Prominent Economists Call for End to Fractional Reserve Banking

Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.

As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.

But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans are not subject to any reserve requirements.

Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico,  Canada, New Zealand, Sweden and the UK).

But there is a growing recognition that this is going in the wrong direction, because fractional reserve banking can destabilize the economy (and credit can easily be created by the government itself.)

It was big news this week when one of the world’s most prominent economics writers – liberal economist Martin Wolf – advocated doing away with fractional reserve banking altogether… i.e. requiring that banks only loan out as much money as they actually have on hand in the form of customer deposits:

Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.

 

***

 

What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.

 

A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well.

 

Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.

 

***

 

Opponents will argue that the economy would die for lack of credit. I was once sympathetic to that argument. But only about 10 per cent of UK bank lending has financed business investment in sectors other than commercial property. We could find other ways of funding this.

 

Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.

(The IMF study is here.)

In fact, a lot of experts have backed this or similar proposals, including:

Interestingly, the Chicago Plan for full reserve banking came very close to passing in 1934. But the unfortunate death of one of its main Congressional sponsors – Senator Bronson M. Cutting  – in a plane crash reversed the momentum for the bill.

As Wikipedia notes:

Cutting played a key role in the political struggles over the reform of banking which Roosevelt undertook while dealing with the Great Depression, and which resulted in the Banking Reform Acts of 1933 and 1935. As a supporter of the Chicago Plan proposed by economist Irving Fisher and others at the University of Chicago, Cutting was among a handful of influential Senators who might have been able to remove from the private banks their ability to manipulate the money supply by enforcing a 100 percent reserve requirement for all credit creation, as stipulated in the Chicago Plan. His unfortunate death in an airliner crash cut short what may have been his most enduring legacy to the nation.




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Can Police Search Your Cell Phone Without A Warrant? The Supreme Court Is About To Decide

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Two very important cases related to the 4th Amendment protection of cellphone data went before the Supreme Court yesterday. At issue here is whether or not police can search someone’s cellphone upon arrest. As usual, the Obama administration’s Justice Department is arguing against the citizenry, and in favor of the (police) state. Let’s not forget that the “Justice” Department also argued in favor of the police being able to place GPS tracking devices on people’s cars without a warrant back in 2011. Fortunately, the Supreme Court ruled against it.

Naturally, the feds in the current case will discuss all of the criminals they were able to bring to justice as a result of these privacy violations, but they will certainly not point out America’s current epidemic of unlawful arrests, as well as arrests for petty non-violent crimes that happen each and every day. For instance, let’s not forget statistics that came out last fall from the FBI that showed police make an arrest every two seconds in the USA. I covered this in detail in my post: Land of the Free: American Police Make an Arrest Every 2 Seconds in 2012.

That translates to 12.2 million arrests in 2012, only 521,196 of which were for violent crimes. So should cops be able to search cellphones of millions of Americans being arrested for non-violent crimes such as drug possession? Or what about the street artist in NYC who was unlawfully arrested for putting on a puppet show? Or the guy who’s house was raided by police for a parody Twitter account. Allowing cops to search cellphones upon arrest in a trigger happy police state seems barbaric, immoral and downright stupid to me.

Furthermore, isn’t it interesting that the feds appear so obsessed with taking away your civil liberties to catch petty criminals, yet they couldn’t put a single banker behind bars for the far more egregious crime of destroying the U.S. economy and ruining millions of lives?

Here are some excerpts from The New York Times article to help you get up to speed on what’s at stake:

WASHINGTON — In a major test of how to interpret the Fourth Amendment in the digital age, the Supreme Court on Tuesday will consider two cases about whether the police need warrants to search the cellphones of the people they arrest.

 

“The implications of these cases are huge,” said Orin S. Kerr, a law professor at George Washington University, noting that about 12 million people are arrested every year, often for minor offenses, and that about 90 percent of Americans have cellphones.

 

The justices will have to decide how to apply an 18th-century phrase — the Fourth Amendment’s prohibition of “unreasonable searches and seizures” — to devices that can contain 100 times more information than is in the Library of Congress’s 72,000-page collection of James Madison’s papers.

 

Others say there must be a different standard because of the sheer amount of data on and available through cellphones. In February, for instance, the Texas Court of Criminal Appeals suppressed evidence found on the phone of a high school student who was arrested on charges of causing a disturbance on a school bus. “Searching a person’s cellphone,” the court said, “is like searching his home desk, computer, bank vault and medicine cabinet all at once.”

