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Believe it or not, the Iraqi army is on the verge of launching an attack on ISIS-held Mosul.

The city – home to millions of Iraqis – is Bakr al-Baghdadi’s most important urban stronghold.

Raqqa is the ISIS “capital”, but it’s easier to command. Mosul is a major city with a population that numbers in the millions. If ISIS were to lose its grip there, it would almost surely mark the beginning of the end for the self-styled “caliphate.”  

Over the past three weeks, Mosul has come under pressure from Russian-backed Shiite militias, US-supported Iraqi regulars, and Kurdish Peshmerga fighters who at this point have no idea who is on their side and who isn’t. 

Below, find excerpts from a new WSJ piece that outlines the pressure Islamic State faces from an international intelligence community that no longer finds them useful. 

Last week, the Pentagon said the U.S. military had killed a man they identified as one of Islamic State’s top military officials. It didn’t give any further information, but Gen. Magsosi said the man, known as Abu Eman, was the top expert at the Mosul bomb lab.

 

When Islamic State captured Mosul, Iraq’s second-largest city, in the summer of 2014, the university was one of the spoils. The university had a strong reputation around Iraq for its science departments, alumni say.

 

By March 2015, dozens of Islamic State engineers and scientists had set up a research hub in the chemistry lab, which was full of equipment and chemicals, according to the people with knowledge of the university.

 

Many of the regular staff, including professors specialized in organic, industrial and analytical chemistry, remained in the city at the time, but the new laboratories were staffed by Islamic State’s own men, according to one of those people.

 

At least since August, dozens of individuals—presumed to be foreigners because they didn’t speak Iraqi Arabic—were seen moving through the labs, the two people said. They said they were told specialized units had been set up there for chemical explosives and weapons research as well as suicide-bomb construction.

 

A separate group at the university’s technical college was dedicated to building suicide-bomb components, one of the two said.

Of course it’s a little late to be getting that kind of feedback. Sure, ISIS is now in control of Mosul’s intellectual community and that includes the bombmakers.

The question is whether these individuals will fold under pressure from the IRGC and admit what they know to the Ayatollah.

via Zero Hedge http://ift.tt/1Y4S4JQ Tyler Durden

Submitted by Peter Schiff via Euro Pacific Capital,

It may be almost impossible to underestimate the gullibility of professional Fed watchers. At least Lucy van Pelt needed to place an actual football on the ground to fool poor Charlie Brown. But in today’s high stakes game of Federal Reserve mind reading, the Fed doesn’t even have to make a halfway convincing bluff to make the markets look foolish.

Just two weeks ago, the release of the Fed's March policy statement and the subsequent press conference by Chairwoman Janet Yellen should have made it abundantly clear that the Central Bank policy had retreated substantially from the territory it had previously staked out for itself. In December it had anticipated four rate hikes in 2016,  but suddenly those had been pared down to two. Based on the conclusion that the era of easy money had been extended for at least a few more innings, the dollar sold off and stocks and commodities rallied.

But in the two weeks that followed the dovish March guidance, some lesser Fed officials, including those who aren't even voting members of the Fed's policy-setting Open Market Committee, made some seemingly hawkish comments that convinced the markets that the Fed had backed off from its decision to back off.

The campaign began on March 19 when St. Louis Fed President James Bullard said that the Fed had largely met its inflation and employment goals and that it would be “prudent to edge interest rates higher.” (H. Schneider, Reuters) Two days later Bloomberg reported that Atlanta Fed President Dennis Lockhart had said, “There is sufficient momentum…to justify a further step…possibly as early as April,” (J. Randow, S. Matthews, 3/21/16)

And it didn't stop there. On March 22, Philadelphia Fed President Patrick Harker said,“there is a strong case that we need to continue to raise rates…I think we need to get on with it.” (J. Spicer, Reuters) On March 24, Bullard chimed in again, saying that rate hikes “may not be far off,” appearing to back Lockhart’s suggestion for a surprise April hike. Suddenly, chatter erupted on Wall Street that the April FOMC meeting should be considered a “live” one, where a rate hike was possible. With such caution spreading, the markets reacted predictably: the dollar rallied, gold and stocks declined. 

At the time I said, as I have been saying all year, that the Fed never had an intention to tighten further, and that it would continue to talk up the economy just to create the impression of health. But many believed that Janet Yellen would use her speech this week at the New York Economic Club (her first public comments since her March press conference) to underscore the comments made by her colleagues in the past two weeks. Instead she delivered a double-barreled repudiation of any potential hawkish sentiment. In fact, her talk could be viewed as the most dovish she has ever delivered since taking the Chair.

The market reaction was swift. In fact, as the text of her address was released a few minutes before she hit the podium, gold jumped and the dollar dropped even before she started speaking. The only surprise was that there was any surprise at all.

