…this is the not the Obamacare you are looking for…

 

 

(h/t Jim Quinn’s Burning Platform Sunday Funnies)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Zx5u-vTP-h8/story01.htm Tyler Durden

Widely credited with being the seminal paper at the 2012 Jackson Hole conference and setting the scene for “threshold-based” policy, Michael Woodford discusses his views on the costs and benefits of “forward guidance” in this Goldman Sachs interview. The Columbia professor explains how he thinks about asset purchases versus forward guidance (it’s a mistake to think of asset purchases as a way to avoid having to talk about future policy intentions), and why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly (there were mistakes in communication, but that does not mean the situation would have been better if the Fed had instead kept its mouth shut, especially in such unprecedented times.) Ultimatley he warns, “by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise.”

 

Goldman Sachs’ Allison Nathan Interview with Michael Woodford,

Allison Nathan: Haven’t central banks always tried to influence interest rate expectations? What is so special about forward guidance today?

Michael Woodford: No, central banks have not tried to do things that were at all similar to this in the past. Until quite recently, all central banks were very reluctant to say things in advance about future policy decisions, and this reluctance remains to varying degrees at many banks. The forward guidance adopted by the Fed and other central banks, which tries to influence expectations by actually saying things about policy intentions, is therefore a new policy tool and indeed one that has become more important given the near-exhaustion of the most traditional policy tool – adjusting policy rates – as rates across the major economies already hover around their effective lower bound.

Allison Nathan: What are the benefits of forward guidance?

Michael Woodford: If policy expectations matter – and I think it is pretty clear that they are crucial to how longer-term assets end up getting priced – then there are two kinds of advantages of explicitly discussing future policy by the central bank. One advantage is that it can reduce misunderstandings about policy intentions, which, in turn, can reduce uncertainty for the central bank about the effect of its policy on the markets. In principle, talking directly about policy intentions would allow the use of more complex policies, which might not otherwise be pursued for fear that they would not be understood without explanation. The second general type of gain from explicitly talking about future policy is to help ensure that the policy committee itself will follow through with its commitments even though it may have motives to depart from them later on.

Both of these potential advantages are particularly clear when you reach an effective lower bound on policy rates. At that point, convincing people that the policy rate will remain “lower for longer” can help ease financial conditions today, providing additional stimulus to the economy when traditional tools no longer can. But talking about the intention of “lower for longer” is crucial because being at this lower bound is a very unusual situation, so there is little past experience that people can look to in order to anticipate how the central bank is going to respond. There is also a clear need for the central bank to commit itself in advance in order to achieve the stimulative benefit. That is because of course later – when the stimulus has worked and the economy is improving – the bank will have little motivation to actually keep rates low (the so-called “time inconsistency” problem) unless they committed to do so in advance. To overcome that problem, the central bank needs to make an explicit promise that would be difficult or embarrassing to just completely ignore later.

Allison Nathan: What are the dangers of forward guidance?

Michael Woodford: The most obvious danger, which has likely been the main reason for central banks’ reluctance to talk about future policy in the past, is the possibility that a policy commitment that looks sensible at some earlier time turns out to be unwise because things happen in the meantime that the central bank did not expect. Those costs can be reduced without losing all of the potential benefits of forward guidance if the central banks think carefully about what kind of commitments about future policy should be made. It makes sense to avoid unnecessary specificity about things that do not need to be specified too precisely in order to achieve the desired change in expectations. For example, in the case of a commitment to keep the federal funds rate low for longer in order to stimulate the economy today, the central bank could make a very specific commitment about the path of the policy rate over time. But there would be much more likelihood of embarrassment in that case than if the bank instead committed to keep rates low until certain economic conditions arise, whenever that may be.

Allison Nathan: The BOE and the ECB have said that the intention of their shift to forward guidance has been to clarify their policies rather than to commit to “lower for longer”. Will this approach negate the benefits of the guidance?

Michael Woodford: Yes, to some degree. In the case of the Bank of England, the structure of their statement – with several so-called “knock-out” provisions – as well as their insistence that the statement was nothing more than a clarification of the BOE’s normal reaction function, has given people little reason to change their prior beliefs about how soon the Bank would raise rates. Because of this, the statement does not seem to have moved market expectations much and in the way that the BOE thought it should. Similarly, the ECB has taken small steps towards doing something that you might think of as forward guidance, but has also done so quite hesitantly; they are also inclined to deny that they are committing themselves at all about future policy. Given the aversion to talking about policy intentions in the past, this hesitation is not surprising, nor is the fact that even central banks that have decided that they should experiment with the policy do it in a way that simultaneously denies that they would ever do it, because it goes against their instincts. But that to some extent defeats the purpose of the policy. Their approach is quite different from that of the Fed, which has more clearly embraced the policy of “lower for longer”.

Allison Nathan: Is the Fed’s shift to outcome-based or “threshold” guidance from “calendar” guidance a good thing?

Michael Woodford: Yes, because threshold guidance is ultimately more credible. The problem with calendar-based guidance is that if there is a real promise to keep rates at a certain level until a certain point in time no matter what happens, it would be a pretty reckless policy. And because the policy would be reckless, it would ultimately be hard to believe. That would be the case unless the central bank restricted itself to a short horizon over which there could not be many surprises. But if the horizon is too short, the impact on future expectations would be small. So I think the possibility of making a commitment
that extends far enough into the future for it to be news about future policy that would significantly matter to asset pricing is much more plausible if it is based on economic conditions rather than just based on a date.

Allison Nathan: There have been several instances when the use of forward guidance has had an opposite impact than the central banks intended – why?

Michael Woodford: The use of forward guidance is not some kind of magical tool where the mere fact that the central bank says something means that people will then think exactly that. A central bank needs to give people a reason to think something new or different about what it is going to do. A critical part of effective policy is therefore understanding what people will think they are learning about the bank’s policy. An example of this that I talked about in my Jackson Hole paper last year was the experience of the Swedish Riksbank in April 2009, when they cut their policy rate to 50 basis points and accompanied this with a statement and a published projected rate path that showed policy rates remaining at 50 basis points – the lowest level ever – until the beginning of 2011. To the Bank’s surprise, market forward rate expectations rose rather than fell following the announcement. Why? Because the big “news” of the statement was not the central bank’s lower projected rate path, which was in any case just a projection and not a commitment, but that the central bank was apparently regarding 50 basis points as a floor, which was higher than at least some market participants had previously guessed. That news shifted the markets’ most likely expected path of the future policy rate up rather than down.

Allison Nathan: How would you explain the violence of the bond market selloff in May/June, which came in response to a very small change in the Fed’s message?