 

Officials in California told the justices that searches are required because cellphones can be used to set off bombs. Mr. Riley’s lawyers responded that “this scarcely resonates as an everyday concern.”

Oh yeah, destroy privacy rights for 320 million people because a phone could potentially trigger a bomb. You can’t get much more stupid and pathetic than that argument.

In any event, the Supreme Court heard arguments yesterday, and from what I can gather the justices appear somewhat split. The conservative justices seem to side with the feds, while the liberal justices appear on the side of privacy. Professor Orin Kerr of The George Washington University Law School wrote in The Washington Post that he expects a middle-ground rule, which would make searches legal in some cases and illegal in others.

On a related note, the Pennsylvania state supreme court just ruled against civil liberties with regard to warrantless car searches. Whereas in the past police would need a warrant in all cases unless there were “exigent circumstances,” now the supposed smell of pot or a dog signaling for a search is good enough. This is extremely concerning given the fact that often times such “probable cause” is a bullshit excuse to violate your rights and no drugs are ever found. The viral video from Tennessee on Independence Day last year is a case in point. Recall: Extremely Powerful Video: Happy 4th of July from a Police State Checkpoint.




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Chinese Currency Collapses To 18-Month Lows; Nears PBOC Limits

After widening its tolerance for real world volatility mid-March, the PBOC has faced a daily battering of USD buyers and CNY sellers which have driven the Chinese currency to its weakest level in over 18 months. However, things are starting to become problematic… while call buying and hedging is exploding – as carry traders and local specs rush to cover exposures, Bloomberg notes that Morgan Stanley fears as the yuan approaches the lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put other currencies under selling pressure. The last time – Summer 2012 – that the PBOC defended its currency, EUR came under selling pressure but as Morgan Stanley notes, “In the very unlikely case” of PBOC not defending band, FX volatility would surge globally with implications going beyond RMB as markets would assume China’s economic problems might be significant… whocouldanode?

 

The Yuan is now trading 1.8% below (above on the chart) its fixing and near the 2% band limit the PBOC expanded to in March…

 

Bloomberg reports that as yuan approaches lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put currencies under selling pressure, helping USD, Morgan Stanley says in note.

CNY at 6.2659 now, trading 1.8% below today’s fixing at 6.1580; PBOC widened daily trading band to 2% on either side of fixing in March

 

 

When a similar situation occurred in June-July 2012, PBOC used $80b of reserves to defend band and, as this operation required China’s reserve managers to sell currencies to boost USD intervention fund, EUR came under selling pressure then, MS says in client note today

 

 

MS says it is more likely that China will seek controlled devaluation, pushing USD/CNY fixing higher, allowing CNY to drift lower within the band; this would be USD-positive

 

But “In the very unlikely case” of PBOC not defending band, FX volatility would surge globally with implications going beyond RMB; markets would assume China’s economic problems might be significant, putting commodity currencies at forefront of global selling interests

What could given them that idea!!??




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Inside The “Low-flation” Myth: A Disquisition On Inflation Seen And Not Seen – Part 1

Submitted by David Stockman via Contra Corner blog,

After paying my bills the other day I had home heating and electric utility costs on my mind—the winter having been an unusually harsh one in NYC like much of the rest of the nation. But then I noticed a story by an outfit called CNS News.com that contained some great historical graphs on decades worth of utility prices, and I was duly reminded that this wintery winter wasn’t all that: Home utility and fuel costs have been rising at a pretty robust clip for more than a decade now.

Indeed, notwithstanding the modest weight (5%) ascribed to utilities and fuel in the BLS price basket, there are few households in America that have escaped their relentless grind higher. Nor would most everyday Americans shuck this off as a trivial component of their own cost-of-living index or express relief that all remains copasetic on the inflation front— since these large utility and fuel gains have been offset by falling iPad prices and hedonic adjustments to the price of their $40,000 family sedan.

The fact is, the price index for electrical power increased by 5.3% during the past 12 months and has reached an all-time high. But I get it. That doesn’t count as “inflation” because its not in the Fed’s preferred measuring stick—the PCE deflator ex-food and energy. And, yes, they do have a point about the short-run volatility of commodity-driven components of the index like the price of Kwh’s from your local utility.

