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What We Read Today 19 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.

  • Putin’s Approval in Russia Soars to Record, America’s Plunges to Near Zero (Wolf Richter, Wolf Street) Putin is a hero at home and and the Russia military is also at approval ratings not seen in decades. And now 39% of Russians think their elections are honest, up from 23% last year and 17%seven years ago. What has changed in Russian elections to improve their opinion? Absolutely nothing. Moral: Don't take survey poll responses literally - they are more about emotions than logic.

russia-confidence-wolf-2014-jul-18russia-approval-china-eu-us-wolf-2014-jul-18

minsky-cycle-600x680

rentier-dominated-state-capitalistic-society-600x670

  • Disturbing Facts About Organic Food (BuzzFeed, MSN Video) We have had articles about the purported benefits of organic food. Below is a presentation about lack of benefits. Note: Sign-in the MSN may be required.

Organic-food-video


There are 12 articles discussed today 'behind the wall'.

The final article discussed resulted in a short article discussing the economic effects of the Fed raising interest rates and/or selling treasury securities from its balance sheet.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

There are between 75 and 100 articles reviewed most weeks. That is in addition to the 140-160 articles of free content we provide.

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  • Six Years After the Global Financial Crisis, What Have We Learned? (Yves Smith, Naked Capitalism) Includes a full repost of an article by Catherine Cashmore which discusses how many of the same problems that led to the Great Financial Crisis (GFC) of 2008 are still operative, and to an even greater extent in some cases. Add some commentary by Yves Smith for some excellent reading. One of Cashmore's major points is the declining share of GDP going to employee compensation, down by about 5% since 1975.

  • Addicted to Inflation (Paul Krugman, The New York Times) Prof. Krugman answers Rick Santelli (see GEI News) and takes on a few other "inflationistas" as well. Quite an amusing column.
  • Laying Foundations for Our Future Cities (Penny Jones, Datacenter Dynamics) This is an interview with IBM Academy of Technology's president Rashik Parmar. IBM has more than 2,500 projects dealing around the world with city design. The major elements are technology, social structure and sustainability.
... when we talk about infrastructure in the USA - we need to remember in the 21st century that it includes the internet. Europe and Asia are far ahead of the USA. As we start to build the Internet of Things we will get more data about the real world, and that data, teamed with what we already know about the world, will allow us to make more intelligent decisions. This will allow us to be much smarter in how we use resources. I am careful to use the word 'smarter' instead of smart because we see this as a journey, to start to instrument things and get new insight. This allows you to improve services and get to new places which then become the new 'norm' which you can evolve from.
  • Giant Global “Chimney” Could Alter Climate Change (Kevin Schultz, Scientific American) We keep learning more about the flow patterns of the planet that drive the climate features. A sparsely populated part of the western tropical Pacific Ocean, known as the “global chimney," has the world’s warmest ocean temperatures. From this area massive volumes of warm gases are vented from the surface high into the atmosphere. This may be one of the dominant forces shaping global climate and air chemistry.

Click on graphic for large image at Scientific American.
global-chimney-Sci-Amer-2014-jul-600x400

  • Drawdown strategies key in a financial secure retirement plan (Nick Otto, Employee Benefit News) The "4% rule" (withdraw 4% of retirement funds each year) is not always a strategy that assures a secure retirement. This article discusses other strategies. Econintersect suggests one sure strategy: Never withdraw more in any year than your portfolio earned (grew, total return) in that year. This is an especially good rule for every year before age 70 (at least, age 75 is even better if you live into your 90's). Being especially careful in the first years of retirement is the most important factor in securing a long and successful retirement.
  • Joe Friday: Ugliness Ahead for the Russell 2000? (Chris Kimble, Advisor Perspectives dshort.com) After creating what could be a double top, the following week the Russell created a "weekly engulfing bearish pattern", wiping out a month's worth of gains in the small cap index in a single week!