Michael Woodford: I am inclined to think that it indicated some mistakes in Fed communication prior to May that led to two possible types of misinterpretation about the Fed’s intentions. First, some people may have interpreted the start of “taper talk” as a signal that the Fed was trying to withdraw accommodation more broadly, and was also preparing to start raising interest rates. That was a surprise to the FOMC; they didn’t think they were saying anything that would suggest they were preparing to raise rates. But they had left themselves open to that misinterpretation by failing to explain earlier the criteria that would determine the path of asset purchases in a way that sounded very different from the criteria that would determine the path of interest rates. The forward guidance about both asset purchases and interest rates focused on labor market conditions and sounded very closely related. I do not think that the Fed meant for the criteria to be the same, but they failed to sufficiently explain why they would not be. Second, there may have been a number of people who thought the purchases were going to continue at the current rate for a lot longer, and learned suddenly that they would not. If that was news to people, it was again a failure of communication because I doubt that the Fed had ever thought asset purchases would continue at the current rate beyond 2013. Despite these failures, it would be a mistake to conclude that the Fed should not have started speaking about tapering when it did; the problems would not have been avoided if the Fed had just kept its mouth shut, because the misinterpretations would still be there. And shutting your mouth is potentially setting you up for an even harder adjustment later when the misinterpretations must eventually be exposed.

Allison Nathan: Why was the market so surprised by the decision not to taper at the September FOMC?

Michael Woodford: It certainly seemed to me that during the summer the ground was being prepared for a slowing of the rate of purchases. As to why they did not actually do it, I think it was a reaction to the fact that the market had responded to those earlier hints more violently than expected. And there was evidently a decision that they could not risk a further unexpected negative reaction to an actual announcement of tapering. That was probably a mistake in judgment. By September, a modest reduction in purchases was widely expected, so I do not think there would have been a big negative reaction to that announcement. But, by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise.

Allison Nathan: Is there actually greater volatility and uncertainty in the markets as a function of this desire to communicate more, but not quite getting it right?

Michael Woodford: I don’t think so, because the question is: what would be people’s understanding of policy if the Fed had not tried to talk about it at all? There would be a lot of uncertainty if the Fed were adopting a policy of silence, especially given that we are in unprecedented territory. When conditions are unusual is exactly the time when trying to provide some explicit guidance is potentially most valuable, even if it is not a panacea.

Allison Nathan: How important are asset purchases as a signal of commitment to accommodative policy?

Michael Woodford: I think that a lot of the effects of asset purchases have been signaling effects. The advantage of purchases as a signal is that it is something that people see being done. It’s not just talk, so it grabs people’s attention. And the fact that action is being taken gives some indication of where the majority of the FOMC stands. But the likelihood that purchases have had some signaling effect does not necessarily mean that they are the most effective way of providing the signals that the central bank wants to send. There has at times been a temptation to view asset purchases and forward guidance as two alternative means to providing further stimulus, so that we can avoid having to say more about future policy if instead we are acting to make additional asset purchases, and I think that is a mistake. To the extent that the main goal of purchases is to give a signal, then you should think consciously about what signal you are trying to give and be comfortable delivering that signal. Thinking about asset purchases as part of a coherent and consistent attempt to give signals about future policy is one thing. But it’s very different from the idea that there will be a mechanical effect of purchases that allows you to avoid saying anything about future policy intentions.

Allison Nathan: What’s next for Fed communication?

Michael Woodford: It would be valuable for the Fed to provide more guidance about the process of policy normalization. When it is clear that they will begin slowing the rate of asset purchases — which I think will have to be fairly soon, although not necessarily this year given that they did not do it in September — the next obvious question will be how quickly the rest of the unusually easy policies will be unwound, and what the broader ‘exit strategy’ will look like. The last time they spoke about that was in 2011 and it’s pretty obvious that what they said then is no longer an operative strategy. They will need
to say something about that at least by the time that they start tapering, because at that point it will be very clear that we are no longer in a period of just staying the course. But a likely reason not to make big statements right now is of course the imminent hand-off of the Chairmanship in January.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/g5wxoYSz324/story01.htm Tyler Durden

Widely credited with being the seminal paper at the 2012 Jackson Hole conference and setting the scene for “threshold-based” policy, Michael Woodford discusses his views on the costs and benefits of “forward guidance” in this Goldman Sachs interview. The Columbia professor explains how he thinks about asset purchases versus forward guidance (it’s a mistake to think of asset purchases as a way to avoid having to talk about future policy intentions), and why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly (there were mistakes in communication, but that does not mean the situation would have been better if the Fed had instead kept its mouth shut, especially in such unprecedented times.) Ultimatley he warns, “by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise.”

 

Goldman Sachs’ Allison Nathan Interview with Michael Woodford,

Allison Nathan: Haven’t central banks always tried to influence interest rate expectations? What is so special about forward guidance today?

Michael Woodford: No, central banks have not tried to do things that were at all similar to this in the past. Until quite recently, all central banks were very reluctant to say things in advance about future policy decisions, and this reluctance remains to varying degrees at many banks. The forward guidance adopted by the Fed and other central banks, which tries to influence expectations by actually saying things about policy intentions, is therefore a new policy tool and indeed one that has become more important given the near-exhaustion of the most traditional policy tool – adjusting policy rates – as rates across the major economies already hover around their effective lower bound.

Allison Nathan: What are the benefits of forward guidance?

Michael Woodford: If policy expectations matter – and I think it is pretty clear that they are crucial to how longer-term assets end up getting priced – then there are two kinds of advantages of explicitly discussing future policy by the central bank. One advantage is that it can reduce misunderstandings about policy intentions, which, in turn, can reduce uncertainty for the central bank about the effect of its policy on the markets. In principle, talking directly about policy intentions would allow the use of more complex policies, which might not otherwise be pursued for fear that they would not be understood without explanation. The second general type of gain from explicitly talking about future policy is to help ensure that the policy committee itself will follow through with its commitments even though it may have motives to depart from them later on.

Both of these potential advantages are particularly clear when you reach an effective lower bound on policy rates. At that point, convincing people that the policy rate will remain “lower for longer” can help ease financial conditions today, providing additional stimulus to the economy when traditional tools no longer can. But talking about the intention of “lower for longer” is crucial because being at this lower bound is a very unusual situation, so there is little past experience that people can look to in order to anticipate how the central bank is going to respond. There is also a clear need for the central bank to commit itself in advance in order to achieve the stimulative benefit. That is because of course later – when the stimulus has worked and the economy is improving – the bank will have little motivation to actually keep rates low (the so-called “time inconsistency” problem) unless they committed to do so in advance. To overcome that problem, the central bank needs to make an explicit promise that would be difficult or embarrassing to just completely ignore later.

Allison Nathan: What are the dangers of forward guidance?

Michael Woodford: The most obvious danger, which has likely been the main reason for central banks’ reluctance to talk about future policy in the past, is the possibility that a policy commitment that looks sensible at some earlier time turns out to be unwise because things happen in the meantime that the central bank did not expect. Those costs can be reduced without losing all of the potential benefits of forward guidance if the central banks think carefully about what kind of commitments about future policy should be made. It makes sense to avoid unnecessary specificity about things that do not need to be specified too precisely in order to achieve the desired change in expectations. For example, in the case of a commitment to keep the federal funds rate low for longer in order to stimulate the economy today, the central bank could make a very specific commitment about the path of the policy rate over time. But there would be much more likelihood of embarrassment in that case than if the bank instead committed to keep rates low until certain economic conditions arise, whenever that may be.