If market watchers actually looked at economic data instead of trying to parse the sentence structure of Fed apparatchiks, they would know that the economy is rapidly decelerating, and most likely heading into recession (if it’s not already in one). These conditions would prohibit an overtly dovish Fed from any kind of tightening. Just this week February consumer spending increased at a tepid .1%, in line with very modest expectations (Bureau of Economic Analysis). But to get to that flaccid figure, the much more robust .5% growth rate originally reported for January had to be revised down to .1%. If that major markdown had not occurred, February would have come in as a contraction. The sleight of hand may have fooled the markets, but the Fed's own bean counters had to take it seriously. The figures were the primary justification for the Atlanta Fed’s decision to slash its first quarter GDP estimate to just .6%. That estimate had been as high as 1.4% last Thursday and 2.7% back in February. Clearly something isn't working. But whatever it is, Janet Yellen won't speak its name.  

In her speech in New York, Yellen was careful to mention that the Fed has not reduced its full year growth forecast of 2.5% to 3.0% that it had laid out in December. This despite the fact that their first quarter predictions, which must be a big part of their full year predictions, have already been hopelessly shattered by the Atlanta Fed's updates. 

If the Fed really believes that we are still on a solid growth track, then two major questions should immediately come to mind:

1) Given that she acknowledges greater than expected financial stresses and expected deceleration abroad, what could possibly be the catalyst that will suddenly reverse our economic trajectory, and

 

2) If it really does believe that this miracle will occur, why has the Fed abandoned the monetary policy trajectory that it announced in December?

The answer to the first question is a mystery. For much of the past year, Yellen stressed the improvements in the labor market, as evidenced by the low unemployment rate. But that figure has been thoroughly debunked by those who correctly point out that job creation in the U.S. has been dominated by low-paying part-time jobs that detract from economic health rather than add to it. But while Yellen clung to her rosy domestic outlook, she acknowledged the significant slowdown abroad. But if these global concerns are sowing caution at the Fed, why does she expect the U.S. to buck the trend?

She is correct that that many countries around the world have badly missed First Quarter forecasts. But she totally ignores the fact that the U.S. has been one of the bigger disappointments. For instance, since the end of last year, expectations for Q1 growth have declined 12.5% for Germany, 30% for Canada, 45% for Norway, and 57% for Japan (Bloomberg, 3/30/16). But based on the current estimates from the Atlanta Fed, the U.S. economy is growing at a rate that is 75% slower than the 2.4% projection Yellen and the Fed had forecast back in December. So why does the Fed acknowledge unexpected weakness abroad, yet ignore even greater unexpected weakness in the U.S.? Could it be that Yellen does not want to be seen as one of those “fiction peddlers” that President Obama criticized in his State of the Union address who have the audacity to suggest that the U.S. economy is not strong?

But the bigger question is not why the Fed is mindlessly cheer-leading, that is after all part of its job description, but how it can justify altering its monetary policy while holding fast to its economic forecasts. To square that circle,Yellen said that the Fed had erred in its assumptions as to what constitutes a “neutral” policy level whereby rates are neither stimulating nor restrictive. She said that based on her global concerns, neutral policy should now be considered close to 0% rather than the 2% that the Fed had hinted at earlier. She also said that the range of factors that the Fed considers in reaching its rate decisions had evolved beyond simply looking at the traditional inputs of GDP growth, inflation and unemployment to include global risk factors that could impact the U.S. In other words, the Fed is not simply “data dependent” but is now “globally data dependent,” a stance that could allow it to point to any potential crisis anywhere in the world as a rationale not to raise rates. Already many observers are suggesting that the June “Brexit” vote in the UK will be a justification to take a rate hike off the table for the June FOMC meeting.

Of course, this ever-expanding list of criteria should be viewed as what it really is: a continual shifting of goal posts that will prevent the Fed from EVER having to raise rates again (at least until a rapidly rising CPI forces its hand). It may have incorrectly believed it could get away with a series of increases when it first started raising in December, but those expectations may have wilted when the markets and the economy dropped so decisively in the immediate wake of December’s 25 basis point increase. Yet even though markets have recovered, I believe they have only done so because the Fed has backed off. In fact, if that initial rate hike was a trial balloon for future hikes, its flight was about as successful as the Hindenburg’s. As such, the Fed hardly wants to risk another sell-off that it may be unable to reverse.

So the handwriting is on the wall for anyone literate enough to read it. The Fed is stuck in a monetary Roach Motel from which it may never escape. Keynesian economists like to discuss a “liquidity trap” but their policies have created an undeniable “stimulus trap” that I believe will remain in place until the whole merry-go-round spins out of control.

The quarter that just ended yesterday saw the biggest quarterly declines in the U.S. dollar in five years (T. Hall, Bloomberg, 3/30/16), and the strongest quarter for gold in 30 years (R. Pakiam, Bloomberg, 3/30/16). These moves completely took the Wall Street establishment by surprise. But given the historic rally enjoyed by the dollar over the past five years, three months’ worth of declines may just be a small down payment on the declines the dollar may experience in the years ahead.