Heck, the price of power is even seasonal—-rising in the spring, peaking with the summer air-con load and then re-tracing in fall-winter. The latter is supposedly already factored into the BLS’ seasonal maladjustments. But, still, it can be granted that on a short-run basis of a few quarters or even years there is probably a lot of off-trend “noise” in electricity prices.

When it gets to a time frame of a decade running, however, I’ll put my foot down. Back in 2004-05, the government said the average price for electrical power was 9.0 cents/ Kwh compared to the 13.5 cents posted last week for March. Doing the math, that’s a compound growth rate of 4.5% over a decade. And that’s not noise. Its signal. Its inflation.

Electricity Price in March

In its article on the surging trend in utility bills, CNSNews.com actually cited the whole index numbers for March and prior year, not just the monthly delta. It then added insult to bubble news injury by placing the utility power gain in the context of overall energy prices trends:

The BLS’s seasonally adjusted electricity price index rose to 209.341 this March, the highest it has ever been, up 10.537 points or 5.3 percent–from 198.804 in March 2013…..Over the last 12 months, the energy index has increased 0.4 percent, with the natural gas index rising 16.4 percent, the electricity index increasing 5.3 percent, and the fuel oil index advancing 2.1 percent. These increases more than offset a 4.7 percent decline in the gasoline index.”

So the above paragraph begs some questions. For one thing, given the magnitude of the index number change for electricity and the double digit year/year change for natural gas something other than falling iPad prices comes to mind. Yet the financial press has so dumbed-down the economic data release narrative via near exclusive focus on algo-feeding monthly “deltas” that our monetary politburo can get away with ludicrous memes like “low-flation”. The trends which refute this nonsense are actually there in plain sight in the data—but are rarely encountered by even the attentive public.

So herein an essay on the overwhelming evidence of inflation during the decade long era in which the central bankers have been braying about “deflation”. Herein, too, some startling evidence of the complicity of the government statistical mills in using the inflation that is not seen (i.e. “imputed”) to dilute and obscure the inflation that is seen (i.e. utility bills).

To be sure, the above paragraph from CNS News might be read to mean that on a 12-month basis inflation is well-contained—even in the energy world. While electrical power and natural gas prices have been roaring upward, weakness in crude oil based products—fuel oil and gasoline—have off-set nearly all the rise. So possibly nothing to see here. Just more “noise” in the index to be left to the experts in the Eccles Building.

Not exactly. Some deep historical perspective is always a good place to start. Otherwise you get caught up in the Fed’s futile mind game of trying to assess the vast outpouring of short-term noise and signal emanating from a $17 trillion post-industrial economy. Indeed, such “in-coming” data is so riddled with guesstimates, imputations, faulty seasonal maladjustments and subsequent revisions as to be nearly meaningless.

And the proof of that is in the transcripts of Fed meetings themselves—released as they are with a 5-year lag. The transcripts show that especially at turning points in the economic and financial cycle, the monetary politburo is essentially clueless—- as it was in much of the spring, summer and early fall of 2008. More importantly, the “in-coming” data cited with grave authority by many FOMC participants with respect to GDP components, jobs, inflation and other macroeconomic trends is often nowhere to be found in the current official data—it having been revised away in the interim.

So starting off with a 100-year perspective on electrical power prices, the chart below makes the big picture point that the rise of Keynesian central banking after August 1971 has been associated with persistent inflation, not deflation. Thus, between 1913 and the early 1960s, electrical power prices in the US were flat—there was no trend inflation whatsoever.

Not coincidently, that era ended with the Johnson-Nixon assault on fiscal rectitude and sound money after 1965. Indeed, ever since the official arrival of discretionary central banking in 1971—that is, floating money anchored to the whims of only the FOMC— there has been a systematic inflationary bias in utility prices as is self-evident below.

Electricity Price Index

But there’s more. June 1997 can well be pinpointed as the date at which the Greenspan Fed went all-in for its modern policy of endless financial market accommodation as its primary policy tool. At that juncture the Fed had spent a few months contemplating Greenspan’s famous “irrational exuberance” warning of December 1996 and had actually made a half-hearted attempt to slow Wall Street’s thundering herd by nudging up interest rates in April. After a decidedly negative reaction, however, rates were eased in June 1997, and the Eccles Building has never looked back.

During the subsequent 17 years the Fed’s balance sheet has exploded from $400 billion to what will soon be $4.5 trillion. Call it 10X. For perspective, compare it to money GDP of 2X over the same period.