Allison Nathan: The BOE and the ECB have said that the intention of their shift to forward guidance has been to clarify their policies rather than to commit to “lower for longer”. Will this approach negate the benefits of the guidance?

Michael Woodford: Yes, to some degree. In the case of the Bank of England, the structure of their statement – with several so-called “knock-out” provisions – as well as their insistence that the statement was nothing more than a clarification of the BOE’s normal reaction function, has given people little reason to change their prior beliefs about how soon the Bank would raise rates. Because of this, the statement does not seem to have moved market expectations much and in the way that the BOE thought it should. Similarly, the ECB has taken small steps towards doing something that you might think of as forward guidance, but has also done so quite hesitantly; they are also inclined to deny that they are committing themselves at all about future policy. Given the aversion to talking about policy intentions in the past, this hesitation is not surprising, nor is the fact that even central banks that have decided that they should experiment with the policy do it in a way that simultaneously denies that they would ever do it, because it goes against their instincts. But that to some extent defeats the purpose of the policy. Their approach is quite different from that of the Fed, which has more clearly embraced the policy of “lower for longer”.

Allison Nathan: Is the Fed’s shift to outcome-based or “threshold” guidance from “calendar” guidance a good thing?

Michael Woodford: Yes, because threshold guidance is ultimately more credible. The problem with calendar-based guidance is that if there is a real promise to keep rates at a certain level until a certain point in time no matter what happens, it would be a pretty reckless policy. And because the policy would be reckless, it would ultimately be hard to believe. That would be the case unless the central bank restricted itself to a short horizon over which there could not be many surprises. But if the horizon is too short, the impact on future expectations would be small. So I think the possibility of making a commitment that extends far enough into the future for it to be news about future policy that would significantly matter to asset pricing is much more plausible if it is based on economic conditions rather than just based on a date.

Allison Nathan: There have been several instances when the use of forward guidance has had an opposite impact than the central banks intended – why?

Michael Woodford: The use of forward guidance is not some kind of magical tool where the mere fact that the central bank says something means that people will then think exactly that. A central bank needs to give people a reason to think something new or different about what it is going to do. A critical part of effective policy is therefore understanding what people will think they are learning about the bank’s policy. An example of this that I talked about in my Jackson Hole paper last year was the experience of the Swedish Riksbank in April 2009, when they cut their policy rate to 50 basis points and accompanied this with a statement and a published projected rate path that showed policy rates remaining at 50 basis points – the lowest level ever – until the beginning of 2011. To the Bank’s surprise, market forward rate expectations rose rather than fell following the announcement. Why? Because the big “news” of the statement was not the central bank’s lower projected rate path, which was in any case just a projection and not a commitment, but that the central bank was apparently regarding 50 basis points as a floor, which was higher than at least some market participants had previously guessed. That news shifted the markets’ most likely expected path of the future policy rate up rather than down.

Allison Nathan: How would you explain the violence of the bond market selloff in May/June, which came in response to a very small change in the Fed’s message?

Michael Woodford: I am inclined to think that it indicated some mistakes in Fed communication prior to May that led to two possible types of misinterpretation about the Fed’s intentions. First, some people may have interpreted the start of “taper talk” as a signal that the Fed was trying to withdraw accommodation more broadly, and was also preparing to start raising interest rates. That was a surprise to the FOMC; they didn’t think they were saying anything that would suggest they were preparing to raise rates. But they had left themselves open to that misinterpretation by failing to explain earlier the criteria that would determine the path of asset purchases in a way that sounded very different from the criteria that would determine the path of interest rates. The forward guidance about both asset purchases and interest rates focused on labor market conditions and sounded very closely related. I do not think that the Fed meant for the criteria to be the same, but they failed to sufficiently explain why they would not be. Second, there may have been a number of people who thought the purchases were going to continue at the current rate for a lot longer, and learned suddenly that they would not. If that was news to people, it was again a failure of communication because I doubt that the Fed had ever thought asset purchases would continue at the current rate beyond 2013. Despite these failures, it would be a mistake to conclude that the Fed should not have started speaking about tapering when it did; the problems would not have been avoided if the Fed had just kept its mouth shut, because the misinterpretations would still be there. And shutting your mouth is potentially setting you up for an even harder adjustment later when the misinterpretations must eventually be exposed.

Allison Nathan: Why was the market so surprised by the decision not to taper at the September FOMC?

Michael Woodford: It certainly seemed to me that during the summer the ground was being prepared for a slowing of the rate of purchases. As to why they did not actually do it, I think it was a reaction to the fact that the market had responded to those earlier hints more violently than expected. And there was evidently a decision that they could not risk a further unexpected negative reaction to an actual announcement of tapering. That was probably a mistake in judgment. By September, a modest reduction in purchases was widely expected, so I do not think there would have been a big negative reaction to that announcement. But, by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise.

Allison Nathan: Is there actually greater volatility and uncertainty in the markets as a function of this desire to communicate more, but not quite getting it right?

Michael Woodford: I don’t think so, because the question is: what would be people’s understanding of policy if the Fed had not tried to talk about it at all? There would be a lot of uncertainty if the Fed were adopting a policy of silence, especially given that we are in unprecedented territory. When conditions are unusual is exactly the time when trying to provide some explicit guidance is potentially most valuable, even if it is not a panacea.

Allison Nathan: How important are asset purchases as a signal of commitment to accommodative policy?

Michael Woodford: I think that a lot of the effects of asset purchases have been signaling effects. The advantage of purchases as a signal is that it is something that people see being done. It’s not just talk, so it grabs people’s attention. And the fact that action is being taken gives some indication of where the majority of the FOMC stands. But the likelihood that purchases have had some signaling effect does not necessarily mean that they are the most effective way of providing the signals that the central bank wants to send. There has at times been a temptation to view asset purchases and forward guidance as two alternative means to providing further stimulus, so that we can avoid having to say more about future policy if instead we are acting to make additional asset purchases, and I think that is a mistake. To the extent that the main goal of purchases is to give a signal, then you should think consciously about what signal you are trying to give and be comfortable delivering that signal. Thinking about asset purchases as part of a coherent and consistent attempt to give signals about future policy is one thing. But it’s very different from the idea that there will be a mechanical effect of purchases that allows you to avoid saying anything about future policy intentions.

Allison Nathan: What’s next for Fed communication?

Michael Woodford: It would be valuable for the Fed to provide more guidance about the process of policy normalization. When it is clear that they will begin slowing the rate of asset purchases — which I think will have to be fairly soon, although not necessarily this year given that they did not do it in September — the next obvious question will be how quickly the rest of the unusually easy policies will be unwound, and what the broader ‘exit strategy’ will look like. The last time they spoke about that was in 2011 and it’s pretty obvious that what they said then is no longer an operative strategy. They will need to say something about that at least by the time that they start tapering, because at that point it will be very clear that we are no longer in a period of just staying the course. But a likely reason not to make big statements right now is of course the imminent hand-off of the Chairmanship in January.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/g5wxoYSz324/story01.htm Tyler Durden

Authored by Santiago Nino Becerra, via La Carta de la Bolsa,

These are the macro figures that the Spanish government submitted to Brussels on last April 26, when it asked for a two-year extension to meet Europe’s wondrous 3% target deficit. Look at the figures closely: see how the anemic growth magically accelerates once the  target is met, how the rampant public debt surprisingly declines upon compliance with such a target, and how the currently unbridled unemployment rate miraculously begins to recover at the very moment the target deficit figure is achieved.

