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What We Read Today 09 July 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.

  • Citi to pay $7bn to resolve US probe (Kara Scannell, Financial Times) Last week Barclays agreed to an $8 billion settlement for money laundering in violation of international sanctions, this week sees another $7 billion settlement for MBS (mortgage backed securities fraud. Remember when a billion dollars was real money? Last year JPMorgan settled MBS fraud charges fro $13 billion. The biggest fish in the MBS swim, Bank of America, has yet to settle. The relatively smaller player, Citi Group settling for much more than had been expected coud push the anti up for B of A, to something well above JPMorgan's $13 billion.

  • Climate sceptics are losing their grip (Martin Wolf, Financial Times) Wolf is very pessimistic about the prospects for averting major problems. He says: "Our current path is likely to cause irreversible and costly damage."


There are 8 articles discussed today 'behind the wall'.

The first two articles discuss the effects of QE on the economy, followed by a 'mini-article' by Econintersect that suggests the debate of the two articles is missing a larger point.

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  • Welcome to the Everything Boom, or Maybe the Everything Bubble (Neil Irwin, The New York Times) Asset prices are high by historical standards almost everywhere. That implies future returns for investors will be lower than they have been. Irwin says this is because money is piling into savings and not being invested at a time when central banks are "on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis". Read also next article.


  • The Growing Bubble–In Everything (Joseph Salerno, Hat tips to Mark Thornton and John O'Donnell. Joseph Salerno has contributed to GEI, most recently Hayek and the Intellectuals. Salerno says in this discussion of Irwin's Op Ed (preceding article) that blame is mistakenly placed at the doorstep of "the market":
Bernanke stands ready to blame market failure-this time, the failure to generate sufficient investment opportunities-for the devastating financial crisis that looms just ahead and whose actual cause is the Fed's policy of recklessly expanding money and credit.

Econintersect suggests that both commentators (two preceding articles) may be slightly off-target regarding failure. Irwin ascribes failure to a market that prefers saving over consumption and investment. Salerno ascribes failure to a Fed that has aggressively expanded the money supply. Both are correct in their observations. But neither considered what, if different, would modify their positions. Econintersect suggests that less money creation might have indeed been a good thing. And also the "preference of the market for savings" may have been a function of how Fed directed money created.

The Fed has directly created an additional $3.6 trillion via QE balance sheet expansion over the past six years.


That is more $2,000 per capita per year for five years. If that money had been injected into the real economy instead of the financial system we would more likely be dealing with inflation rather than the disinflation of the recent past. A much smaller monetary action might well have done the trick (and avoided inflation). (Ignore the fact that fiscal policy is the tool normally used to inject money into the real economy - fiscal policy has been on vacation).

If, instead of creating $3.6 trillion in the financial system, this could have been injected into the real economy (over $2,000 per capita per year for five years). But just a fraction of the $3.6 trillion might have been sufficient. With less than 30% as much, even without any multiplier greater than 1 in any given year, the amount of money in the real economy would have been up to $600 billion larger per year. If Main Street had elected to save 1/2 (pay down debt, for example) then GDP would have been boosted by $300 billion per year. If 1/2 of each year's increase in economic activity carried forward to the following year (money remained in circulation buying goods and services) we calculate that GDP nominal growth would have been greater every year as follows: 2009: 2.2% (vs. 0.12%); 2010: 5.5% (vs. 4.58%); 2011: 4.2% (vs. 3.85%); 2012: 3.9% (vs. 3.80%). The nominal GDP growth in 2013 would have been nearly unchanged.

At the end of 2013 nominal GDP would have been $17.67 trillion instead of the actual $17.09 trillion realized. Econintersect estimates that this would have increased the ranks of the employed between between 2.1 million and 4.3 million. The current U-3 unemployment rate could be as low as 3.5% if the labor force remained at the current level.

Note: This little exercise is loaded with ceterus paribus defects. For example we have made no estimate for any adjustment needed for nominal GDP to correct for the absence of QE in the financial sector and any bleed-through to the real economy. And the level of inflation has not been assessed so the impact on real GDP is not attempted. Nonetheless, we feel we have made the point that there are ways to expand the money supply which will have a direct effect of increasing employment and there are ways that have difficulty in being effective in that regard. In recent years the latter has been the policy of the day.

A large part of this shift is the skills mismatch. Companies are increasingly looking for skilled and experienced workers and are having a tough time filling those openings. If you are in retail for example, you will have no problems getting part and full time workers to stock the shelves in your store or run the cash register. On the other hand finding someone with the skills to run a store, even a really small one, is becoming more of a challenge. You'll get dozens of resumes to be sure, but very few with the right qualifications.

See this for the definition of the U-5 unemployment rate .

  • Can China shake its investment addiction? (Peter Cai, China Spectator) Beijing is doing a good job on reining in local government, banking and shadow banking forces that are anxious to keep on investing and building. But will the government remained disciplined when the GDP numbers begin to fade?
  • A California Oil Field Yields Another Prized Commodity (Norimitsu Onishi, The New York Times) The Kern River oil field now produces more water than oil and this is a valuable product during the California drought. The oil field water is cleaned and sold to local farmers for irrigation. The "oil" field is producing about 760,000 barrels of water a day compared to 70,000 barrels of oil.
  • ESU14 – Sep E-Mini S&P (Rick Ackerman, Ricks Picks) A third day of selling would be ... interesting! But a sharp recovery (pivot) could also occur. The level from which the bounce occurs yells us something about this market.

Click on chart for large image at Rick's Picks.

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