More importantly, recall that during most of this period the Fed has conducted recurrent jousts against threated, looming or just imagined “deflation”. Yet as the graph below shows, the average CPI gain over the period was 2.3%/year; and, appropriately, nothing is “ex’d” out of that number because every single American citizen did eat and need heating and transportation fuel during that 17-year time frame.

But here’s the bigger point. With respect to that part of inflation which is “seen”, as in a monthly utility bill, the rate of increase was much higher at 3.5% per annum. For those who think this kind of “moderate” inflation is a salutary thing, consider what a dollar saved today would be worth after a thirty year working life time under that 3.5% inflation regime. Answer: 35 cents.

In short, not a single one of America’s 115 million households—renters, owners and borrowers alike—escape the monthly electric utility bill. At $200 per month its not trivial, and the 3.5% trend of the past 17 years has just accelerated to 5.3%. And that happened straight into the jaws of what is being heralded as “low-flation”.

The above flat-out inflationary trend of nearly two decades running is by no means unique to electrical power prices. Consider gasoline, which has ticked down slightly during recent quarters, but about which there is no doubt regarding the trend.

Over the past seventeen years, retail gasoline prices are up at a 6.5% CAGR and by an almost equally inflationary 6.0% over the past nine years. Even giving allowance to the skyrocketing global petroleum prices after September 2007 and their subsequent crash after crude peaked at $150/bbl. a year later, gasoline prices have been heading upwards at a 3.0% rate since the eve of the financial crisis.

So let the recent downward squiggles depicted in the chart below not trouble the monetary politburo. People who travel by internal combustion machine have experienced a steady wallop of inflation for a long as the Fed’s fireman have been professing to be warding off deflation.

OK, there were some people around the Princeton campus who didn’t own a car and ambulated by bike or on foot. But they did need heating fuel in the winter and there was nothing disinflationary about meeting that expense—especially for the 10 million households who heat with home heating oil.

During the last 17-years the index has climbed at a 11% annual rate; and by a 6% CAGR since 2007. The fact that we are not at the momentary oil-price blow-off peak of mid-2008 is truly a case of “cold comfort”. An essential commodity that cost about $0.50 per gallon when Bernanke first started gumming about the “deflation” danger in 2002 now costs $3.00.

Yes, over reasonably long periods of time, most people eat and drink, too. Self-evidently, there is nothing deflationary, disinflationary or otherwise benign about the BLS sub-index for food and beverages. It is up by 2.4% annually during the 17-years since Greenspan kicked monetary discipline out of the Eccles building; and by 2.0% per year since Bernanke launched his own war against deflation in late 2007.

Moreover, there is nothing in that relentlessly ascending curve that speaks of a sudden downshift in recent quarters. During the 12 quarters ending in March 2014, food and beverage prices rose at a 2.2% annual rate.

The above observation leads to an obvious corollary. If you heat it, you have to rent it or own it. For the 40 million households who rent their castle, there has obviously been nothing very deflationary for a long time. For the past 17-years, rents have risen a 3.0% compound rate. And there is no sign of meaningful deceleration there, either. Rents were up by 2.8% in the year ending in March, and by 2.7% in the year before that.

There remains the 75 million households who own their homes, and according to the BLS, the rate of inflation there has been considerably more benign. We will take that apart forthwith, but it is worth noting that whether households own or rent, they end up with costs for water and sewer, trash collection and repairs.

According to the BLS, there has been no signs of deflation in any of these expense categories, either. The cost of water and sewer and trash collection, for example, has doubled since Greenspan had his irrational exuberance moment. That amounts to an 4.5 % rate of annual increase in every day life. As for home repairs, the CAGR is up by 4.8% per year since 1997. And in none of these categories there been any significant deceleration during recent periods.

 

So that gets us to the proverbial owners equivalent rent(OER)—about which three things are notable. First, it counts for 25% of the regular CPI. Secondly, it comprises 40% of that unique specie of inflation visible in the Eccles building—that is to say, the CPI less things which are inflating such as food and energy. And finally, it is derived by a methodology that can only be described as a preposterous bureaucratic farce.

Specifically, each month several thousand survey respondents, who own their homes and would likely not dream of renting their castle to strangers, and who are also not in the professional landlord business, are asked what they might expect to earn monthly if the did rent their home.

