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What We Read Today 16 March 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • The Most Dishonest Number in the World: LIBOR (William K. Black, New Economic Perspectives) William K. Black contributes to Global Economic Intersection. Don't miss this one. It is direct to the point and much shorter than many of Bill's articles.

  • Shifting foundations threaten to undermine China's cities (Harold Thinault, The Guardian) Hat tip to Sig Silber. Fifty fast growing cities in China are suffering land subsidence due to construction on unstable soils (rather than bedrock) and excessive extraction of groundwater. Shanghai has sunk 2.6 meters (8.4 feet) over the past 93 years. Shanghai has recently started injecting 60,000 tonnes of water a year into its aquifers in an attempt to slow, arrest or reverse the subsidence. Smaller subsidence is reported in some non-urban areas.

There are 13 articles discussed 'behind the wall' today, including one discussion of the dramatic increase in Fed reverse repo actions which is actually a short article.

Stuber's logic may be confusing. He says the average per day for reverse repos by the Fed is $80.577 billion and he gives that exact same amount as the amount of liquidity withdrawn for the entire month. Since the Fed is selling and then rebuying the securities in a reverse repo, Econintersect would argue that only the difference between sell and higher buy is actually added to the system and nothing is withdrawn even for a full banking day.

(Note: There are actually 49 repos in Stuber's table so his average should have been slightly higher, $82.22 billion.)

There is an "overnight" (or weekend) liquidity removal for the financial system agents buying the securities from the Fed's SOMA (System Open Market Account, dealing in assets on the Fed's balance sheet) with a repo agreement to sell them back the next day (or after weekend) to the Fed. The Fed is actually creating reduced overnight liquidity by the total amount of reverse repos it assumes at any specific time and is adding a permanent level of liquidity equal to the sell-buy back spread paid to the same financial institutions. The financial institutions are buying a very small higher level of long-term liquidity (and financial system balance sheet asset increase) in return for a very much larger short-term (overnight) reduction in liquidity.

The $4.029 trillion total is merely a cumulative currency "float" for the transactions, with a current "float" never exceeding $130.74 billion at any time (and averaging about $57 billion per day for the 71 days starting 02 January 2014 and ending 13 March 2014). Thus the amount of long-term liquidity added is the buy-sell differential per day (0.03% from the table provided by Stuber), which totals $57 billion x 71 days x 0.0003 = $1.21 billion.

(Note: This rate per day is probably on the low side so the liquidity added may well be up to as much as $2 billion or slightly more. Some of the per day rates in this time period were less than 0.02% per day, but others were found as high as 0.05% per day.)

This in no way sterilizes (counteracts) the $150+/- billion QE liquidity injection over the same 2+ months. The net effect is a small increase in total financial system liquidity over the total period and a small improvement in positive cash flows for financial system participants. There are overnight reductions in liquidity averaging $82 billion counting only banking days or $57 billion counting calendar days. These are all reversed the next banking day.

The Fed claims the reverse repo operations are a tool to improve the ability to "manage short-term interest rates".

Stuber claims the actions by the Fed are in a desperate attempt to stem a decline in the value of the dollar and shows the following chart:


  • The Geographical Dispersion of U.S. Inflation ( Menzie Chin, Econbrowser) Menzie Chinn contributes to Global Economic Intersection. From 2009 through 32011 there was dramatic variation among the four U.S. regions in core inflation but the dispersion has been reduced since.


  • St Helena to receive Cutting Edge Aircraft System (St. Helena Wirebird) St Helena is to receive a cutting edge aircraft landing system before any UK airport. The system is ideally designed to suit St Helena's varied terrain and remote location; 700 miles away from the nearest possible emergency diversion, and 1,100 miles away from the mainland. This is where Napoleon Bonaparte died. Econintersect publisher has visited there and says the island has no ports, is accessible only by air.
  • After Big Bet, Hedge Fund Pulls the Levers of Power (Michael S. Schmidt, Eric Lipton and Alexandra Stevenson, The New York Times) Short selling is supposed to expose weak companies through market forces, but is lobbying to back your short positions a market force?
  • Dow Attempting to Break Resistance Dating Back to 1987! (Chis Kimble, Advisor Perspectives Chris Kimble has contributed to Global Economic Intersection. Chris says that hitting up against multiple long-term resistance lines, "risk management is very important at this price point!"


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