These figures, you will recall, were accompanied by speeches made by various members of government whom at the time underlined that the Spanish economy was at a critical crossroads. Of key relevance to effectively send the message across were the speeches delivered by Prime Minister Rajoy and Minister of Economy De Guindos. Subsequently, Brussels gave its assent to the figures and granted Spain the two -year extension it had requested on the target deficit.

A few weeks ago, on October 17, the Spanish government submitted an updated version of last April’s macro figures to Brussels, only this time the projections end in 2016. Indeed, the revised chart scraps the magic that was to take place thereafter.

The differences between the two charts mainly lie in estimations of a little more growth and a substantial increase in debt. There are no unemployment figures in the new chart, or such did not make it to public opinion. Of course, scrupulous compliance with the target deficit was maintained from one document to the other. The numbers, as you can see, are sad and anemic, and continue to envelop the arabesque promise of target-deficit compliance; which I think is impossible to achieve unless it is all based on significantly higher doses of pain: a staggering deficit reduction from -4.2 % to -2.8 %.

Naturally, these figures were again accepted by Brussels. This is the point where we go into paroxysms of laughter.

Mysteriously, all talk regarding the above figures, as well as discussion of the 2014 Budget have ceased. Indeed, and relying on the meager 0.1% growth projections published by the Bank of Spain for Q3 of this year, as well as on the recent decline in the unemployment rate (which seasonally adjusted did not actually happen), the government and other semi institutional entities have rushed to announce the end of recession, that the Spanish economy now sees the light at the end of the tunnel, and that foreign investors’ such as Bill Gates’ have renewed their interest in Spain. What has happened?

Despite the country’s macro figures and a budget which assumes that 30% of the country’s spending next year will go to debt interest payments, how is it possible that we are suddenly being bombarded with wonderful news about Spain’s current situation – no longer at a cross roads – and colorful future? Several things have happened, I think.

First, the public wants to hear nice things because they are tired of hearing the bad; so if they want good stories, they’ll get them . No matter what happens tomorrow. Tomorrow, when reality hits and the scissors are again sharpened to trim that which growth will not produce, not even to even pay the interest on the debt, the public will be told other stories.

Second, time references have changed. The date now is the end of November 2014, when the European Central Bank (ECB) is due to publish the findings on its grand audit of the euro area’s largest 126 banks (16 of them Spanish ), as well as the results of the various tests that the European Banking Authority (EBA) will have administered on such banks. Until then, let there be peace everywhere, but specially in Spain. Surely, after next Summer, and in order to prepare the people’s mindset for what is to come, a few things may be filtered, but that will be then. For now, do not be surprised to hear things such as “Spain is doing well again.”

Finally, the divorce between the people and their representatives has consummated. The government tells its stories while the people perceive a different reality. Yet this matters little. What matters is making it through tomorrow. And if to make it through tomorrow the government has to go back on its words and say it meant differently from what it said not long ago, so be it.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/chJ_SPsfqvQ/story01.htm Tyler Durden

This post was first published on Bawerk.net. You may also follow us on @EBawerk

If there is one single event that could derail the euro experiment it is the German Federal Constitutional Court ruling on the European Stability Mechanism (ESM) and Outright Market Transactions (OMT). We will take you through the different legal arguments used on both sides of the aisle, but first you need to understand the importance of this ruling.

Without the ESM and more importantly the OMT there would be widespread sovereign defaults within the euro zone. This would have dragged down banks, pension funds and financial markets in general. Alternatively, the troubled sovereign would simply pull out of the monetary union altogether and default in all but name through massive inflation of its own and newly established currency.

We estimate the Draghi put is worth around 400 basis points given the response in sovereign credit markets since he announced it. And it is simple to understand why! If , say, Spanish 10 year bond should once again yield anything close to 7 per cent, they would simply ask the ECB to intervene and promptly push the yield back down to around 4 per cent.

The investors that understood this back in 2012 bought Spanish bond at 7.62 per cent and made a handsome profit. It also window-dressed the Spanish banking sector balance sheet enough to silence skeptics for a while.  

An alternative way to look at this is provided through the TARGET2 imbalance that shrank in the immediate aftermath of the OMT announcement.

Whilst the market tries to tell us that southern European capital consumption is unsustainable and should be reined in, Draghi has simply told investors that such nonsense is unnecessary. Ever since Keynes thought us that central banks can produce capital at will, we should not be concerned about those evil “causal-realist” economists; they belong on the scrapheap together with other barbaric relics.

Luckily for us, there are some barbaric “causal-realists” still in Germany, not just on the ether, that share our concerns. They have taken the OMT to court along with the ESM. If the OMT turns out to be illegal according to the German constitution, then the ECB would be forced to retreat, or Germany have to leave the Euro. We are not sure if humorless economists find Gerxit to be as enchanting as Grexit, but we are sure the “barbarians” would appreciate it.   

The Federal Constitutional Court in Karlsruhe is mandated to uphold the Grundgesetz or basic law of Germany. In earlier rulings on the EFSF and also on a temporary injunction against the ESM we know how the Karlsruhe judges looks at this mandate.

Their underlying guiding principle is always to make sure that the eternity clause in the Grundgesetz is in no way jeopardized. For obvious historical reasons, the Grundgesetz was written with the concept of “unconstitutional constitutional amendments” at its core.

While this may seem to contradict our understanding of legal hierarchy at first, it does fit into the rules made by the constitution about amending it. And there is no way to amend the Grundgesetz guiding principle about the Federal Republic of Germany being a “democratic and social free state”

Article 79 divides the Grundgesetz into amendable and un-amendable portions in which Article 20 stating that Germany is a democratic state is specifically mentioned as an un-amendable part. Article 38 is again part of Article 20. Article 38 (1) states that ”Members of the German Bundestag shall be elected in general, direct, free, equal and secret elections. They shall be representatives of the whole people, not bound by orders or instructions, and responsible only to their conscience.”

As an extension of this, we learn from the EFSF ruling issued September 7^th 2011 that “members of Parliament must remain in control of fundamental budget policy… …when establishing mechanism of considerable financial importance which can lead to incalculable burdens on the budget, the German Bundestag must
therefore ensure that later on, mandatory approval by the Bundestag is always obtained”. They continue by stating that “the legislature… …is prohibited from establishing permanent mechanisms under the law of international agreement which result in an assumption of liability for others states` voluntary decisions, especially if they have consequences whose impact is difficult to calculate”

In other words, the Bundestag cannot transfer budgetary power to institutions in Brussels, or Frankfurt for that matter, as this would violate the right of the German people to independently govern themselves. Any transfer of funds from Germany to any other institution must be approved by the Bundestag on a case-by-case basis, and they must always know exactly what amount they sign up for. The liability must be strictly limited and decisions regarding this liability can never be transferred to any non-German institution.