Self-evidently, they have no clue— and so neither does the Commerce Department which conducts the survery or the BLS which processes the data. And that assumes that the raw data did indeed data come from respondents, rather than consisting of numbers plugged in at the end of the month by Census Bureau employees rushing to finish their quota of interviews. There have been some recent news leaks to exactly that point.

Yet even as so dubiously measured, there has been significant OER inflation over the last 17 years: 2.4% annually to be exact. That figure has mysteriously slowed down to 1.7% annually since 2007, but even that rate of gain would not exactly qualify as deflation. OER would double every 40 years at that rate.

 

But here’s the thing. During the same 17-year period home prices as measured by the Case-Shiller repeat sales index have risen at a 5.2% annual rate—double the OER. And that’s notwithstanding the partial round trip of the housing sector boom and bust during that period.

Undoubtedly, some spreadsheet wiz at the Fed would say do not be troubled by this yawning gap between housing prices and OER. In its wisdom, the Fed has radically repressed the benchmark Treasury rate over this period, meaning that the “carry” cost of homeownership has declined sharply. So, yes, the fact that the housing asset price rose at 2X the rate of imputed rents over the past 17 years all makes sense!

Needless to say, now that interest rates are beginning to normalize the implication would be that the carry cost of ownership—that is, OER—-should begin to accelerate, too. Self-evidently, the deflation fighters in the Eccles building do not expect that—perhaps because they have a front row seat at the government fudge factory where OER is manufactured.

There is one component of the CPI that has experienced genuine deflation since the 1990s—and that is tradable goods subject to the withering force of labor cost reduction that resulted from draining the rice paddies of East Asia. Thus, the index for household furniture, appliances, furnishings, tools and supplies—which has a 4% weight in the CPI— has actually decline slightly since 1997.

The same is true of apparel and shoes which account for another 3.5% of the CPI. Still, household goods are down by only a cumulative 2% over the past 17 years and apparel and shoes by 4%. Those welcome but modest declines pale into insignificance relative to the 50-100% cumulative gains for the commodities and services highlighted above.

And the decline in tradable goods prices do not even begin to off-set the massive but partially invisible rise in the cost of medical, education and other services as will be outlined in Part 2.

Suffice it to say, the monetary politburo has well and truly reached a point of sheer desperation. To keep the Wall Street gamblers in play it needs to keep the money market rates at zero, and therefore the carry trades in business. But 7 years of ZIRP is so insensible on its face that it requires the invention of a giant, preposterous lie—-the myth of “low-flation”—to keep the printing presses humming in the basement of the Eccles Building.

Part 2: The Inflation Which Is Invisible.




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Ukraine Denies Funneling Arms To Jihadis In Syria

Over the weekend, Germany’s Der Spiegel magazine published a report on the funneling of Ukrainian arms to jihadists in Syria via Germany. According to information obtained by Der Spiegel, a Ukrainian state enterprise is delivering rifles to Germany, but the German federal government allegedly doesn’t know what is happening with the weapons. In fact, as Spiegel notes, Berlin “can not dispel the suspicion that these weapons have been passed on to Islamist holy warriors to cause a regime change in Syria.” It seems the “news” has spurred reaction from the peace-loving Ukrainian government who, as Interfax reports, staunchly denied any possibility of Germany’s re-exporting firearms to Syria this morning.

 

As Syria 360 reports, Der Spiegel has just published a report on the funneling of Ukranian arms to jihadists in Syria via Germany. The following is a translation of the German text by Emily-Dische Becker:

“According to information obtained by Der Spiegel, a Ukrainian state enterprise is delivering rifles to Germany. The German federal government allegedly doesn’t know what is happening with the weapons. Are they being used in the war in Syria?

 

According to information obtained by SPIEGEL, the Ukraine is apparently doing arms deals through Germany. As the German Foreign Office acknowledged in response to a request by Die Linke (the Left party), the Ukrainian state company Ukroboronprom has been exporting semi-automatic rifles of the SKS Simonov variety to Germany. These imports were approved by the responsible government agencies.

 

The Foreign Office however is concealing where the weapons are ending up in Germany: The delivery terms of the German contract partner are “a business and a trade secret.” The rifles, it says evasively, are being delivered to Germany “for the purpose of modification.” The American Jamestown Foundation think-tank, which is said to enjoy strong historical ties to U.S. intelligence agencies, believes that the weapons are being delivered from Germany to Syrian rebels. Jamestown estimates the delivery of 54,000 small arms in the years 2011 and 2012. These could have been used for ” covert operations ” in Syria.