Despite having fallen for all of the Fed’s prior head fakes,  some economists are taking today’s March payroll report, which showed the creation of 215,000 jobs and a tick up in the labor participation rate to 63.0% (Bureau of Labor Statistics), as a sign that the Fed will now have to shift back into a hawkish stance. Putting aside the fact that the majority of the new jobs were part-time and went to people who already had at least one, and that the official unemployment rate actually ticked up, one wonders how much more of this will we have to witness before economists  finally realize that there will likely never be a real ball to kick.

via Zero Hedge http://ift.tt/25BGMm4 Tyler Durden

In the wake of the terrorist attacks that left nearly two dozen killed and some 100 people injured, officials in Brussels (not to mention presidential candidates in the US) are wondering whether police in Belgium should have tortured Salah Abdeslam last weekend.

To let Donald Trump and others tell it, torturing Abdeslam would likely have yielded valuable information that may well have prevented the attacks that left some 34 people dead last week. 

Meanwhile, “the terrorists” are planning attacks on Belgium’s nulclear facilities – or at least that’s what the mainstream media wants you to believe. 

As you can see from the following headline dump however, the real threat to peace in the Western world may emanante from sheer incompetence.

via Zero Hedge http://ift.tt/1X4CePk Tyler Durden

Submitted by Justin Raimondo via AntiWar.com,

Unlike many libertarians, I love presidential election season, because that’s when generally ignored foreign policy issues are discussed beyond the small circle of Washington wonks. And that’s why I’m having such fun with Donald Trump – much to the annoyance of some of my readers, both libertarians and liberals alike: because he’s provoking a much-needed discussion about who benefits (and loses) from “American leadership” on the world stage. Most useful is his recent assertion that the North Atlantic Treaty Organization (NATO) is “obsolete.”

So it is. When the Berlin Wall fell, and the Soviet Union dissolved, the rationale for NATO disintegrated along with it. However, as libertarians know all too well, government programs (especially those that benefit the corporate sector) never die, nor do they fade away: they just keep growing to the degree that their constituency wields political clout. In NATO’s case, this clout is considerable.

When the citizens of Berlin did what Ronald Reagan urged Gorbachev to do – “Mr. Gorbachev, tear down that wall!” – the Soviet leader tried to negotiate with the West. And, to his mind, he succeeded: an understanding was reached with Washington that the Russians would allow German reunification on the condition that the NATO alliance would not expand eastward.

That promise was not kept. Instead, the lobbyists, both foreign and domestic, went into overdrive in a campaign to extend NATO to the very gates of Moscow. It was a lucrative business for the Washington set, as the Wall Street Journal documented: cushy fees for lobbyists, influence-buying by US corporations, as well as political tradeoffs for the administration of George W. Bush, which garnered support for the Iraq war from Eastern  Europe’s former Warsaw Pact states in exchange for favorable treatment of their NATO applications.

The Committee to Expand NATO, later re-dubbed the US Committee on NATO, had at its core many of the founding members of Bill Kristol’s Project for a New American Century (PNAC) which played such an instrumental role in agitating for the invasion of Iraq. Yet it was too lucrative to exclude “progressives” of the Clintonian variety, bringing together neoconservatives like Paul Wolfowitz, Robert Kagan, Stephen Hadley, and Richard Perle, with liberal internationalists such as Will Marshall, of the Progressive Policy Institute, and Sally Painter, a former Commerce Department official under Bill Clinton –turned-lobbyist, who raked in hundreds of thousands in contracts from aspiring NATO countries and their corporate clients in the US.

Founder and president of the NATO Committee was Bruce Jackson, at the time finance director of Bob Dole’s presidential campaign, and vice-president in charge of planning and strategy for Lockheed – today Lockheed-Martin – the biggest military contractor in the country.

The NATO expansion project fit neatly in with Jackson’s day job: all NATO applicants must upgrade their military forces in order to meet uniform standards, and this meant a windfall for the military-industrial complex – with Lockheed first in line. The Lockheed connection was reinforced by Randy Scheunemann, a member of the Committee’s board, and president of Orion Strategies, a public relations firm whose clients include Lockheed.

The Clinton administration fully supported NATO expansion, and the Committee’s activities brought together the White House, members of Congress from both parties, and the Washington lobbyists and their foreign clients for a spate of conferences, dinners, and private meetings. Reams of propaganda were aimed at the mass media, and the political class, including a very visible presence at the national conventions of both political parties.

In short, NATO expansion was – and is – a crony capitalist’s dream, albeit not the sort that gets the same amount of attention from “libertarian” critics of such boondoggles as the Ex-Im Bank, who regularly remind us that Boeing is the Bank’s biggest customer. Forgotten (or evaded) is the fact that Boeing (or Lockheed-Martin, General Dynamics, etc.) gets billions whenever a new applicant is added to NATO’s ranks and has to modernizes its forces.