Now, let’s start with the European Stability Mechanism and see what legal difficulties it may face. In the ruling of September 12 2012 where the court refused the applications for the issue of temporary injunctions we got a good grasp on what the ESM ruling will be, but there are still caveats to be cleared.

First of all, in the preamble to the Treaty on the ESM (T/ESM 2012) it says that “The European Council agreed on 17 December 2010 on the need for euro area Member States to establish a permanent stability mechanism.”

As we learnt from the EFSF ruling of 2011, the Court specifically told the legislature that any permanent mechanisms would be un-constitutional.

Further, we read from the ruling of September 12 2012 that “it is required to ensure in the framework of the ratification procedure under international law that the provisions of the ESM Treaty may only be interpreted or applied in such a way that the liability of the Federal Republic of Germany cannot be increased beyond its share in the authorised capital stock of the ESM without the approval of the Bundestag and that the information of the Bundestag and the Bundesrat according to the constitutional requirements is ensured.”

The Court says this requirement is fulfilled by T/ESM 2012 Article 8 (5), but in Article 9 it states that the Managing Director of the ESM can always demand participating countries to pay in unpaid capital by simple majority decision to restore the level of paid-in capital if impairments or losses should occur. Admittedly, this does not in itself invalidate the limitation set forth by Article 8, but if we move to Article 25 (2) that outlines routines in case of losses we are amiss to distinguish between Article 8s limited liability concept as requested by the Court and the potential for unlimited liability.

Article 25 (2) specifically states that “If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3), a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed. The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount.    

It is not clear to us that Germany`s liability is limited and “easy to calculate” and apparently it is not clear to the court either. Thus, they explicitly made it clear that Article 8 will have to be interpreted in a way that it trumps both Article 9 and 25 in all respects! This cannot be done without changing the wording of T/ESM 2012.

Under the assumption this requirement can somehow be adhered to; the ESM will be approved more or less as is. The OMT on the other hand faces problems of its own.

On September 6 2012 the ECB issued a press release outlining the technical features of Outright Monetary Transactions. There are three things that stand out for the legal discussion

1)      OMT support is conditional on the country in question also engage the ESM; which comes with a macroeconomic adjustment program.

2)      OMT will predominantly, but not necessarily exclusively, be focused on the short end of the yield curve; defined as maturities of less than three years but more than one year.

3)      No ex ante quantitative limits are set on the size of the OMT – the program is potentially unlimited.

The problem with number 1 is obvious from the view that a central bank shall be independent. If a fiscal program is the condition for proper monetary policy, how can ECB policy be independent? What if the country in question fails to fulfill the adjustment program, will the ECB stop its OMT? Does that make sense from their mandated goals?

When it comes to number 2 and 3, we need to see these together and in conjunction with the EFSF-ruling regarding limited liability. If the ECB is free to buy unlimited amounts of sovereign bonds it violates the eternity clause in the Grundgesetz.

But, according to the Grundgesetz Article 88 “The Federation shall establish a note-issuing and currency bank as the Federal Bank. Within the framework of the European Union, its responsibilities and powers may be transferred to the European Central Bank, which is independent and committed to the overriding goal of assuring price stability.”

How can the Court rule against the OMT when the constitution itself says the ECB is independent.  Would that not be the very definition of irony? The Court that is mandated to uphold the Grundgesetz must violate the very same Grundgesetz to rule on the OMT.

In any case, the eternity clause should in theory trump Article 88 and the Court should could still vote no, despite violating the principle of monetary policy independence.

The OMT could also be said to violate the Treaty of the Functioning of the European Union (TEFU) Article 123 (1) which clearly states that “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

If so, the case need to be submitted to the European Court of Justice, as the Karlsruhe Court mandate is limited to the Grundgesetz.

The way out for Karlsruhe!

While the legal entanglements the OMT is in, seem to be insurmountable it is naïve to think politics does not play a big role here. The pressure on Karlsruhe is immense and they will have to come up with a way to get it through no matter what.

Here is how we think they will go about.

First of all, limit the OMT to the one to three year maturity range and make sure it only applies to bonds already issued at the time of OMT engagement. This takes care of two problems.

First of all, it is easy to calculate the potential liability beforehand as we know the size of the market.

Secondly, making sure the country under OMT help does not swap all its longer term bonds for newly issued shorter maturity bonds, the decision on the ultimate liability is no longer in the hands of non-German institutions.

Further, in order to keep the Bundestag nominally in control, maintain
the connection between OMT and the ESM adjustment program.

Lastly, limit the OMT to secondary market interventions and claim Article 123 of the TFEU does not apply (it does, but they can at least pretend). If need be, the ESM can always make primary market interventions.  

While these limitations on the OMT are noteworthy, they will probably not be large enough to undermine the Draghi put.

Alternatively the Court could use Article 88 of the Grundgesetz and give an all clear or send the case to the European Court of Justice. Legal proceedings here would probably take another year of two which buys even more time, just as the OMT was originally designed to do.  

Conclusion

There are four alternatives for Karlsruhe, but given the importance of politics only one seems very likely at this point.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/u9z2OnWSc7g/story01.htm Eugen Bohm-Bawerk

India's love affair with gold is well-understood in Asia but completely misunderstood in the West — a phenomenon we have always found fascinating — but recently, as Grant Williams exclaims, it has become abundantly clear that this disconnect is widening almost daily as the Western fixation with 'The Gold Price' and the Eastern obsession with 'The Price of Gold' take ever more divergent paths…

After the recent frenzied activity at the Reserve Bank of India (which, if it had taken place in the USA, would absolutely have been labeled "The War on Gold" by CNN) as they tried every means possible to stop Indian citizens from buying gold (something I documented in "Never The Twain", TTMYGH August 27 2013), I set about thinking why it is that attitudes in the opposing hemispheres are so different regarding the yellow metal.

As I ruminated, a good friend of mine, who has forgotten more about gold than most will ever know, pointed me towards the Hindu Business Line; and there I stumbled upon a couple of pieces by S. Gurumurthy which, rather conveniently, do a lot of the heavy lifting for me.

In the first piece, entitled "Gold: Villain or Saviour?", S. tackles the stark disparity between economists' views of the "barbaric [sic] relic" and the views of the ordinary Indian citizen. And he does so beautifully:

(Hindu Business Line): Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserves of over 20,000 tonnes by 1950.

 

Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation's stocks. Indian gold habits clearly mock at modern economic theories.

So far, so good. Now at this point S. begins laying down a few facts and figures, and as he does so, the clouds surrounding the question of how important gold is to the average Indian quickly start to evaporate:

Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion — almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewelry are indistinguishable. Jewelry is the working capital of families; families collateralize it for commercial borrowing.

 

Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganized financial sector, urbanites access bank loans.

 

The authors of Market Oracle seem to understand India's family-gold nexus better than Indian policymakers. Yet, despite such a paradigmatic difference, economic laws on gold based on the Western experience are continuously being tried out in India. Result: the establishment hates what the people love.

