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From Sean Corrigan of Diapason Commodities Management

No Zero Bound on Reason

Now it may be that Professor Krugman can insist that the grossly inequitable distributional effects which this brings about – letting the GINI out of the bottle as we have elsewhere categorised it – are somehow benign (his irrational hatred of the thrifty clearly overlapping with his bien pensant contempt for the rich with whom he presumably identifies them and thus overcoming his equally demagogic distaste for bankers). But we are far more sympathetic to the analysis presented by that eminently more reputable economist, Axel Leijonhufvud, who, in an address to Cordoba University in Argentina a few months back, dealt decisively with just this malign side-effect of the central banks’ ‘every tool is a hammer’ approach to policy, declaring that:

“Most of all, reliance on monetary policy has the inestimable advantage that its distributive consequences are so little understood by the public at large. But relying exclusively on monetary policy has some unpalatable consequences. It tends to recreate large rewards to the bankers that were instrumental in erecting the unstable structure that eventually crashed. It also runs some risks. It means after all doubling down on the policy that brought you into severe trouble to begin with.”

Prof. Leijonhufvud, noting that the privileges extended to our limited liability money-creators are ‘in effect transfers from taxpayers as well as from the mostly aged savers who cannot find alternate safe placements for their funds in retirement’ and talked of the effortless enrichment to be had by those who can borrow at near zero rates from the central bank and leverage it up multiple times to buy higher-yielding government paper, all the while patting themselves on the back – and padding themselves in the pocket – for their genius.

Coincidentally, we were sent a report condemning the large French banks’ lack of progress in restoring their finances to anything resembling a structure which could endure the slightest adverse gust were all these implicit and explicit state guarantees not so readily extended to them. Taking a quick look – more at random than out of any more studied approach to finding the worst offender – we checked the broad-brush financials for one of them, Credit Agricole, on the Bloomberg.

Mon vieux CA disposes of assets of around €1.8 trillion – not far short of a year’s worth of French GDP – against which it holds in reserve an official ‘Tier 1 Risk- Based Capital Ratio’ of 10% and a ‘Total Risk-Based Capital Ratio’ of what looks likely a highly conservative 15.4%. But therein lies the rub – namely, in the weasel words ‘Risk-Based’ and ‘Tier 1’. If we look at a good, old-fashioned measure like, say, tangible common equity to total assets, the cushion between continued existence and business failure falls to the exiguous level of 1.27%.

Putting that another way, for every euro of equity to hand, this one bank has piled €78.74 of assets – funding a hefty portion of them, no doubt with the BdF’s favourite little, officially-endorsed, ECB collateral-eligible, exceedingly short-dated TCNs. Our good Swedish professor would be in danger of choking on his smorgasbord if he were to read of such a degree of state-sponsored hyperextension.

We would also gently remind the reader here that, in Hayek’s sophisticated reading of the economic problems we create for ourselves which we quoted above, he relied heavily on a similar concept of distributional unevenness – rather than of an indiscriminate aggregate shortfall – for an explanation of why the  Gutenberg School of Economic Quackery should never be allowed the final word.

So, no, Prof. Krugman, savers cannot presume to be ‘guaranteed’ a positive real return on the sums they set aside (though you no doubt hope that those looking after your own, no doubt substantial nest egg will manage to achieve this very feat). But what they can rightly demand from a just society is that the only risks they run are everyday commercial ones and they are not systematically robbed by feckless politicians following the kind of crude leftist trumpery which you and your kind never cease to espouse.

Finally, no treatment of these issues would be complete without a brief nod to the spreading predilection for invoking an explanation for the inconvenient fact that we are not responding in textbook fashion to the potions, poultices, and bleedings being administered to us by our leeches at the central banks. This is the hackneyed old idea that we have somehow lapsed into a period of ‘secular stagnation’ – a wasting disease wherein our utter satiety with all the riches which a technologically mature society can shower upon us leaves us enfeebled and enervated, all compounded by the fact that our ineffable ennui has led us to procreate with ever decreasing regularity to the point it is threatening, horror of horrors, to make our blue sapphire of a planet a little less crowded than once we feared it might become.

