-49-35.png

    It is just getting started and will last awhile. If every boomer had retired at their full benefit rate, the number would be almost 26 million in the past 8 years. There is another 50+ million to go over the next 12 years. While the root cause of the LFP falling was attributed by politicians as being due to boomers and the current trend is edging up... it will begin falling and it will be due to boomer retirements, or will it?

    One final note... the term boomers may not mean what you think as well. The war was over and millions of soldiers returned home, started families, etc.

    Maybe and maybe not...

    Median age of American marriages 1890 ~2010.
    upload_2018-7-7_12-11-16.png

    Okay, got that off my chest.:)
     
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  7. Harry Havens

    Harry Havens Well-Known Member
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    The June CPI report.
    In a nutshell.
    • The overall increase (unadjusted) the past 12 months is 2.9%.
    • My fabricated price index is 2.29% yoy.
    • For COLA observers, although we are not in the third quarter phase, is running 3.1% yoy.
    • For FED watchers the 0.2% core (2.3% yoy) is not likely to generate any changes in rates as it is near target.
     
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  8. Harry Havens

    Harry Havens Well-Known Member
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    I generally ignore most of Paul Krugman's writings as he has a penchant for reversing course on any number of items. As Churchill said about Keynes, if you put two economists in a room and pose a question, you will likely get two differing answers. If Keynes is one of duo... then at least 3 differing opinions. Krugman has managed to reverse his opinions on many of his pre-nobel conclusions. Quite the Keynesian, imo.

    This from one of his writings this week.
    Clearly the British public is nowhere near as smart as Mr. Krugman and he happily tells everyone. I don't think Brexit was about trade, but rather regaining sovereignty. The trade crap came later. Maybe it should have been discussed and maybe it was. But Trump's election was guaranteed to crash the stock market and send the economy into a tailspin according to some (Krugman) just as the Brexit vote has completely crushed the UK economy as he also predicted. (note: it is a rarity that an economist has accurately predicted a recession. Look no further than the NBER and Krugman leading up to the great recession. In December, 2007, the consensus was no disruptions to the economy. In 2009, these same guys pegged 12-2007 as the official start.)

    What set me on this bash-fest was watching SkyNewsLive. They have a nightly show called the press review. I find it generally entertaining, fresh, edgy and sometimes downright funny. Nothing like U.S. news shows. It is rare for one of the participants to be ill informed and nearly all have been quite combative to some degree about their positions, but with a certain sense of humor.

    Tonight they had a "guest" on that reminded me of Krugman. Smug, superior, pretentious, et al.. just like Krugman. She wouldn't relent, even after a couple of polite remarks. So yes, Trump is embarassing, but so is Krugman and this lady. Oddly they all three are from NY.

    NY stereotype?
     
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  9. Don Alaska

    Don Alaska Very Well-Known Member
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    The New York stereotype does have some validity, as New Yorkers (especially successful ones) tend to be a bit brash in their statements and abrupt. That is part of Trump's problem with the media and other political figures--he says what he means in an abrupt manner without a lot of thinking about the consequences of misinterpretation, e.g., "You're fired!"

    I, too, think that Brexit was more about sovereignty that economics, although I think many of the old folks voted for it because they saw the "Olde England" fading away and they could still remember what the UK was like before it joined the EU.
     
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  10. Harry Havens

    Harry Havens Well-Known Member
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    The BEA's 1st take of 2nd quarter's GDP was released today... to much fanfare. I won't debate whether it is sustainable, the price of soybeans, etc. I do have an issue with Federal debt, as it relates to the GDP. The federal debt is outpacing the rate of nominal GDP growth.
    upload_2018-7-27_18-56-19.png

    While the chart seems to indicate a softening of the upward trend, understand it is a product of abnormally low interest rates on the debt service. Rates have shot up in the past year, although functioning in somewhat of a narrow range at this point. It would not be unrealistice to expect some moderate upward movement in rates, which would increase the debt service. With congress spending like drunken sailors, the national debt will accelerate without outside influences. Factor in the potential the ECB moving excess reserves from negative to '0" or above and the U.S. treasury rates will quickly jump up, imo. Not sure the ECB can make such a move as it would create demand for the Euro and drive up the EURO/USD exchange rates. Big exporters in the EU, would not take kindly to such a move.

    upload_2018-7-27_19-6-16.png

    In a more fiscally responsible nation, where the public debt rises at the same rate as the GDP, we would have spent $351B less this past year. To put that into some sort of perspective... We complain about the NATO partners not making their 2% defense to GDP spending. If we truly believe that 2% is an effective number for the NATO countries, why couldn't we do the same... and save about $350B each year? Just saying.
     