Do Indian policy makers not understand "India's family-gold nexus"? Of COURSE they do — but gold is the only refuge from inflation for the Indian population; something that just isn't acceptable to "The Establishment", because India's national debt has been run up by politicians amidst a corrupt and totally inefficient bureaucracy, whilst Indian citizens have patiently and painstakingly accumulated real wealth a gram at a time over many centuries. They are not about to give that up.

The Reserve Bank of India (RBI) set up a working group to investigate what every one of its members already knew instinctively (yet more taxpayer money being put to good use), and the conclusion they reached after a year's expensive extensive study was this:

(Reserve Bank of India): Demand for gold appears to be autonomous and a function of several influences and factors in India and may not be strictly amenable to policy changes. Supply of gold, through organised channels can be constricted, but buyers may take recourse to unauthorised channels to buy gold. The share of banks in importing gold has already been on decline over the years. Since it is difficult to vary the demand for gold the policy focus will have to be directed to (i) design and offer gold investors, alternative instruments that may fetch positive returns with a flexibility of liquidity; and (ii) increased unlocking of the hidden value locked in idle gold stocks through increased monetisation of gold. In this context encouraging gold jewellery loans from Banks and NBFCs, ensuring customer protection of borrowers and changes in the practices of NBFCs is desirable.

Brilliant! Welcome back, Captain Obvious!

Seriously, though, this is perhaps the most ludicrous government-funded study since US$3 million was spent on helping the National Science Foundation study shrimp running on a treadmill (no, really).

…

Westerners aren't used to the kind of inflation levels, government confiscation, and currency volatility so common in places like India; and so the need to own gold as protection isn't fully appreciated in the West.

Westerners pay lip service to gold's being "an inflation hedge" or "a currency" or "a safe asset", but these terms are used in an extremely abstract way by the vast majority of the investing public, who see gold as mostly just another trading vehicle. Yes, there are Western investors who have a deeper understanding of the reasons for owning physical gold, but they are a tiny minority.

In short, Asians like their gold to be heavy, shiny, and made of … well, gold.

This massive disparity in appetite for "placeholder gold" is just one side of the coin, however; and India is just one of the Eastern countries that has been soaking up copious amounts of physical gold in recent months.

…

That is a twelve-fold increase in bullion traffic between the primary vault in London and the major refineries in Switzerland.

Extraordinary.

Now, we don't know with absolute certainty where that gold is ultimately bound — but we know it isn't Switzerland. If we throw into the mix the widely covered movement of gold into China through HK, a picture begins to emerge of an incredible wave of physical metal heading from West to East, even as the price continues to languish.

One of the primary sources of supply in this steady transfer of physical bullion has been the GLD warehouse. I've touched on the subject of the incredible vanishing ETF gold holdings before, but it's worth revisiting the phenomenon and reminding readers of a chart I included in the July 16th edition of Things That Make You Go Hmmm…, entitled "What If?":

The gold in London is heading somewhere — and it's heading there via Switzerland, by the looks of it.

…

The chart below shows seasonal gold price performance since 1969. (Although the data stops at 2010, so that there are a couple of down years missing, the pattern is the important thing here.) I have laid the chart out from September to August to better illustrate the phase we are moving into.

October has traditionally been the weakest month of the year, while November through January has been the strongest period:

So, how does this all play out?

Well, I've been watching this situation unfold through most of this past year with an increasingly bemused look on my face, because the numbers just don't add up. But so far, despite clear evidence of massive demand for physical gold, "The Gold Price" has continued to trade poorly. However, the longer this situation persists, the more definitely it will resolve itself; and it's very hard to see how that resolution ends in anything but higher prices.

Demand levels from Asia continue to soar while production increases just a couple of percent each year; and leaving aside Indian festivals and increasing central bank purchases, the fiat alternative to gold bullion — the US dollar — is coming under renewed pressure in the wake of the Taper That Never Was and the appointment of Janet Yellen as Ben Bernanke's successor.

…

But, like the infatuation America had with the Monkees in 1967, this fascination with the fiat dollar will prove to be nothing more than a passing fad; and one day — perhaps soon — the citizens of the West will, like their cousins in Asia and the Indian subcontinent, realize that there really is no alternative to sound money.

The only problem is, when the realization finally dawns, where will all the gold be?

 

Full Grant Williams letter below:

TTMYGH – Let It Be Fiat Monkees & Golden Beatles.pdf

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QaSa0Mi1L2w/story01.htm Tyler Durden

India's love affair with gold is well-understood in Asia but completely misunderstood in the West — a phenomenon we have always found fascinating — but recently, as Grant Williams exclaims, it has become abundantly clear that this disconnect is widening almost daily as the Western fixation with 'The Gold Price' and the Eastern obsession with 'The Price of Gold' take ever more divergent paths…

After the recent frenzied activity at the Reserve Bank of India (which, if it had taken place in the USA, would absolutely have been labeled "The War on Gold" by CNN) as they tried every means possible to stop Indian citizens from buying gold (something I documented in "Never The Twain", TTMYGH August 27 2013), I set about thinking why it is that attitudes in the opposing hemispheres are so different regarding the yellow metal.

As I ruminated, a good friend of mine, who has forgotten more about gold than most will ever know, pointed me towards the Hindu Business Line; and there I stumbled upon a couple of pieces by S. Gurumurthy which, rather conveniently, do a lot of the heavy lifting for me.

In the first piece, entitled "Gold: Villain or Saviour?", S. tackles the stark disparity between economists' views of the "barbaric [sic] relic" and the views of the ordinary Indian citizen. And he does so beautifully:

(Hindu Business Line): Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserves of over 20,000 tonnes by 1950.

 

Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation's stocks. Indian gold habits clearly mock at modern economic theories.

So far, so good. Now at this point S. begins laying down a few facts and figures, and as he does so, the clouds surrounding the question of how important gold is to the average Indian quickly start to evaporate:

Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion — almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewelry are indistinguishable. Jewelry is the working capital of families; families collateralize it for commercial borrowing.

 

Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganized financial sector, urbanites access bank loans.

 

The authors of Market Oracle seem to understand India's family-gold nexus better than Indian policymakers. Yet, despite such a paradigmatic difference, economic laws on gold based on the Western experience are continuously being tried out in India. Result: the establishment hates what the people love.

Do Indian policy makers not understand "India's family-gold nexus"? Of COURSE they do — but gold is the only refuge from inflation for the Indian population; something that just isn't acceptable to "The Establishment", because India's national debt has been run up by politicians amidst a corrupt and totally inefficient bureaucracy, whilst Indian citizens have patiently and painstakingly accumulated real wealth a gram at a time over many centuries. They are not about to give that up.