The NATO expansionists won their battle: Poland, Hungary, and the Czech Republic joined in 1999: Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia were added in 2004. Albania and Croatia came on board in 2006. The latest applicants are tiny Montenegro, a splinter shaved off of the former Yugoslavia, which will probably be admitted this summer, and Georgia, which is not even in Europe, and is still fighting to join the club: its inclusion is controversial in part because it would be seen as throwing down the gauntlet to Russia, with whom it fought a brief war in 2008 over the breakaway Republic of Ossetia.

Therein lies the real danger posed by NATO expansion – and, indeed, the existence of the alliance thirty years after the Soviet implosion. As Sen. Robert A. Taft put it in a 1949 nationally broadcast speech opposing US entry into NATO, he said:

“It obligates us to go to war if at any time during the next 20 years anyone makes an armed attack on any of the 12 nations. Under the Monroe Doctrine we could change our policy at any time. We could judge whether perhaps one of the countries had given cause for the attack. Only Congress could declare a war in pursuance of the doctrine. Under the new pact the President can take us into war without Congress. But, above all the treaty is a part of a much larger program by which we arm all these nations against Russia… A joint military program has already been made… It thus becomes an offensive and defensive military alliance against Russia. I believe our foreign policy should be aimed primarily at security and peace, and I believe such an alliance is more likely to produce war than peace. A third world war would be the greatest tragedy the world has ever suffered. Even if we won the war, we this time would probably suffer tremendous destruction, our economic system would be crippled, and we would lose our liberties and free system just as the Second World War destroyed the free systems of Europe. It might easily destroy civilization on this earth…

 

“There is another consideration. If we undertake to arm all the nations around Russia from Norway on the north to Turkey on the south, and Russia sees itself ringed about gradually by so-called defensive arms from Norway and. Denmark to Turkey and Greece, it may form a different opinion. It may decide that the arming of western Europe, regardless of its present purpose, looks to an attack upon Russia. Its view may be unreasonable, and I think it is. But from the Russian standpoint it may not seem unreasonable. They may well decide that if war is the certain result, that war might better occur now rather than after the arming of Europe is completed…

 

“How would we feel if Russia undertook to arm a country on our border; Mexico, for instance?

 

“Furthermore, can we afford this new project of foreign assistance?”

Which brings us to Trump’s critique: that NATO is a “bad deal” because we bear a disproportionate share of the costs. He is quite correct on this score. As of today, the US and Estonia are the only two NATO members keeping to the “requirement” that their military spending equals two percent of GDP. Former Defense Secretary Robert Gates pointed this out in a 2011 speech in which he predicted that NATO’s future was sure to be “dim if not dismal.” Our shiftless allies are all too “willing and eager for American taxpayers to assume the growing security burden left by reductions in European defense budgets,” he said.

Added to the direct costs of NATO is the expense of stationing over 60,000 troops in Europe, maintenance of our many bases, and the opportunity costs of money that could have been diverted to productive domestic uses. Taft, it seems, was right that the costs of NATO would turn out to be “incalculable.”

And then there is yet another cost – the price of risking World War III.

NATO expansion has led to Russian rearmament and the nullification of arms treaties negotiated as the cold war neared its endpoint. The Western powers have launched provocative military “exercises” that cannot be seen by the Russians as anything other than a dress rehearsal for war – and the Kremlin has reacted accordingly.

With his plan – or, rather, inclination – to abandon the old NATO and replace it with some sort of multilateral counterterrorist operation, and his insistence that our “allies” pay up, Trump is forcing an issue onto the stage that hasn’t been seen since the days of Bob Taft. And with the bogeyman of Communism absent, he is free to say he could get along with Vladimir Putin and only catch flak from committed neocons.

NATO isn’t just an expensive luxury of the sort we can no longer afford – it is a tripwire that could be set off by a minor border conflict involving Moldova, the status of Kaliningrad, or – more likely – another round of hostilities in Ukraine.

Would we start World War III in defense of the oligarchs of Kiev?

I wouldn’t put it past them.

That’s why, no matter what the fate of Trump’s presidential bid, we all owe him for raising this vital issue – and within the GOP, no less, a party which has been, up until now, a bastion of support for the NATO-crats and the new cold war against Russia.

via Zero Hedge http://ift.tt/1pSk4W3 Tyler Durden

Earlier his week, California paved the way for a $15/hour minimum wage, in a move that essentially communicated the following message: “..to hell with economics.”

The living wage issue is one of the most controversial debates playing out in America today and it goes right to the heart of partisan politics.

Anyone who’s “feeling the Bern” so to speak, believes they’re entitled to make enough flipping burgers to feed their family. And you know what? They’re wrong. Dead wrong.