r-2000-kimble-2014-jul-18

  • How do you pay for a drug that costs $84,000? (Jason Millman, The Washington Post) If 3 million people need the drug how can it cost $84,000? That is $252 billion to treat 3 million hepatitis-C patients? Congressmen from both parties are calling for a justification for the cost.
  • Apple-IBM Deal: Trouble For Google, Microsoft (Thomas Claburn, Information Week) The deal announced this past week to jointly market IBM service apps on Apple iPhones and iPads may well mark the end of the PC era. It is possible that future growth of this venture will steal what might have been new business for Microsoft and Google. More and more the battle for the next wave of tech growth is being defined by how former rivals change alliances.
  • Yellen Hints at Detrimental Fed Action (Dock Treece, Safe Haven) Over two days of Senate hearings, Federal Reserve Chairwoman Janet Yellen addressed a number of questions and concerns related to US monetary policy and potential impacts on our economy and financial markets, including the potential for the Fed to react to further improvement in labor markets by raising short-term interest rates.

Here is what Treece has to say:

This wouldn't be the worst possible Fed reaction, but it's nevertheless the wrong tack. Instead of raising near-term rates by adjusting the Fed funds or discount rates, the Fed should liquidate all or some of its excessive portfolio of long-term US treasury bonds.

The majority of this country's major economic expansions of the past century have been preceded by a steepening of the yield curve (the line drawn along yield rates of US treasury notes and bonds of various durations), not a flattening. With long-term rates currently just above short-term rates - and offering almost zero return to long-term fixed income investors like retirees or pension funds - it's far more important to see increases in long-term rates rather than shorter-term. After all, raising short-term rates would serve to flatten the yield curve, which historically precedes a slowdown of economic growth, and with short-term rates at or near zero, they simply can't be cut any more than they already have.

The effect of a flattening yield curve is correctly discussed. The statements about the current condition of the yield curve couldn't be more wrong (see emphasis we added above):

Yield-Curve-1990-2014

If the Fed raised short-term rates to 1% and the long bond didn't change the long-term slope would still be above 2%, far from the flattening that has been seen within a couple of years before a recession starts. In order for such a Fed tightening to result in a move toward a fl;at curve the long bond would have to come down close to 1% (it is currently around 3.3%). That is not likely to happen unless economic activity slows more than now appears on the horizon. If that happened then the result would be a flattening yield curve because the anticipated inflation rate would be reduced as a result of a recession.

The fundamental error in Treece's discussion is the apparent premise that flattening the yield curve produces an economic slowdown. We suggest that is an incorrect hypothesis. The yield curve flattens because economic activity is indicating an imminent economic slowdown is possible. It is a signal of what is going on in the economy; it is not a condition that produces the economic condition.

Treece makes another error when he suggests that a better course of action would be to sell part or all of the $2.4 trillion of treasury securities it now holds. How would this boost the economy? If the treasuries were bought using excess reserves there would be no direct economic impact at all: the "cash" credits in the reserve accounts would be converted to treasuries in the capital accounts of the purchasers. From an overall balance sheet point of view there would be no change. Also there would likely be no change in the money supply. If the treasury securities were sold in open market action the buyers would be using money that was essentially in their "checking and savings accounts" and replacing it with money in savings certificates (treasury securities). The only possible effect here would be contractionary if a reduction in M1 or M2 resulted. But most likely the effect would be an exchange of one type of M2 or M3 deposit for another (actually would be a risk-free addition to the bank equity account which could be debited by the bank at any time that M2 or M3 liabilities required). See description of Money Supply.

Treece seems to have missed the point that the only possible effect of the Fed liquidating their treasury holding would more likely be contractionary, not expansionary. We add a caveat to that: If $2.4 trillion of treasuries were held by the public instead of the Fed, then the approximately $90 billion in interest that the Fed currently returns to the Treasury would instead be paid to the public and mostly added M1 or M2. This would have an expansionary effect.

We invite any of our readers with money and banking experience to explain any shortcomings they find in our analysis.


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