The Reserve Bank of India (RBI) set up a working group to investigate what every one of its members already knew instinctively (yet more taxpayer money being put to good use), and the conclusion they reached after a year's expensive extensive study was this:

(Reserve Bank of India): Demand for gold appears to be autonomous and a function of several influences and factors in India and may not be strictly amenable to policy changes. Supply of gold, through organised channels can be constricted, but buyers may take recourse to unauthorised channels to buy gold. The share of banks in importing gold has already been on decline over the years. Since it is difficult to vary the demand for gold the policy focus will have to be directed to (i) design and offer gold investors, alternative instruments that may fetch positive returns with a flexibility of liquidity; and (ii) increased unlocking of the hidden value locked in idle gold stocks through increased monetisation of gold. In this context encouraging gold jewellery loans from Banks and NBFCs, ensuring customer protection of borrowers and changes in the practices of NBFCs is desirable.

Brilliant! Welcome back, Captain Obvious!

Seriously, though, this is perhaps the most ludicrous government-funded study since US$3 million was spent on helping the National Science Foundation study shrimp running on a treadmill (no, really).

…

Westerners aren't used to the kind of inflation levels, government confiscation, and currency volatility so common in places like India; and so the need to own gold as protection isn't fully appreciated in the West.

Westerners pay lip service to gold's being "an inflation hedge" or "a currency" or "a safe asset", but these terms are used in an extremely abstract way by the vast majority of the investing public, who see gold as mostly just another trading vehicle. Yes, there are Western investors who have a deeper understanding of the reasons for owning physical gold, but they are a tiny minority.

In short, Asians like their gold to be heavy, shiny, and made of … well, gold.

This massive disparity in appetite for "placeholder gold" is just one side of the coin, however; and India is just one of the Eastern countries that has been soaking up copious amounts of physical gold in recent months.

…

That is a twelve-fold increase in bullion traffic between the primary vault in London and the major refineries in Switzerland.

Extraordinary.

Now, we don't know with absolute certainty where that gold is ultimately bound — but we know it isn't Switzerland. If we throw into the mix the widely covered movement of gold into China through HK, a picture begins to emerge of an incredible wave of physical metal heading from West to East, even as the price continues to languish.

One of the primary sources of supply in this steady transfer of physical bullion has been the GLD warehouse. I've touched on the subject of the incredible vanishing ETF gold holdings before, but it's worth revisiting the phenomenon and reminding readers of a chart I included in the July 16th edition of Things That Make You Go Hmmm…, entitled "What If?":

The gold in London is heading somewhere — and it's heading there via Switzerland, by the looks of it.

…

The chart below shows seasonal gold price performance since 1969. (Although the data stops at 2010, so that there are a couple of down years missing, the pattern is the important thing here.) I have laid the chart out from September to August to better illustrate the phase we are moving into.

October has traditionally been the weakest month of the year, while November through January has been the strongest period:

So, how does this all play out?

Well, I've been watching this situation unfold through most of this past year with an increasingly bemused look on my face, because the numbers just don't add up. But so far, despite clear evidence of massive demand for physical gold, "The Gold Price" has continued to trade poorly. However, the longer this situation persists, the more definitely it will resolve itself; and it's very hard to see how that resolution ends in anything but higher prices.

Demand levels from Asia continue to soar while production increases just a couple of percent each year; and leaving aside Indian festivals and increasing central bank purchases, the fiat alternative to gold bullion — the US dollar — is coming under renewed pressure in the wake of the Taper That Never Was and the appointment of Janet Yellen as Ben Bernanke's successor.

…

But, like the infatuation America had with the Monkees in 1967, this fascination with the fiat dollar will prove to be nothing more than a passing fad; and one day — perhaps soon — the citizens of the West will, like their cousins in Asia and the Indian subcontinent, realize that there really is no alternative to sound money.

The only problem is, when the realization finally dawns, where will all the gold be?

 

Full Grant Williams letter below:

TTMYGH – Let It Be Fiat Monkees & Golden Beatles.pdf

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QaSa0Mi1L2w/story01.htm Tyler Durden

Submitted by James E. Miller of The Ludwig von Mises Institute of Canada,

“If you like your health care plan, you can keep your health care plan.”

These words, spoken by U.S. President Barack Obama in various forms and iterations, have become a running joke amidst the rollout of the Affordable Care Act. All across the country, hundreds of thousands of citizens are receiving cancellation notices in the mail. The stringent requirements for insurance plans under the new edict are curtailing many individual policies. A simpleton can grasp the economics: you prohibit something, it goes away. And yet, for years prior, the White House ignored the oncoming train and is now slowly inching away from the wreckage.

This was not the unforeseen consequence of good-intentioned legislation. According to an investigative report from NBC, the Obama Administration was fully aware of the result its health care bill would have on the marketplace for insurance. A provision written in the original version of the law would have allowed for the grandfathering of existing plans that did not meet the new standards. However, the Department of Health and Human Services rewrote the stipulation to radically narrow the rule, so that an estimated “40 to 67 percent of customers will not be able to keep their policy.” Not one to be a wet blanket, President Obama continued to assuage the public and reassure everyone that their preferred insurance policy would not being going away.

This was a lie. And not one kept close-to-the-chest by a few high-level officials. House Democratic Whip Steny Hoyer admitted that many in his party knew “there would be some policies that would not qualify and therefore people would be required to get more extensive coverage.” A presidential election and a litany of Senate seats were won based on the falsehood that America’s health insurance market would not be totally disturbed.

The admission of guilt may have ramifications for supporters of big government. In the short term, it undermines the President and the promises he makes going into the future. But voters are fickle and have a memory prone to lapses. When the subsidies start flowing, they will begin to smile again. The balancing act will be whether the boost in tax benefits outweighs being forced to pay a higher cost for what was once a cheaper product. Those who are net beneficiaries will be content while the losers may sulk but will ultimately accept the “new normal.”

The deceit behind ObamaCare is nothing new in the practice of governing. The state’s monopoly power makes it a natural target of suspicion. Even the most ardent worshiper of socialism is still wary that his nation’s controllers will turn on him. He keeps an ear out for fiction spun by his rulers but will not question larger injustice as long as he is fed well enough. Even with the preponderance of lies, there is still the naive hope “good folks” will soon come along who have a deep aversion to dishonesty. The white knight never arrives, but optimism prevails.

The happy voter is the one who refuses to grasp the obvious point that government serves as a vehicle for the worst in society to play out their violent fantasies. As Hayek put it, “the unscrupulous and uninhibited are likely to be more successful” in operating the machinery of total intimidation. It is always from the throne of authority that the worst deeds are accomplished. This includes mass aggression against property as well as the truth. The productive capacity of society is decimated enough by government’s necessarily parasitical operation; the public’s concept of verity is challenged by the various ministries of agitprop that disguise their actions as beneficial rather than schemes of plunder.

The false characterization needed to sustain Obama’s signature piece of legislation was another variation of Plato’s noble lie. In his widely heralded Republic, the classical philosopher wrote on the necessity of the few lording over the many to achieve harmonious social relationships. These “philosopher-kings” could govern best by spreading falsities that would have the “good effect” of making the underlings “more inclined to care for the state and one another.” One could call this a textbook lesson in the art of ruling over a dim and detached populace.

