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What We Read Today 24 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.

  • Russia-Ukraine Crisis Threatens Europe Economy: Cutting Research (Simon Kennedy, Bloomberg) Exports demand reduction for the Eurozone and other EU countries would cause economic problems in the west, as would negative feedback from constricted financial relations. In addition, sanctions could disrupt 25% of Germany's energy supplies and 100% for Finland (which come from Russia). See also next article.
  • Russia Staring at Recession on Sanctions (Andra Timu, Henry Meyer and Olga Tanas, Bloomberg) Russia will suffer more than Europe according to these authors. They quote sources projecting two quarters of recession for Russia. See also preceeding article.
  • GIANT FLESH-EATING DEVIL CHICKENS roamed North Dakota (Lewis Page, The Register) Some 66 million years ago what are now the plains of North America were "overrun by terrifying swarms of enormous flesh-eating demon chickens". The creature stood about 10 feet tall and researchers have nicknamed it the "chicken from hell".

Today we discuss 13 additional articles 'behind the wall'.

Click on graphic for much larger image at Advisor Perspectives

  • We Cannot Get Away from Gold or Silver (Hugo Salinas Price, Moneda de Plata Para Mexico) Hat tip to Michael Welyki, Newsana. First, who is Hugo Salinas Price? He is Pennsylvania born head of Mexican Civic Association Pro Silver, A.C. Price made his fortune building the Mexican retailing giant Grupo Elektra from a small electronics assembly workshop. His son, Ricardo Salinas Pleigo, current head of Elektra, is the second richest man in Mexico ($17.4 billion in 2012). Second, for those that don't know Spanish the Econintersect translation of the website name is "Money of Silver Coin for Mexico".

Price says:

The fact is that all currencies which we unthinkingly use incorporate a historic element. The digitizalization of currencies does not eliminate the historic element. Digital currencies DERIVE from paper currencies, and paper currencies, ALL of them, derive from original monetary units which were various quantities of gold or silver.

True, except for the word "original". Price is neglecting the fact (Graeber, 2011) that the use of metals for money came after the use of accounts of credit as the means of exchange, according to archeological records. The IOU is the original form of money and so credit predates precious metals or any other commodity based exchange system in an organized society. The use of gold and silver came into use because there were no means of generalizing accounts of credit outside of local communities and a means was needed to enable exchanges over greater distances.

We need to face the challenge of understanding how to operate monetary systems but using a flawed view of human history will not help.

  • The Blessing of a Declining Stock Price (Vitaliy Katsenelson, Contrarian Edge) This article covers what questions you should ask the next time you buy a stock and then watch it drop in price. The questions after you buy should be a lot like the questions you asked before the purchase.
  • Markets dismiss the risk of higher rates inhibiting growth (Walter Kurtz, Sober Look) The Dow Jones Transportation Index has been leading the DJIA higher, usually a sign of improving industrial production. This has all happened with a spike in interest rates of a seldom-seen magnitude. So the market doesn't see higher rates slowing the economy?



  • G.M.ís Bankruptcy Drawn Into Defect Inquiry (Danielle Ivory and Matt Apuzzo, The New York Times) There is a federal investigation underway to look into the possibility that G.M. new about an ignition switch defect when it filed for bankruptcy in 2009. The defect led to future expensive recall and replacement costs and could lead to charges of fraud if deliberate concealment can be proved. Why is this happening to G.M.? Well, for one reason they are not a bank.
  • China tightens again (Houses and Holes, Macro Business) Last week the PBoC (People's Bank of China) removed 50 billion yuan using reverse repo operations. On the other hand most short-term interest rates were little changed, except for the overnight rate fell by 50 bps (hardly a tightening). Looking at the charts of recent interest rates one wonders if the PBoC uses a yo-yo as an interest rate setting tool.

Click on any chart for larger images of all three.

"There have been a number of positive credit developments since S&P downgraded the U.S. I'm not sure the ratings companies expected the degree of contraction in the annual deficit that we've seen."


  • Fed opens its doors wider to repo trading (Tracy Alloway and Michael MacKenzie, Financial Times) This article focuses on the reduction of business for primary dealers (banks authorized to trade treasury securities for the Fed). Although reverse repo actions by the Fed ultimately do add money to the banks accepting repo positions, the FT article maintains that profits are lost because they are displaced from taking reverse repo positions now taken by the Fed. Presumably they are losing more than are derived by taking the marginal daily repos gains. And, of course, any member bank may enter repo/reverse repo positions with the Fed, not just the nineteen primary dealers. Thus the primary dealers are are sharing the market with their former customers. Trading in MBS (mortgage backed securities), a common repo vehicle, has declined by 40% as the Fed has scaled up their reverse repo activity.

Last week another WWRT discussion covered the question about whether the Fed's reverse repos were effectively "sanitizing" (offsetting) current QE purchases. Since then Econintersect has not seen further publications on that thesis. The next article discussion is copied from last week.

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" (it is sometimes over 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 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:


Patrimonial capitalism-and the landed or urban gentry living off of inherited wealth-was dealt a mortal blow by the Great Depression and World Wars. But it's making a comeback, and the only way to stop it might be a worldwide tax on capital.


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