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What We Read Today 17 September 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 (and sometimes longer ones) 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.

  • PBoC injects $81bn into banking system (Josh Noble, Financial Times) This is a move to counter the real estate sector slowdown and the weak manufacturing numbers that threaten to lower GDP growth well below targets. More stimulus moves may follow.

  • Fed Seen Doubling Reverse Repos to Raise Interest Rates (Matthew Boesler, Bloomberg) The Fed will be using reverse repo operations to maintain overnight interest rates at the level they desire. In a trial period to date in 2014 the volume of trades have been around $120 billion. Economists surveyed by Bloomberg say the total each day (night) will have to be at least double that. Boesler explains very well what is going on:

The Fed's need for a tool to influence repo rates directly arose after almost six years of bond buying to stimulate economic growth flooded the banking system with $2.68 trillion of excess reserves. That means banks no longer need to borrow reserves in the once-vibrant fed funds market, so the fed funds rate no longer represents the true cost of overnight credit.

In order to raise bank borrowing costs and ensure that the fed funds rate doesn't trade below the FOMC's target range when it begins tightening policy, the Fed will have to absorb cash from money funds that would otherwise be lent to banks through repos.

  • Home Free? (James Surowiecki, The New Yorker) What is the best way to reduce social services costs for homelessness? Utah has found that simply giving a home to the homeless costs the state's taxpayers slightly less that 40% of the traditional social services costs.
  • Recent articles about Scotland Independence Vote :

A Better Nation, Scotlandís Divisive Independence Vote (Boston Review)

The Energy Prices at Risk with Scottish Independence (Money Morning) By Kent Moors who has contributed to GEI.

Scottish independence: polls put No campís lead at four points (Financial Times) Too close to call.

  • Articles about wars elsewhere in the world:

UN Brokers Agreement to Start Gaza Rebuilding (abc News)

White House officials warn Syria over ISIS mission (Fox News)

US to strike ISIL 'sanctuaries' in Syria (Al Jazeera)

Syria in Revolt, Understanding the Unthinkable War (Boston Review)

US Troops Could Fight ISIS in Iraq, General Tells Senate (abc News)

Ukraine crisis: Rebels granted self-rule and amnesty (BBC News)

Ukraine ratifies EU integration deal (The Guardian)

Can EU-Ukraine trade pact survive Russian pressure? (BBC News)


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

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In general, people like bargains, and when bargains get big enough, people do not wait for even bigger bargains. Consider Christmas shopping. Most do not wait until after Christmas when bargains are even bigger than before Christmas.

People delay purchases because they don't have a job, don't have money or have too much debt in Mish's opinion. He mentions the concern about deflation in Italy as misplaced (graph below). His conclusion is that Japan is a prime facie case which disproves the Keynesian thesis that government can pick up the slack when the private sector contracts. His proof is still awaited, however, because he says it is the collapse of the yen which will provide the proof. Econintersect has some reservations. See next article.

italy-inflation-mish-2014-sep-15

  • Japanese Yen to US Dollar Exchange Graph (ForecastChart.com) Econintersect: What does the "collapse of the yen" mean? Can you explain it in terms of the following 45-year chart? Is JPYUSD = 150 a "collapse"? It might better be described as an exchange rate near the upper limit of a 25-year exchange rate range. Is JPYUSD = 250 a collapse? Why would a return to an exchange rate that was operative during the Japan boom years be a collapse? Yes there are arguments about energy costs going up but then there are also questions about the use of renewable domestic energy which would become very compelling from a cost perspective with the weaker yen And the questions about Japan being able to pay interest? As long as Japan is producing sufficient goods and services there is no limit to the amount of money it can create other than it be enough to match the production and not significantly more. Interest rates can remain near zero under those conditions. See the next article.

yen-dollar-exchange-rate-45-years

  • The Natural Rate of Interest is Zero (Warren Mosler and Matthew Forstater, Working Paper No. 37, cfeps.org) The thesis is developed that deficit spending by a sovereign drives the overnight inter-bank lending rate to zero because the spending creates bank reserve credits in aggregate. The time structure of interest (inflation expectation) and the risk premium of interest should always build off the short-term risk free natural rate of zero. See also The Natural Rate of Interest is Zero (Bill Mitchell, Modern Money Mechanics).
Ideological debates usually exist for a reason: both sides often have a few good points. The key is for people to learn as much as they can so they can understand the good and bad points from both sides. The reality is that rarely is one side completely right or wrong. But usually each side has some part of the truth. As these ideological wars almost certainly continue for decades and centuries ahead, it'll be crucial that we keep getting closer and closer to the correct middle ground.

healthcare-government-share-stockman-1960-2020

  • The Biggest Lie of the New Century (Barry Ritholtz, Bloomberg) The claims that executives running companies like Bank of America, Citigroup and JP Morgan were not committing criminal acts are simply implausible if not laughable. Ritholtz delivers an itemized indictment, crime by crime.
  • S&P 500 to 2,150 in 2015: Goldman's David Kostin (Drew Sandholm, CNBC) Bonds okay for next couple of years then investors should move away. Stocks held for the next 3 1/2 years should return an average annual gain of 6%. Ten-year treasuries should return an annual average about 1%, which will be a negative real return.
  • Other Economics and Business Items of Note

Property Trusts Pull Support as Mounting Debt Due: China Credit (Bloomberg)

Redesigning Remedial Math (National Journal)

6 Design Trends You'll See More Of (Realtor Mag)

Early Earth less hellish than previously thought (R&D)

Touchdown Site Selected for Comet Lander (Scientific American)

Why investors may get a rude awakening: Siegel (CNBC) Includes interview video.

The Rebel Alliance, Grover Norquist and Ralph Nader, ahead of their time. (National Journal)

Millennials start leaving Mom and Dad's nest (CNBC) Includes Diana Olick video report.

20 Best & Worst Tax States (ThinkAdvisor)


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