 

The federal government is aware of the suspicions of the Americans, but does not want to investigate them. As stated in their response to the Left party’s inquiry, they have “no findings of [their] own on this matter.” Neither the German army, nor the military counterintelligence agency, nor the federal intelligence service (BND) are involved in the purchase of weapons [the federal government claims].

 

The Left party’s expert for foreign affairs, Sevim Dagdelen, is alarmed by the government’s ignorance: “It is scandalous that the federal government can not convey anything about the whereabouts of these weapons. ” To make matter worse, Berlin “can not dispel the suspicion that these weapons have been passed on to Islamist holy warriors to cause a regime change in Syria. “

And now this morning, Interfax reports the denial…

  • Ukrainian agency denies possibility of Germany’s re-exporting firearms to Syria

Now who do you believe?




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AsiaPac Double ‘Data’ Whammy: China PMI Misses Following Aussie PMI Collapse

On the heels of disappointing March data in China for Services and Manufacturing, China’s “official” manufacturing PMI saw its lowest ‘April’ print on record (typically a period of renaissance post-New Year data snafus) missing expectations for the first time in 0214 and just marginally above last month’s data. China is still in Schrodinger-land with “official’ data (biased towards larger SOEs) in very modest expansion and Markit (weighted towards smaller – more realistic – entities) in considerable contraction. That China disappointment follows earlier data which saw Aussie PMI collapsed over 3 points in April to its lowest in 9 months with the deterioration broad-based across the key sub-components. As Goldman notes, production is now at its weakest in a year, employment remains in contraction and, most worryingly, new orders printed their largest contraction in 13 months. This is the 6th month in a row of Aussie manufacturing contraction.

 

This was China’s lowest April Manufacturing PMI print on record…

 

Missing expectations… for the first time in 2014

 

But leaving the official data in modest expansion and Markit firmly in contraction…

 

 

Aussie PMI at its lowest in 9 months as all the key sub-components collapse…

 

As Goldman concluded – rather ominously,

…manufacturing conditions remain very challenging despite the considerable monetary policy easing by the RBA. Moreover, with the recent appreciation in the AUD now adding to the headwinds facing this sector, a meaningful recovery in manufacturing sector activity still seems some way away.

 

 

Charts: Bloomberg




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17 Facts To Show To Anyone That Still Believes That The U.S. Economy Is Just Fine

Submitted by Michael Snyder of The Economic Collapse blog,

No, the economy is most definitely not "recovering".  Despite what you may hear from the politicians and from the mainstream media (shrugging off today's terrible GDP print), the truth is that the U.S. economy is in far worse shape than it was prior to the last recession.  In fact, we are still pretty much where we were at when the last recession finally ended.  When the financial crisis of 2008 struck, it took us down to a much lower level economically.  Thankfully, things have at least stabilized at this much lower level.  For example, the percentage of working age Americans that are employed has stayed remarkably flat for the past four years.  We should be grateful that things have not continued to get even worse.  It is almost as if someone has hit the "pause button" on the U.S. economy.  But things are definitely not getting better, and there are a whole host of signs that this bubble of false stability will soon come to an end and that our economic decline will accelerate once again.  The following are 17 facts to show to anyone that believes that the U.S. economy is just fine…

#1 The homeownership rate in the United States has dropped to the lowest level in 19 years.

#2 Consumer spending for durable goods has dropped by 3.23 percent since November.  This is a clear sign that an economic slowdown is ahead.

#3 Major retailers are closing stores at the fastest pace that we have seen since the collapse of Lehman Brothers.

#4 According to the Bureau of Labor Statistics, 20 percent of all families in the United States do not have a single member that is employed.  That means that one out of every five families in the entire country is completely unemployed.

#5 There are 1.3 million fewer jobs in the U.S. economy than when the last recession began in December 2007.  Meanwhile, our population has continued to grow steadily since that time.

#6 According to a new report from the National Employment Law Project, the quality of the jobs that have been "created" since the end of the last recession does not match the quality of the jobs lost during the last recession…

  • Lower-wage industries constituted 22 percent of recession losses, but 44 percent of recovery growth.
  • Mid-wage industries constituted 37 percent of recession losses, but only 26 percent of recovery growth.
  • Higher-wage industries constituted 41 percent of recession losses, and 30 percent of recovery growth.