Perhaps the best exponent of the noble lie was the late, neoconservative king Irving Kristol, who held political theorist Leo Strauss as a strong intellectual influence. Kristol affirmed what many thinkers before him found when it comes to truth:

“There are different kinds of truths for different kinds of people. There are truths appropriate for children; truths that are appropriate for students; truths that are appropriate for educated adults; and truths that are appropriate for highly educated adults, and the notion that there should be one set of truths available to everyone is a modern democratic fallacy. It doesn’t work.”

In many ways, this statement is completely accurate. In a democracy, the people must be corralled. They must get behind measures that ordinarily wouldn’t receive a lick of support outside of a few special interests. The naked, unvarnished truth is a dangerous weapon against tyranny. So it must be distorted to fit the agenda of collectivists, statists, dictators, and despots. Anything will do to assure for maximum support with minimum resistance.

Had President Obama been upfront about the full ramifications of his health care edict, the public may have turned. It’s one thing to apply for and receive a subsidy. It’s another to disrupt lives and force people to take action they otherwise wouldn’t. Outside disturbances are a nuisance to common folks trying to make the best go at their lives. Like a dog with its tail between its legs, the Administration is now backtracking on its own selling point. In a recent press hearing, White House spokesman Jay Carney, the quivering apparatchik of social democracy, was quick to ignore past statements and highlight the benefits of the health care bill. He told Fox News correspondent Ed Henry,

Well, let’s just be clear, what the President said and what everybody said all along was that there were going to be changes under brought about by the Affordable Care Act that create minimum standards of coverage — minimum services that every insurance plan has to provide.

So goes the guarantee of “if you like it, you can keep it.” As progressive columnist Clarence Page admitted to radio host Hugh Hewitt, it was “one of those political lies, you know.” The promise will eventually find itself lodged somewhere in the memory hole along with the guarantee of liberty in a security state. The state itself is a great lie. It purports to be the great savior of mankind. The political class likens itself to the great deliverance from struggle and despair. The reality ends up not as rosy.

Kristol was right on one thing: not everyone accepts the truth. They will self-deceive to feel comfortable in their own skin. It is this weakness the politician will manipulate for his own aggrandizement. Honesty and truth are always a virtue. And that’s why they are wholly absent from the halls of power.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5wJeBBuacIw/story01.htm Tyler Durden

The last time we looked at global corporate cash flow and capex as a percentage of G4 (US, UK, Europe and Japan) things were bad. Two quarters later, things have gotten much worse, with that purest proxy of true growth, or lack thereof, corporate cash flow (and not fudged, adjusted, normalized, pro forma earnings), sliding yet again tracking the ongoing collapse in capex, and now down to levels last seen during 2009, and what’s worse going further back, all the way back to 2003 levels. In other words, even when taking into account the tens of trillions of liquidity injections by global central banks to prop up capital markets, the flow through to actual corporate cash flow has been non-existent, and the entire past decade is now a scratch despite the global asset price bubble rising to unprecedented new heights.

And just like last time, as we explained in early 2012, it is still the Fed’s fault.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_OK1mRJP8n8/story01.htm Tyler Durden

Note: The next three annual subscriptions (retail or professional) will get the opportunity to purchase their own pair of Google Glass Explorer Edition, through the Glass referral program. Click here to subscribe, and if you want to be referred to purchase your own pair of Glass then email me after payment.  

Last week in Reggie Middleton’s Apple Q4 2013 Analysis: RDF In Full Effect As Analysts & Press Go GaGa Over Garbage! I wrote:

Apple Still Has The Business and Financial Press Mesmerized With It’s RDF (Reality Distortion Field)

For some reason when I read management comments and financial statements I seem to see something totally different from Sell Side Analysts and the financial and business press. This is an excerpt from “Business Insider” on Apple’s Q4 earnings results:

The stock initially tanked after the numbers were out thanks to weaker than expected margin guidance. Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

On the company’s earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

Apple’s margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 

Apple’s margins have been and will be hit harder as I’ve predicted.  This non-sense about the deferred revenue from giving away software and Gene Munster’s “real margin” comments are utter nonsense. Apple’s reported margin IS ITS “REAL MARGIN”! The reason it is giving away its core software products for free is to compete with the entry and the threat of Microsoft’s Surface 2 tablet that comes bundled with a real, the real, office suite – Microsoft Office. This makes it real deal contender in the enterprise, where Office is not on the de facto standard – it is the standard. It also has to compete with Google’s Android who bought Quick Office and is now giving that office suite for free. For those who don’t think that makes a difference, what OS do you think took the iPad from 92% market share in 2010 to 32% market share last quarter?

Let me add to this since both Gene Munster and I are both frequent CNBC guests:

gene munster aapl forecast

On the same network, I recommended an Apple short:

 

If you did this investment thing to actually make money, who do you think CNBC should have on more regularly???

Well, my analysis has been vindicated once again, as per the NextWeb: 

KitKat ships with Google’s Quickoffice, bringing Microsoft Office editing out of the box to all new Android users

With Android 4.4 KitKat, Google’s biggest blow to Microsoft isn’t against Windows Phone. It’s against Microsoft Office. You see, KitKat ships with Quickoffice, letting you edit Microsoft Office documents, spreadsheets, and presentations on the go, without paying a dime, straight out of the box.

This tidbit was largely lost in the news yesterday, given the large number of improvements and new features that KitKat offers. Yet it’s a very big deal: every Android user that upgrades to KitKat will get Google’s Quickoffice, and every new Android device (starting with the Nexus 5) that ships with KitKat or higher will get access to Quickoffice.

office anywhere 730×457 KitKat ships with Googles Quickoffice, bringing Microsoft Office editing out of the box to all new Android users

Google acquired Quickoffice back in June 2012. In December 2012, the company released Quickoffice for iPad, making it exclusively available for free to its Apps customers. In April 2013, it followed up with free Android and iPhone versionsfor Apps customers as well. Last month, Google released Quickoffice for free, making it available to all Android and iOS users.

Here’s what we wrote at the time:

Microsoft shot itself in the foot here. Sure it finally released Office Mobile for iOS in June and Office Mobile for Android in July, but there was one small problem: an Office 365 subscription was and still is required.

In other words, Microsoft matched Google’s deal. Now Google has hit back and undercut Microsoft once again, and this blow might be the biggest yet.

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Click here to subscribe or purchase this update. Paid subscribers click here:  Apple 4Q2013 preliminary update. As we wait for my elfin magicians and presdigitation analysts to finsih up on the updated valuation numbers, I’m quite comfortable in recommending subscribers adhere to the latest set of valuation numbers proffered in the last Apple update. 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

•  Apple 3Q2013 Valuation Update – Retail
  (Technology)
•  Apple 3Q2013 Valuation Update – Pro & Institutional
  (Technology)

The update from two months ago is also of value for those who haven’t read it. It turns out that it was quite prescienct!

•  Apple 1Q2013 update – Pro & Institutional
  (Technology)
•  Apple 1Q2013 update – Retail
  (Technology)

See also:

What Sell Side Wall Street Doesn’t Understand About Apple – It’s Not The Leader Of The Post PC World!!!

 The short call – October 2012, the month of Apple’s all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made – Share Price, Market Share, Strategy and All

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WXwHP6Rpy8M/story01.htm Reggie Middleton