Either, i) they don’t have the skill set they need to find a job that pays a decent wage, ii) they have other personal problems that keep them from securing gainful employment, or iii) the US economy has simply become a service sector, minimum wage job creation machine that severely limits job seekers’ opportunities and forever relegates the vast majority of society to the bottom of the pyramid in what is increasingly becoming a feudal system.

Note that our rather harsh assessment doesn’t actually put the blame on workers.

Sorry, but society doesn’t value a dollar menu cheeseburger as much as it values a porcelain cavity filling. So the guy (or girl) putting the burger in a bag makes $8/hour while the dentist makes $100. That doesn’t mean the burger flipper is “worth” less of a person than the dentist in metaphysical terms. Sure, sometimes the people handing you a Taco Bell bag at the drive-through might have spit in your burrito, but you know what? the dentist who fills your cavity might be having an affair with the hygienist who just cleaned your teeth. In the back of the office. Just before you signed in and got comfortable in the chair.

The point is that what’s missing in this equation are the breadwinner, skilled labor jobs that allow everyday people who i) have attained a decent education and acquired a skill that’s useful to society, and ii) are willing to work hard 10 hours a day, to get a job where they can simultaneously benefit the global economy while making enough money to support their families.

Raising the minimum wage to $15 or $20 or even $30/hour isn’t going to fix that. And neither are labor unions. This is an existential problem that needs to be addressed at the highest possible levels. Of course it won’t. The good folks that inhabit the Eccles building will point to record low unemployment to justify rate hikes (when they want to, but when they don’t they’ll point to China and subpar inflation to justify keeping things on hold) and to support the contention that the US economy is on solid footing.

Here’s a bit of color on the New York mandatory minimum issue via Reuters:

Governor Andrew Cuomo and state legislative leaders reached a deal on Thursday to raise New York state’s minimum wage towards $15 per hour, but fell short of a uniform state-wide increase.

 

The deal outlines a faster rise in New York City, but carves out a slow lane for small businesses and surrounding counties. In less prosperous areas north of the city it rises to $12.50 per hour before a state review of the law’s impact.

 

The minimum wage agreement was part of a broad budget deal that Cuomo announced late on Thursday. He said the plan included 12 weeks of paid family leave and $4.2 billion in tax cuts. The $147 billion budget caps spending growth at 2 percent.

 

“I believe that this is the best plan the state has produced in decades,” Cuomo told a news conference.

 

Under the terms of the deal the minimum wage would rise from its current $9 per hour to $15 over three years in New York City starting on Dec. 31, 2016. City businesses with up to 10 employees would be given four years to implement the measure.

 

Long Island and Westchester County around New York City would be given six years to push through the increases while the rest of the state would see the minimum wage rise to $12.50 in five years, with indexed increases to $15 possible after review.

 

There is also a provision to suspend the increases from 2019 if economic conditions worsen.

Great. You’ll now make $15/hour to serve downtown lattes to Jamie Dimon’s assistant and on the off chance someone important happens to venture up to mid-town (which they won’t), you may get a $5 tip in the plastic cup. 

Of course you still won’t be able to afford your upper east side apartment without an annoying roommate, nor will you have any hope of making anything of your life other than ensuring that you know the difference between a latte and a cappuccino.

But don’t worry. Your vote counts. Because Hillary will fix this.

Or Trump will.

Or Bernie will.

Or Cruz will.

Or wait… is this hopeless? 

Maybe you’ll just stay broke until the “right” person comes along…

* * *

Bonus: from Bloomberg…

Raising wages by government fiat seems to be catching on. The lowest-paid workers in Britain and California — two of the world’s largest economies — are only the latest beneficiaries of plans to lift the minimum wage.

The goal in every case is commendable, but the method is far from ideal. On Friday, Britain’s minimum wage will increase to 7.20 pounds ($10.36) an hour for workers age 25 and older, rising each year until it is expected to be above 9 pounds by 2020. California has agreed to set a $15 minimum wage by 2022. New York Governor Andrew Cuomo wants to do the same in his state.

At least 25 U.S. cities have raised their minimum wage since 2014. Germany did so last year, and more increases are planned. Japanese Prime Minister Shinzo Abe hascalled for a 3 percent increase in the minimum wage each year.

It’s hard to quarrel with the goal of a “higher wage, lower welfare, lower tax” society, as the U.K.’s government puts it. But the minimum wage is a two-edged instrument, because it raises the cost of hiring unskilled labor. Any increase, therefore, runs the risk of raising unemployment — and the bigger the increase, the bigger the risk. In addition, governments aren’t being honest about who bears the costs. At least some of the increase in employers’ costs will be passed along as higher prices to consumers.