Heaven forbid, but the latest sermoniser to propagate this nonsense was none other than Larry Summers – the man some thought might actually be a bit, well, less open-handed had anyone had the temerity to risk installing him as Blackhawk Ben Bernanke’s successor – suggesting that maybe Madame Yellen was not the worst choice, after all.

Dear old Larry has come over all Zero Bound constipated, fretting that the natural, real rate of interest has somehow become fixed down there at negative 2%-3% where conventional policy (if you can still remember of what that used to consist) cannot get at it – unless we blow serial bubbles, that is, these episodes in mass folly and gross wastefulness now being raised to the level of such perverse desiderata of which Krugman’s only partly-facetious call for a war on Mars forms an infamous example.

In fact, this entire notion is another piece of nonsense to spring from the one of Keynes’ least cogent ramblings, the notoriously insupportable notion of ’Liquidity Preference’ – a logical patch fixed over the lacunae in his reasoning when, having insisted that saving must always equal investment, all he could think of to determine the rate of interest was our collective desire to hold money for its own sake. From such intellectually bastard seed soon sprang, fully-armed like Minerva from the head of our economic Jove, the even worse confusion of the ‘Liquidity Trap.’

Not only Austrians, not only Robertsonians, not only Wicksellians like our man Axel Leijonhufvud have shown this to be a nonsense – easy enough since all of these generally look in some way at the balance being struck between the funds made available for loan according to potential savers’ subjective degree of time preference and the eagerness with which these funds are sought with regard to would-be entrepreneurs’ estimations of the profitability of their projects. But even Keynes himself all but confessed he had the whole thing backwards less than a year after that infernal tract, ‘The General Theory’, was first published.

Responding then to concerted criticism of his peculiar concept of interest rate determination as an internal mental conflict conducted in the heads of ‘framing’- prone, stick-in-the-mud, ‘college bursar’ bond-buyers who would, he felt, resolutely reject unusually low market rates on gilts in favour of accumulating cash hoards , he was forced to admit that the main part of that demand for money which he found to be the root of all macroeconomic evil was not at all related to people’s supposedly irrational desire to hoard it for its own sake, but rather was due to their wholly unobjectionable aim of ensuring a ready supply of funds prior to making planned outlays from them, s
omething Keynes, with uncharacteristic humility, admitted in print that he ‘should not have previously overlooked’.

Since Summers himself made reference to a man dubbed the ‘American Keynes’ – that avid New Dealer Alvin Hansen – who raised this spectre, seventy years ago, let us also refer the reader to the complete dismissal of this strain of thought accomplished by George Terborgh in his contemporary 1945 work, ‘The Bogey of Economic Maturity’.

As Terborgh summarised in what he called a ‘thumbnail sketch’ of this theory:-

‘Formerly youthful, vigorous, and expansive… the American economy has become mature. The frontier is gone. Population growth is tapering off. Our technology, ever increasing in complexity, gives less and less room for revolutionary inventions comparable in impact to the railroad, electric power, or the automobile’

— Robert Gordon and Tyler Cowen are hardly the trailblazers they like to imagine they are, either, it appears –

‘The weakening of these dynamic factors leaves the economy with a dearth of opportunity for private investment… Meanwhile… savings accumulate inexorably… and pile up as idle funds for which there is not outlet in physical capital, their accumulation setting in motion a downward spiral of income and production… the mature economy thus precipitates chronic over-saving and ushers in an era of secular stagnation and recurring crises from which there is no escape except through the intervention of government.’

‘In short, the private economy has become a cripple and can survive only by reliance on the crutches of government support.’