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  11. Thomas Stearn

    Thomas Stearn Active Member
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    Maybe you could considering all the efforts the US made in the past and up until the present. It's really for the other NATO members like Germany and may be some others to make an effort now. It's hard to believe that, as for Germany, only 4 out of 82/128 Eurofighter jet fighters are fit for combat, that there are no helicopters fit to fly and pilots having to use civil helis of automobile associations for training. No sub is being ready for operation. That is a scandal. Something has to be done and is being done but it'll take some time...
     
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  12. Harry Havens

    Harry Havens Well-Known Member
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    My issue is with the U.S. debt and the outlook going forward. In the long range, we simply cannot afford many of these expenditures. Now is the time to take a very hard look at our budget and defense spending is just one facet that needs to be looked into. What NATO countries spend or don't spend is not much of an issue. An arbitrary number of 2% was deemed adequate for NATO countries, which is largely EU countries. If that is deemed adequate for EU defense, then it should also be adequate for U.S. defense. When making that statement, I am not just focusing on NATO, but numerous other alliances as well.

    It is often stated that the U.S. debt should not be a large concern, as the debt is in dollars and the U.S. controls its own currency. That is a true statement but it would involve a devaluation of that currency. Am I to believe that foreign governments with massive U.S. debt holdings would easily or peacefully accept such a devaluation? Would anyone want to buy U.S. debt after such a move?

    The 2nd oft repeated statement about U.S. debt is it was an enormous 120% of GDP at one point and it was reduced. Yes, at the end of WWII it was, but the national budget was cut a whopping 2/3. In 2009 dollars, the budget did not return to WWII levels until 1975, yet somehow we survived as a nation. Just sayin...
     
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  13. Harry Havens

    Harry Havens Well-Known Member
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    The Treasury department announced their estimates for the 3rd quarter borrowing and it stands at $329B anticipated. I have no doubt they (or is it we) will borrow that amount as nearly every estimate has been low for quite some time. Just like I have no doubt they are low-balling the 4th quarter estimate at $440B.

    This is the results of the past 5 years results, with dates being the ending point of the year. Example 2013Q1, would include 2012Q2,Q3,Q4, etc. That rapid ascent is the product of the known, as well as using the treasury's estimates for as described in the article. In the fall of 2008, there was a similar ascent, but we can understand the situation, with reduced revenues... with the onset of the recession, nearly doubling until hitting peak in 2009, Q2.

    upload_2018-7-30_19-44-39.png
     
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  14. Harry Havens

    Harry Havens Well-Known Member
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    Russia ridding itself of U.S Treasuries from April through May seems to be in the news. Okay, they sold about $80B and currently have around $16B. In the grand scheme of things, the near $100B represented a mere 1.6% of foreign held debt and now stands at about 0.25%. But what was Russia doing by having such a dramatic sell off?

    It certainly didn't have the anticipated impact on the USD/RUB exchange rate. While this might be good for th Russian oil barons, maybe not so much for the common folk. In any case, not what I would have expected from a dumping of U.S. Treasuries.
    upload_2018-7-31_18-35-25.png

    The official line was Russian buying of gold, but the spot market did not detect it. In fact gold continues its merry slide downward, which has the gold bugs once again forecasting doom and gloom at nearly every turn and the need to buy gold, or more importantly... their gold.
    upload_2018-7-31_18-40-50.png

    Maybe Russia anticipated bond prices falling rapidly and decided to get out while the getting is somewhat good. I'm not buying into any of the offered scenarios by their government, our government or pundits at large. I guess we'll know in due time.

    Any ideas?
     