It’s hard to say exactly what the effects of this minimum-wage activism will be. The economic literature on the subject is voluminous — but inconclusive. A 2014 Congressional Budget Officestudy concluded that a $10.10 minimum wage in the U.S. would lift 900,000 out of poverty but result in the loss of 500,000 low-wage jobs. Other studies say the employment effects would be smaller. There’s little experience as yet with minimums as high as $15.

Another problem, especially with national minimums, is that labor-market conditions vary a lot from place to place. Britain’s minimum applies equally to London, where the wage floor by 2020 will be 47 percent of local median income, and Sheffield, where it will be 71 percent. The one-size-fits-all approach is going to cause problems for Germany as it tries to absorb an enormous influx of unskilled immigrants.

If governments overdo it and push the minimum too high, correcting the error might not be easy. Lowering the minimum will arouse political resistance. The California proposal includes “off ramps” that would allow the government to pause the annual increases, but it couldn’t lower the floor — and current rates of inflation would take a long while to do that without assistance.

A safer and more honest way to support the wages of the low-paid is with a subsidy, using programs such as the U.S.’s earned income tax credit. Rather than reducing the demand for unskilled labor, a subsidy increases it. The drawback is political rather than economic — the cost to taxpayers is explicit. This approach, therefore, calls for brave leadership, which is not always in supply.

The best way to raise low wages is to raise productivity by helping workers to acquire skills and by ensuring that new entrants to the workforce are well educated. Reform along these lines requires not just political courage but also patience, because the benefits might not be apparent for years.

In the short term, raising the minimum wage — modestly, and with sufficient flexibility to allow for local market conditions — might do more good than harm. Relieving poverty in work deserves to be a high priority. But smarter ways of doing it shouldn’t be sidelined, and caution should be the watchword.

via Zero Hedge http://ift.tt/25BBG9k Tyler Durden

Submitted by Pater Tenebrarum via Acting-Man.com,

Reader Questions on Negative Interest Rates

Our reader L from Mumbai has mailed us a number of questions about the negative interest rate regime and its possible consequences. Since these questions are probably of general interest, we have decided to reply to them in this post.

 

The NIRP club – negative central bank deposit rates – click to enlarge.

 

 

Before we get to the questions, a few general remarks: negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

In theory, time preferences can rise almost to infinity: for instance, if an asteroid were to hit Earth in two week’s time and we knew for sure that it would destroy the planet, it would no longer make sense to provide for the future. Saving, investment and production would stop, and everybody would confine himself to consumption. But the opposite can never happen, since we cannot just stop consuming. As long as time passes and there is a “sooner” and a “later”, there simply cannot be zero or negative interest.

 

A far more detailed explanation of the topics summarized in the introductory remarks above can be read in Human Action by Ludwig von Mises.

 

Fiduciary Media vs. Covered Money Substitutes

Now let us look at L’s questions. He writes:

I am interested in knowing more about negative interest rates. I feel at some stage it might lead to people pulling out their cash out of the bank. I am trying to figure out what happens when they do it en masse (Let us forget how they are going to store it for the moment).

 

Can it bring a bank down? Since banks seem to have a lot of deposits, no loans to make, it ends up as excess reserves, on which they have to pay negative interest rate to the CB (in Europe now) and thus they do not want it. In fact RBS I read somewhere refused a big deposit from an Institutional Investor. In such a case I am not able to understand how pulling deposits out of a bank can bring a bank down. Does it mean even if the bank has excess reserves a bank run can bring it down?

In a fractionally reserved system, any withdrawals from bank deposits will in theory create a “reverse multiplier effect”. Hypothetically speaking, if a banking system were to operate under a 10% minimum reserve requirement and was “fully loaned up”, having created $90 in additional money for every $10 on deposit, it would be forced to call in loans if people started withdrawing money from their deposits.

The banks in our example can only be “fully loaned up” under the assumption that all newly created deposit money was kept within the banking system, that all banks extended loans to the full capacity allowed by the reserve requirement, and that any imbalances between banks were canceled out via interbank lending of reserves. In that case the credit multiplier is simply given by the formula d/r (d=deposits, r=reserve ratio).

In reality, reserve requirements haven’t played a role in the banking systems of developed economies for a long time, in the sense that have not represented an obstacle to credit expansion. As a result, the vast majority of deposit money extant prior to the 2008 financial crisis consisted of fiduciary media, i.e., uncovered money substitutes.

People had numbers in their accounts, but there was almost no standard money held in reserve covering these numbers. This has changed dramatically since 2008 as a result of “QE”. While the percentage of covered money substitutes in the US banking system was a mere 0.35% on the eve of the 2008 crisis, it stood at 23.67% at the end of February 2016. The true money supply has expanded enormously, but the percentage that consists of fiduciary media is far smaller than previously:

 

The percentage of covered money substitutes in the US banking system (calculated as the ratio between total bank reserves and TMS-2 excl. currency). Note that in the annotation it should actually say “the banks had created almost $100 per 35 cents on deposit” – one must deduct the 35 cents…  🙂 – click to enlarge.