Two hundred-odd closely-argued and empirically-rich pages later, Terborgh sums up as follows:-

‘If… we suffer from a chronic insufficiency of consumption and investment combined, it will not be… because investment opportunity in a physical and technological sense is persistently inadequate to absorb our unconsumed income; but rather because of political and economic policies that discourage investment justified, under more favourable policies, by these physical factors.’ Here! Here!

As Wikipedia laconically notes in its biographical sketch of Terborgh’s protagonist, Hansen, the verdict of history was unrelenting:-

‘The thesis was highly controversial, as critics… attacked Hansen as a pessimist and defeatist. Hansen replied that secular stagnation was just another name  for Keynes’s underemployment equilibrium. However, the sustained economic growth beginning in 1940 undercut Hansen’s predictions and his stagnation model was forgotten.’

So, why should we not forget it, too? Only because, as Terborgh was only too aware, the popularity of such views is a gilt-edged invitation for continued, large-scale interventionism by the Bernankes, Summers, and Yellens of this world and there will surely come a point where the slow drip, drip of these will utterly undercut the foundation of our modern order and usher in to office a much darker series of opportunistic overlords and aspiring saviours.

On that somewhat sombre note, we will leave matters for now, with only this series of question to ask of our present leaders by way of an epilogue:

If, as you and your ilk mostly do, you affect to fear that we are somehow exhausting the planet’s capacity to give our species a domicile, how can you also be worried that we may be slowing down, dying out, and using less—and doing so, moreover, in a wholly voluntary fashion?

Furthermore, if you really do believe that we are on the verge of such a ‘stagnation’ as you describe—with all it implies for the potential dwindling of income streams and the drying up of future returns on capital—how can you reconcile the current, extraordinary buoyancy in the stock market with your firm insistence that no part of the policies you have been implementing can have contributed to what must therefore be an untoward degree of optimism in the valuation of its components?

Answers, please, on a postcard.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TkaqQ6fAT6I/story01.htm Tyler Durden

Confirming that the brotherhood of the “fairness doctrine” in which everyone is equal to everyone else (but some are too big to fail or prosecute, and are thus a little more equal) will have to do more work to bring wayward Switzerland, home to some of the world’s biggest companies, fattest bank accounts and wealthiest individuals, into the socialist fold was the announcement moments ago that Switzerland roundly rejected a proposal to limit executive salaries to 12 times that of the lowest paid employee, with 66% of the voters opposing. This so-called “1:12 initiative for fair pay,” was brought about by the youth wing of the Social Democrats (JUSO) which claimed that nobody should earn more in a month than others earn in a year. The outcome is notable because it was in March when Swiss voters backed proposals to impose some of the world’s strictest controls on executive pay, with some 70% of voters thought to have supported plans to give shareholders a veto on compensation and ban big payouts for new and departing managers. Surprisingly, just over six months later, the drive to bring more equality to all appears to have lost it steam.

“Of course we are disappointed. But I also believe that we have an achievement nonetheless,” JUSO President David Roth told Reuters. “A year ago, opponents were defending high salaries. Today no-one is doing that. No-one in Swiss politics would dare say that million salaries are justified.”

Maybe not, but they refused to enact it into law, which means that million and much higher salaries will continue. From Reuters:

Sunday’s vote is just one of several initiatives being put to Swiss voters to try to address the widening income gap in the country. Switzerland will also hold a vote on whether to introduce a basic living wage of $2,800 per month from the state, though a date has not yet been set.

 

While anger at multi-million payouts for executives is not limited to Switzerland, the Swiss system of direct democracy – which allows for up to four national referenda per year – means popular outrage can more easily be translated into action.

 

Deborah Warburton, a partner at executive search consultants Hedley May said the issue has resonated in other parts of Europe.

 

“Even though it was a ‘no’ vote, the question of how to make executive pay fairer is still very much a live issue,” she said, adding Britain has implemented a law to give shareholders a binding vote on executive pay while France and Germany are weighing similar measures.

