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What We Read Today 17 March 2015

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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).


Every day most of this column ("What We Read Today") is available only to GEI members.

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U.S. warns banks it may revoke some money-laundering settlements (Brett Wolf, Reuters)  A U.S. Justice Department official said on Monday that some banks with non-prosecution agreements over failures to police transactions for criminal activity could see those deals withdrawn and be forced to plead guilty. Such deals in the last three years with HSBC Holdings Plc, Standard Chartered Plc, JPMorgan Chase & Co and Commerzbank AG. The DOJ spokeman did not specify which banks might face further prosecution.  Assistant Attorney General Leslie Caldwell told an Association of Certified Anti-Money Laundering Specialists conference:

"We don't want DPAs and NPAs to be perceived as a cost of doing business."

She further said the the Justice Department has seen "a number of repeat offenders", in which banks with agreements still in force "engaged in additional criminal activity".

Note:  NPAs are non-prosecution agreements; and DPAs are deferred-prosecution agreements.

Articles about events, conflicts and disease around the world







Tech stocks today look nothing like they did in 2000 (Akin Odedelle, Business Insider)  This will keep the talk about a new tech bubble in perspective.


Credit Markets Review and Outlook (John Lonski, Moody’s Analytics)  High-yield loans have tended to lead total loan activity for U.S. banks.  That leads one to become increasingly wary about the economy (and the stock market) when high-yield lending declines.  It gave a timely warning with the peak in late 2007 and an untimely warning in 2011.  What will the late 2013 peak turn out to signify.  We see the sound and fury but ...  And don't wait for the signal to be confirmed by commercial and industrial bank lending turns down.  The confirmation in the Great Recession came late in 2008 when much of the damage was already done.


American banks are safer, but don’t forget about the shadow banks (Quartz)  Shadow banking remains in control of almost half of all U.S. financial activity.  So regulation of banks, even if it were effective, which is debatable, does not really control financial risk.  In fact, if banking regulation did improve it might actually increase risk.  From this article:

Some argue that the very regulation that is improving the safety of banks is also pushing risky behavior out of the regulated system altogether. Such so-called “shadow banking” was also a source of financial instability during the crisis.

What you should know about shadow banking (Steve Liesman, CNBC)

One Bank Research Agenda (Discussion Paper, Bank of England)  Globally shadow banking is bigger than GDP.  Globally the shadow banking finance sector is larger than global GDP.  See graph below.  It has a similar size relationship globally to the U.S. (close to half of all finance).  Total global banking activity (including shadow banking) is projected to reach $163 trillion by 2017.  Extrapolating from the graph below shadow banking should exceed $80 trillion that year. 

But much of that total has nothing to do with the real economy - it is money created for finance activities between financial institutions.  A study just released by the Bank of England found that, in 2013, 75% of the revenue generated by the world's largest investment banks was from interbank activities and only 25% impacted the real economy producing goods and services.  See GEI News.  We know of no study that includes commercial banking. (Of course, commercial banking and investment banking are all mixed together in the same stew for the large banks so commercial activity is included in the BoE study.)  And we know of no study that includes shadow banking, as well.

So what is the portion of GDP which has banking involvement? That is a question that has troubled us for some time.  And at what level does financial activity become useless to the real economy?  And how much becomes harmful?  See next article for some perspective (even though it has no answers).

The Declining Usefulness of Debt (John Lounsbury, Seeking Alpha)  This is a May 2009 article.  This article quoted from work by Antal Fekete with the following summary:

Prof. Antal Fekete argues that the creation of excess new money in the current situation is deflationary, because we have entered an era of negative marginal returns on added debt. In this condition, the more debt created, the lower the GDP growth (or the greater the GDP shrinkage).

Remember, this is work by Prof. Fekete written early in 2009 (here) predicting many of the deflationary pressures experienced in recent years, and at a time when many were screaming about hyperinflation risks.   It has some elements in common with the earlier Great Depression era work by Irving Fisher on the nature of debt deflation.  See The Debt-Deflation Theory of Great Depressions.

The second graphic below is from the Lounsbury article under discussion, reproducing from available data a similar graph that had been published by Jim Welsh (now a regular GEI contributor) and discussed in an earlier Lounsbury article from Seeking Alpha in May 2009:  Jim Welsh on the Economy: Past the Point of No Return.  (Note:  We were introduced to Jim by another GEI contributor, John Mauldin.)

In the first graph below it is suggested that the data extrapolates to negative growth.  In the second graph it is suggested that the graph, with a polynomial fit rather than a linear fit, might extrapolate to a limiting value greater than zero growth.

In fact, both conditions occurred:  growth did go negative (sooner than the extrapolation predicted) and then subsequently returned to a positive (but certainly very low) level.

This entire analysis needs updating through 2014.  Furthermore, the debt data should be disaggregated into private debt growth and government debt growth to determine (if possible) how those two individually interact with GDP growth.   



Other Economics and Business Items of Note and Miscellanea

Tech Skills Heading the Way of the Dinosaur - 2015 Edition (Global Knowledge)  Remember, making buggy whips was once a tech skill.

Facebook adds payments support to Messenger (Seeking Alpha)  Hoping to compete with PayPal?

High-Yield MLP ETFs for a Rising Rate Environment (ETF Trends)

Jim Cramer's 'Mad Money' Recap: This Is One Stupid Market (TheStreet)

The Ellen Pao Trial:  What Do We Mean by "Discrimination"?  (The New Yorker)

Dalio warns Fed of 1937-style rate risk rise (Financial Times)  Warning in letter to clients from Ray Dalio, one of the world's most powerful hedge fund managers (Bridgewater Associates).

The Economic Effect Of Immigration (The Hoover Institution)

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