 

In other words, nowadays the large percentage of uncovered money substitutes is no longer such a big problem. Bank reserves can always be transformed into cash currency when customers are withdrawing money from demand deposits. Still, deposits are an important funding source for many banks, so we don’t think they would be very happy if people started emptying their deposits en masse.

More importantly though, while banks haven’t been constrained by reserve requirements for a long time (e.g. in the euro area official reserve requirements ystand at a mere 1%, while in the US reserve requirements have been circumvented through sweeps since the mid 1990s), they are definitely constrained by new regulations regarding capital requirements and leverage ratios (details on the Basel III regulations and the EU’s new capital rules can be easily found via Google).

So a bank run could certainly still not be shrugged off as a non-event. After all,  bank reserves deposited with the central bank represent the cash assets of commercial banks. It obviously makes a difference whether or not they have those. It has to be assumed though that central banks will do whatever it takes to mitigate such an event, just as they have done in 2008.

Lastly, negative interest rates on bank reserves do represent a problem for banks. In Germany they are referred to as “penalty rates”, since they are an additional cost for commercial banks that they cannot really escape (since QE continues to create more and more reserves, whether they like it or not). The low interest rate environment has also had a sizable negative impact on their net interest margins.

Why central bankers ever thought that this was a good idea is completely beyond us. But then again, the last time a central banker said or did anything that made sense was probably in the 1950s.

 

Hoarding of Cash Currency

There is not enough currency to go around, so what is likely to happen, do CBs start printing them? What else could they do? Also what could be its effect as they may not be able to print it as fast as people want to pull it out and that could cause serious panic and panic can bring the system down.

We don’t believe this would be a big problem. Yes, a lot of currency would indeed have to be printed, but there exists a fairly large stock of vault cash that could be used to satisfy those at the head of the queues, so there would presumably be enough time to print sufficient amounts of new currency.

In extremis, the authorities will per experience impose restrictions on withdrawals or declare what is euphemistically called a “bank holiday”, i.e, they’ll simply order the banks to close. This has recently happened in Cyprus and Greece, and before that in Argentina. It is usually the precursor to the outright confiscation of bank deposits. This is nowadays called a “haircut”, as if one were just visiting a hair-stylist (formerly known as a barber).

 

Vault cash held by US banks – currently approx. $72 billion. Note the big spike in vault cash after the WTC attack – this shows that large amounts of additional cash can indeed be mobilized quite quickly – click to enlarge.

 

Stemming the Tide

When $500 billion was pulled out from money market funds in 2008, the Fed woke up to the fact that there was something amiss and did a lot of things. What are the possible measures they are likely to take now? What happens if it does not stem the tide?

First of all,  we would note here that ever since negative interest rates on bank reserves have been imposed, there has been a concerted media campaign with assorted statist bien pensants  arguing in favor of a cash ban under a multitude of pretexts (apart from breathing air, criminals use cash, and we have to make central bank intervention more effective). These were the usual suspects, such as e.g. Mr. Summers and Mr. Rogoff in the US (representing the two main wings of establishment-approved statist economic thought, namely Keynesianism and Monetarism) and their counterparts in other countries.

Consider that in spite of having to pay penalty rates on reserves, commercial banks have as a rule not passed negative rates on to their customers, precisely because they fear that this could lead to a run on deposits. Obviously, if our vaunted central planners continue to try to force people to increase their spending and consumption (putting the cart before the horse is their idea of creating “economic growth”), the idea of simply making cash withdrawals impossible must seem tempting. For obvious reasons, banks would also not be averse to this. And lastly, a cash ban would utterly destroy financial privacy, installing a system of total control.

However, as we have previously discussed, extending negative interest rates beyond the realm of bank reserves would hasten the arrival of a profound crisis, as it would lead to widespread capital consumption. The complex latticework of the economy’s structure of production would become increasingly fragile as entrepreneurs would withdraw their capital to consume it or to render it inert (by e.g. buying gold) in order to wait for better times.

Apart from this campaign to either ban cash or make its use beyond certain amounts illegal (cash payments exceeding certain thresholds have already been banned in several European countries), we can be fairly certain that there are no limits to the creativity of central bankers when it comes to fighting a crisis of confidence. But there are other limits: whatever they decide to do will only work as long as confidence in state-issued fiat money itself doesn’t evaporate.

 

Government Bonds vs. Cash

How can government bonds be better investment than physical cash in such an environment? Cash becomes a interest earner in a deflationary environment. Thus why will not Institutional Investor not hold cash instead of buying bonds (Munich Re has started doing this in a small way)? Then what happens to the bond market?

Assuming confidence in state-issued fiat money as such remains strong, it seems obvious that cash should be preferred over bonds sporting negative yields. So why are these bonds still in demand, given that they generate a guaranteed loss if held to maturity?