#7 After adjusting for inflation, men who work full-time in America today make less money than men who worked full-time in America 40 years ago.

#8 It is hard to believe, but 62 percent of all Americans make $20 or less an hour at this point.

#9 Nine of the top ten occupations in the U.S. pay an average wage of less than $35,000 a year.

#10 The middle class in Canada now makes more money than the middle class in the United States does.

#11 According to one recent study, 40 percent of all Americans could not come up with $2000 right now even if there was a major emergency.

#12 Less than one out of every four Americans has enough money put away to cover six months of expenses if there was a job loss or major emergency.

#13 An astounding 56 percent of all Americans have subprime credit in 2014.

#14 As I wrote about the other day, there are now 49 million Americans that are dealing with food insecurity.

#15 Ten years ago, the number of women in the U.S. that had jobs outnumbered the number of women in the U.S. on food stamps by more than a 2 to 1 margin.  But now the number of women in the U.S. on food stamps actually exceeds the number of women that have jobs.

#16 69 percent of the federal budget is spent either on entitlements or on welfare programs.

#17 The number of Americans receiving benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.

Taken individually, those numbers are quite remarkable.

Taken collectively, they are absolutely breathtaking.

Yes, things have been improving for the wealthy for the last several years.  The stock market has soared to new record highs and real estate prices in the Hamptons have skyrocketed to unprecedented heights.

But that is not the real economy.  In the real economy, the middle class is being squeezed out of existence.  The quality of our jobs is declining and prices just keep rising.  This reality was reflected quite well in a comment that one of my readers left on one of my recent articles

It is getting worse each passing month. The food bank I help out, has barely squeaked by the last 3 months. Donors are having to pull back, to take care of their own families. Wages down, prices up, simple math tells you we can not hold out much longer. Things are going up so fast, you have to adopt a new way of thinking. Example I just had to put new tires on my truck. Normally I would have tried to get by to next winter. But with the way prices are moving, I decide to get them while I could still afford them. It is the same way with food. I see nothing that will stop the upward trend for quite a while. So if you have a little money, and the space, buy it while you can afford it. And never forget, there will be some people worse off than you. Help them if you can.

And the false stock bubble that the wealthy are enjoying right now will not last that much longer.  It is an artificial bubble that has been pumped up by unprecedented money printing by the Federal Reserve, and like all bubbles that the Fed creates, it will eventually burst.

None of the long-term trends that are systematically destroying our economy have been addressed, and none of our major economic problems have been fixed.  In fact, as I showed in this recent article, we are actually in far worse shape than we were just prior to the last major financial crisis.

Let us hope that this current bubble of false stability lasts for as long as possible.

That is what I am hoping for.

But let us not be deceived into thinking that it is permanent.

It will soon burst, and then the real pain will begin.




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The “Greatest Irony” About The Entire “Record American Inequality” Debate

One can read 696 page neo-Marxist tomes “explaining” inequality in a way only an economist could – by ignoring the untold destruction economists themselves have unleashed on society with their “scientific theories” (and providing a “solution” to the inequality problem which we warned readers was coming back in September of 2011) or one can read the following 139 words by Elliott’s Paul Singer which in two short paragraphs explains everything one needs to know about America’s record class inequality, including precisely who is the man responsible:

Inequality in the U.S. today is near its historical highs, largely because the Federal Reserve’s policies have succeeded in achieving their aim: namely, higher asset prices (especially the prices of stocks, bonds and high-end real estate), which are generally owned by taxpayers in the upper-income brackets. The Fed is doing all the work, because the President’s policies are growth-suppressive. In the absence of the Fed’s moneyprinting and ZIRP, the economy would either be softer or actually in a new recession. 

 

The greatest irony is that the President is railing against inequality as one of the most important problems of the day, despite the fact that his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough.

Q.E.D.




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Want To Fix Income/Wealth Inequality? Here’s How

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

There is nothing fancy about these three solutions.

I have covered rising income/wealth inequality for many years in dozens of entries. Since Thomas Piketty's new book has catapulted the topic into the media spotlight, it's a good time to list solutions that go deeper than Piketty's proposed global wealth tax–a proposal he characterizes as utopian.

