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What We Read Today 06 June 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.

  • Fixing Benchmarks (Paul Amery) Even Central banks (especially in Asia) are in the "fixing" business.
It's really no exaggeration to call this the most spectacular and grimly hilarious irony of the current era of U.S trade and globalization policy: Wal-Mart is running into big-time trouble because it can't cut even its rock-bottom prices low enough to make them affordable for its low-income-dominated customer base.
  • Vermont Passes Call for Convention to Overturn Citizens United! (Rootstrikers) Hat tip to Naked Capitalism. Vermont becomes the first state to call for a constitutional amendment that would overturn the Supreme Court decision on Citizens United. This organization is calling for petition signers to support efforts in other states. Presently they state California, Hawaii, Massachusetts, New Jersey, New Mexico, Rhode Island, Connecticut, Maryland, Colorado, Oregon and Montana also have efforts underway to call for a constitutional convention. For more details see Vermont Just Took a Radical Step To Get Money Out of Politics (Tom McKay, PolicyMic). McKay points out that no constitutional convention has ever been convened by public petition. Previous amendments were passed by super majorities in the House and Senate and then ratified by the states.

Today there are 12 articles discussed 'behind the wall'.

There are six articles discussing the ECB action and other Eurozone economic news.

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  • The World Had Never Seen This Chart From A Major Monetary Authority Before Today (Myles Udland, Business Insider) The Starship Enterprise of central banks will start charging banks for holding their reserve deposits. So far the media reports Econintersect has seen do not discuss the relationships between reserves and and credit in the ECB system. If it is the same as the U.S. system then required reserves are increased when additional credit is issued and reduced when credit is extinguished. If that is true in Europe then why won't charging for reserves reduce bank lending? See also the next article.

ecb-negative-rate

  • What does the ECB decision mean for me? (YouTube) Mario Draghi answers a reporter's question about how the announcement will effect savers with accounts in member banks. Draghi says if your interest on savings go down that is the bank's decision and nothing to do with us. Are you smiling yet? Or is that a grimace?

  • The nagging fear that QE itself may be causing deflation (Ambrose Evans-Pritchard, The Telegraph) Econintersect will paraphrase and briefly summarize (possibly too briefly) what Evans-Pritchard says. We feel his bottom line is that QE, aimed at increasing money in the economy, is misdirected because it is increasing money in the financial sector only. He concludes, quoting Napoleon: "If you want to take Vienna, then take Vienna." We think he might have added something like "taking Innsbruck and waiting for Vienna to come for a skiing holiday is a flawed strategy". Along the way during our reading we got an image of helicopter drops on Main Street being the implied solution rather than on Wall Street. But Evans-Pritchard never actually says that. Perhaps he should have been thinking about napoleon and Vienna at that point as well.
  • A look at today's ECB action - without the hype (Walter Kurtz, Sober Look) Two of the important points in this excellent summary: (1) The negative interest rates on reserve deposits are two years too late; Excess reserves are a fraction of what they used to be. See first graph below. (2) A uniform monetary policy across the diverse fiscal realms of the eurozone results in money way too loose for Germany and way too tight for the rest of the zone. See second graph below. An example mentioned in the article is a German housing bubble with prices up 25% in less than six years. Over the same time period prices are down 40% in Spain. See next article.

euro-area-excess-reserves-sober-2014-june-05

eurozone-germany-taylor-rule-rates-sober-2014-jun-05

  • Spain Property Market Outlook 2014: Home Price May Fall By Another 15% (Moran Zhang, International Business Times) Down by almost 40% from 2008 the Spanish housing market may reach 50% down before things stabilize. See first graph below. At the same time German house prices have risen about 25%. See second graph below from Sober Look (previous article above).
  • spain-housing-price-index-IBT-moran-zhang-2014-feb

german-house-prices-1996-2014-sober-2014-jun-05

  • In a First, Test of DNA Finds Root of Illness (Carl Zimmer, The New York Times) Does this story point the way to a future where millions of cases will be diagnosed and treated for a few hundred dollars? Where today many go undiagnosed and those that are treated, sometimes incorrectly, consume thousands of dollars or more? There will powerful interests that will fiight this for selfish economic reasons. But remember that buggy whip makers eventually had to find something else to do and so will superfluous medical practices that can be replaced with less costly, more effective alternatives.
  • Dow - Inflation Adjusted (Chart of the Day) The Dow has gained 45% over the past 14 years in nominal terms but is currently only 3.2% above it's 1999 high, adjusted for inflation. Are you Dow-holders happy with your 0.22% compounded annual return on principal and your dividends collected (less than 2% a year, on average)? A 15-year to maturity treasury bought in the secondary market 15 years ago would be maturing this year and would have returned 147% nominally and 60% adjusted for inflation, or 3.2%a year real return on average. Taxes would have partially leveled the difference. For someone in the top tax bracket, stocks would have returned an average of about 1.6% a year after federal taxes (without recognizing deferral of capital gains if no stocks were ever sold) and the bond holder would have received an average of about 2.1% after all income taxes (states do not levy income tax on Treasury securities' interest). But just think how bored the bond holder would have been - no stock market roller coaster ride.

dow-history-inflation-adjusted

platinum-advisoranalyst-2014-jun-02


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