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  15. Don Alaska

    Don Alaska Very Well-Known Member
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    I might guess a tantrum on the part of the Russia government to try to start a larger sell-off by larger bond holders, or perhaps they wanted to liquidate the bonds while the price was up. As the interest rate rises, the market value of the bonds will drop, right. That was what you mentioned in your post. I am only a "guesser" when it comes to economics and market behavior, though.
     
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  16. Harry Havens

    Harry Havens Well-Known Member
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    I am as well. Considering I was 0-2 on my presumptions... a bad guesser at that!
     
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  17. Frank Sanoica

    Frank Sanoica Veteran Member
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    @Harry Havens Not clear to me, what the abscissa increments above indicate. If months, 1360 to 1220 is inconsequential. If daily, disastrous. If hourly, bye-bye goldbirds!
    Frank
     
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  18. Harry Havens

    Harry Havens Well-Known Member
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    The two blue vertical lines indicate 4-10-18, with the far right being near by (current). It is daily, although not disastrous. The end point is about midway of the range over the past 5 years, bouncing between 1050 and 1350. (It peaked over 1,900 a mere 7 years ago). Generally speaking... the gold bugs need people to prop up the price, imo. You rarely hear from them when it is pushing towards the 1,300 mark.

    The issue in this case being Russia moving out of U.S. treasuries and where the money went. Russia claims they are restructuring their portfolio and moving towards more gold, which they have been, but their own reports indicate the dollar value of the gold has remained stable. Even with that, the amount purchased does not match the treasuries being sold.

    I would put forth the idea Russia simply has gone with the redemptions route without buying any replacement treasuries. They were not very active in the U.S. Treasury market until 2007 and reached $100B+ by end of 2008. The treasury had been delaying redemptions, which kept matured bonds at lower rates until this past December. Russia ramped up their exit a couple of months thereafter. Of course, the Russians may have been concerned the U.S. would refuse redemptions as part of some sanctions.

    All plausible, but where did the money go? The treasuries are redeemed in dollars. To convert to rubles, the ruble would have gained strength, not fallen as the law of supply and demand would indicate. To buy that much gold, that same law would indicate the price of gold moving up. Are the Russian monetizing into actual dollar currency? That scenario might fit the gold charts and the rouble exchange rates.
     
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  19. Harry Havens

    Harry Havens Well-Known Member
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    The CPI was released this morning. The CPI-U is the headline number.
    My personal tracking stands at 2.15% over the same period.

    The all important C.O.L.A. (Note: COLA is based on FY 4Q average compared to previous FY of same period. August and September remain to be factored).

    Historically, the CPI-W has been less than CPI-U, prompting complaints about using a different method. Be careful what you ask for, as alternative measures are sold as more fair to the consumers and increases longevity of the OAS trust fund (You simply can't achieve that outcome without increasing the OAS portion of OAS-DI tax). Typically, during these discussions, the Chained Consumer Price Index gets bandied about....

     
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  20. Don Alaska

    Don Alaska Very Well-Known Member
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    @Harry Havens, it was rumored that the various CPI numbers were "doctored down" during the Obama Administration to reduce the increases in Federal wages and entitlements. Since you track it on your own, did you ever see evidence of such tampering?
     
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  21. Harry Havens

    Harry Havens Well-Known Member
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    Short answer would be no. My basket performance has mirrored the BLS basket performance over the years and my tracking is not quite the detail of the BLS. It has had adjustments over the years, just as my spending habits have changed. Also, the percent assigned to each item is established in December for the following year. This can result in the following year having the "substitution" effect on the CPI. This would then be adjusted for the following year. The most common example of substitution would be the when the best cut of a steak jumps in price and the consumer opts for hamburger.

    The problem with the substitution argument as being somehow a cover for "real" inflation ... we would have stopped eating altogether at some point. I haven't really seen any evidence to support that idea.

    Obviously the "basket" does not match 1982 items, but iPhones weren't around back then, just as some things from back then aren't used much these days... "Princess" phones!

    Here is an archive of CPI report dating back to January, 1994.

    As for John Williams and shadowstats... I have tracked my inflation for over 25 years and would seriously question his methodology, if one actually exists. https://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/
     
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  22. Don Alaska

    Don Alaska Very Well-Known Member
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    Thanks for clearing that up for me.
     
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