Every solution is utopian, because the Financial Aristocracy and their central bank cronies have democracy by the throat. There is no legislative way to change the Status Quo when political power is for sale to the highest bidder, and central banks are issuing nearly-free money to the financial oligarchy that owns the political machinery.

But listing solutions is still important, because it reveals just how far from democracy, rule of law and free-market capitalism we have fallen. I have been describing various aspects of widening inequality in recent entries:

America's Nine Classes: The New Class Hierarchy
A Critique of Piketty's Solution to Widening Wealth Inequality
Are You an Elitist? Class Warfare and the New Nobility

I propose three straightforward solutions that will systemically rectify wealth and income inequality.

1. Rather than add taxes to fund more social welfare–in effect, placing a Band-Aid over the tumor–let's start by removing the source of rising inequality: the Federal Reserve. I laid out in detail how the Fed's policies have enriched the top .1% at the expense of everyone else in Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve (January 28, 2014)

This boils down to the Cantillion Effect: new money is injected into the economy at specific points, creating winners and losers. Those with access to the new money (in the Federal Reserve's policies, those with financial power) gain immensely and everyone far from the free-money spigot loses purchasing power.

There's no mystery here: if trillions of dollars are available at near-zero interest rates to those at the top of the pyramid, they will benefit accordingly.

This chart shows how access to the Fed's free-money spigot causes the very top layer of owners of capital to outpace their less-wealthy peers: while the top 10% has outpaced the bottom 90% and the top 1% has outpaced the top 10%, the real action is at the very pinnacle of wealth holders: the top .1% has outpaced the 1%, and the top .01% has outpaced the .1%.

Were the Fed abolished, the top holders of financial wealth would no longer have access to unlimited sums of free money, and the asset bubbles that are the essential engines of wealth inequality would all collapse, along with the vast majority of the top holders' phantom wealth.

The collapse of asset valuations would impact middle-class holders of IRAs, 401Ks and pension funds invested in asset bubbles, but the real losers would be those at the top who own most of the phantom financial wealth.

2. Eliminate the 6.2% Social Security payroll tax paid by employees and employers, and print the money to pay Social Security benefits in the Treasury. I described this solution in How About Ending Social Security and Paying Retirees with Cash? (November 15, 2013).

The basic idea is this: rather than borrow money into existence via the Federal Reserve, abolish the Fed and print the new money directly. There is no interest to be paid on this new money, and so the financial parasites have nothing to gain from its creation.

This would wipe out the most regressive tax on the working poor, and benefit all employers. Each currently pay 6.2% of wages, so eliminating Social Security taxes would give every worker an immediate 6.2% raise and every employer a 6.2% reduction in labor overhead. (The 1.45% Medicare tax each pays would remain in place.)

The newly issued $800 billion a year would flow directly into tens of millions of individuals' accounts, where the the majority of it will be spent in the real economy.

As for those who claim creating $800 billion a year would spark runaway inflation: the Fed has printed over $3 trillion in the past five years, and inflation is mostly a result of asset bubbles and cartel pricing (sickcare, college tuition, F-35 aircraft, etc.), not new money.

Abolishing the Fed would trigger a deflationary collapse of asset bubbles. Printing $800 billion and distributing it to tens of millions of households would only counter some of this deflationary wave. The $800 billion annual distribution is simply too small to create inflation in a $16 trillion economy that is undergoing a cleansing of trillions of dollars in phantom wealth at the top of the wealth pyramid.

3. Tax unearned income at much higher rates than earned income. The vast majority of the New Nobility's income is unearned income from rents, interest, dividends and capital gains. Taxing unearned income is in effect a wealth tax because only those who own income-producing assets have unearned income.

It would be easy to set up a simple tiered tax structure that reduces income taxes for households with less than $250,000 annual earned income and offsets that reduction by raising the tax on unearned income above some level that enables small entrepreneurs and middle-class households to accumulate capital–for example, unearned income such as interest, dividends and capital gains would be taxed at the same rate as earned income up to $100,000 and then rises to much higher rates above that level.

There is nothing fancy about these three solutions. They shift the incentives away from speculation to earned income/productive work, they lower regressive taxes on the middle class and working poor and they do not restrain legitimate enterprise and wealth accumulation. They eliminate complex systems (the Federal Reserve and the tax code) and put money in the hands of tens of millions of households rather then the top .1%.

Yes, they are utopian, but only because we keep electing the same bought-and-paid-for Demopublican lapdogs of the super-wealthy and vested interests.
 


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