For one thing there are speculative reasons – some buyers expect to sell them at still higher prices and even more deeply negative yields.  Apart from that though, there are a numerous other reasons why government bonds remain in demand.

For instance, financial repression is imposed via various government regulations: the same capital and solvency rules that constrain the activities of banks in many ways these days also give them a strong incentive to hold government bonds, which have been assigned a risk-weighting of zero.

Insurers are also subject to regulatory pressures with respect to capital, liquidity and the assets they may hold. Government bonds are also widely used as collateral in repo transactions so many financial institutions need to have an inventory of such bonds in order to be able to operate in these markets.

 

As of February, approx. $7 trillion in government bonds were sporting negative yields-to-maturity – click to enlarge.

 

Moreover, big investors may actually prefer to hold government bonds at a small loss rather than keeping cash on deposit with banks, because short term government bonds are considered less risky. Large deposits could come under threat if a bank becomes insolvent and its losses are too large to be absorbed by its shareholders and bondholders – especially under the new “bail-in” regime.

Government bonds are usually highly liquid, and can be sold at any time if cash is needed.  Short term bills of highly rated government debtors are actually akin to secondary media of exchange, since they are widely accepted as collateral in financial transactions. Many may consider storing cash in a vault as problematic in terms of flexibility, as it cannot be deployed quickly. T-bills on the other hand can be sold at a mouse click.

 

Germany’s 5 year government bond yield: minus 33 basis points – click to enlarge.

 

What Munich Re. has done is of course under consideration by a number of other insurers and pension funds as well. After all, the more deeply government bond yields fall into negative territory, the more competitive the costs of storing and insuring large amounts of cash will become. However, as we know e.g. from Switzerland, the authorities are actively discouraging institutional investors from taking such steps, even though they would be perfectly legal (see “The War on Cash Migrates to Switzerland” for details on this).

We actually don’t think the government bond market is under much of a threat from an increase in cash hoarding. What represents the biggest potential threat to the bond market would be a crisis of confidence focused on state-issued money itself – but that would be bad for cash as well. This is the kind of crisis our central planners are likely to eventually provoke, for the simple reason that they fail to take the very long term effects of their radical ad hoc policies into account.

Naturally monetary bureaucrats believe such a thing is impossible, because they are convinced  they will be able to maintain confidence in fiat money by taking certain measures such as raising interest rates, draining liquidity from the system, and so forth. It sounds simple enough, but it ignores the economic and political pressures the authorities will probably face when the time to implement such measures comes.

It also ignores the “potential energy” harbored by the enormous amounts of money that have been created already. A loss of confidence is not a linear event. Usually, confidence appears just fine until a certain unknowable threshold is crossed – and then it is lost in a flash.

 

Conclusion

Negative interest rate policy is inherently self-defeating, as are more traditional forms of monetary pumping. The aim is to rescue a system that has been brought to the verge of implosion after too much unsound debt and too much malinvested capital have accumulated, by creating even more unsound debt and provoking even more capital misallocation. This, in a word, is insane. While debt continues to grow, the economy’s ability to create the wealth that will be required to repay it is concurrently undermined.

We cannot be sure what shape the next crisis will take, although it seems likely that it will be yet another “deflation scare”, mainly caused by falling asset prices. However, we do know what the last crisis of the current system will look like. It will entail a crumbling of the public’s faith in fiat money and the institutions that issue and administer it.

Ironically, repeated deflation scares are actually hastening the arrival of this long-term outcome, as they provoke ever more extreme policy responses, all of which tend to end up boosting the amount of outstanding money and credit.

 

US money supply TMS-2: economic downturns and “deflation scares” continually provoke money printing on an ever more breathtaking scale – click to enlarge.

 

via Zero Hedge http://ift.tt/1VZdKbT Tyler Durden

While the media goes into a frenzy every time someone is punched or maced at a Trump rally, or frankly any time Trump says anything out of place (and lately he has has had more than his fair share of supply), what according to many is the real scandal, is quietly being doused with the media obligingly looking the other way.

Moments ago, AP reported that the State Department has suspended its internal review into whether former Secretary of State Hillary Clinton or her top aides mishandled emails containing information now deemed “top secret.”

Spokeswoman Elizabeth Trudeau said Friday the department had paused the review to avoid complicating or impeding an ongoing FBI investigation into Clinton’s use of a private server while she was America’s top diplomat. She said the review would remain “on hold” pending completion of the FBI probe. The review could result in counseling, warnings or other action if findings show information was mishandled.

It will most likely result in absolutely nothing, and with the DOJ stonewalling the FBI probe which supposedly has 147 agents on the case, “nothing” is also what the ultimate outcome of any and all probes involving the future president of the US will be, something the broader betting market has also figured out.

An FBI spokesman did not immediately respond to request for comment in a phone call from the AP.

via Zero Hedge http://ift.tt/1RCSAeu Tyler Durden