Meanwhile, corporations and others who benefit from unlimited pay, are understandably delighted:

Opponents to the proposal had warned it would harm Switzerland by restricting the ability of firms to hire skilled staff, forcing firms to decamp abroad, resulting in a shortfall in social security contributions and higher taxes.

 

“It’s an important decision for the Swiss business location,” Valentin Vogt, president of the Swiss Association of Employers told Swiss television SRF. “The Swiss people have clearly decided that it’s not up to the state to have a say on pay.”

 

The Swiss have a history of voting against proposals they feel could hurt the country’s economic success story or threaten competitiveness.

The last is particularly surprising in a world in which workers are eager to make their lives as easy as possible because contrary to the rest of the world, in Switzerland initiatives to increase workers’ annual paid holiday allowance to six weeks from four and to cut the working week to 36 hours from 42 both have failed at the ballot box in the past. Impossible US labor unions would say. But such is life when one is actually concerned about the long-run instead of just maximizing one’s consumption potential in the here and now.

Still it is likely that anger at social inequity will continue even in this most “neutral” of countries:

Some Swiss firms have acknowledged the public anger. Last month, Credit Suisse said it made a “mistake” by paying Chief Executive Brady Dougan 19.2 million francs ($21 million) in cash and stock in 2009, plus 70 million francs($76.75 million) worth of stock under a bonus plan for 2004. That meant his total pay was 1,182 times that of the bank’s lowest paid employee, according to Travail.Suisse.

Finally, while Switzerland may have no problem with capping executive pay at 12 times the minimum wage, we wonder how the Swiss, or Americans for that matter, would feel about a ratio of nearly 20 times that, or 213 to 1 which is how much more, at last check, the average Fortune 50 CEO made more than their average worker.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cpU_b00awYc/story01.htm Tyler Durden

The following statement was made by British Prime Minister, Neville Chamberlain, on September 30, 1938 in front of #10 Downing Street, London, after his arrival home from the notorious Munich Conference of 1938.

We, the German Fuhrer and Chancellor, and the British Prime Minister, have had a further meeting today and are agreed in recognizing that the question of Anglo-German relations is of the first importance for our two countries and for Europe.

 

We regard the agreement signed last night and the Anglo-German Naval Agreement as symbolic of the desire of our two peoples never to go to war with one another again.

 

We are resolved that the method of consultation shall be the method adopted to deal with any other questions that may concern our two countries, and we are determined to continue our efforts to remove possible sources of difference, and thus to contribute to assure the peace of Europe.

 

My good friends, for the second time in our history, a British Prime Minister has returned from Germany bringing peace with honor. I believe it is “peace for our time.” Go home and get a nice quiet sleep

75 years later, last night appeasement came to Iran:

(L to R) British foreign secretary, German foreign minister, EU foreign policy chief, Iran’s foreign minister, Chinese foreign minister, US secretary of state and Russian and French foreign ministers in Geneva on November 24, 2013.

It remains to be seen if appeasing Iran will lead to yet another anschluss or worse, but for now one thing is certain: nobody really knows what to make of last night’s historic nuclear “deal” with Iran. Because when even the two main participants are unable to agree on what was decided…

Now, THAT’s “win-win” diplomacy —> pic.twitter.com/5zbI5Db6Kh

— Nima Shirazi (@WideAsleepNima) November 24, 2013

… how is everyone else expected to fare any better?

In any case, here is a sampling of the immediate reactions, most of which were as expected. First, Israel:

• Israel Foreign Minister Lieberman: Iran’s greatest diplomatic victory since the Islamic revolution

Which is a good thing right? Wrong:

“What was concluded in Geneva last night is not a historic agreement, it’s a historic mistake,” Netanyahu said. “It’s not made the world a safer place. Like the agreement with North Korea in 2005, this agreement has made the world a much more dangerous place.”

Not surprisingly, Israel hates any deal that diffuses tension in the region and lowers the probability of war. Iran, on the other hand was giddy:

IRAN NUCLEAR DEAL A “REAL SUCCESS’ FOR NATION”

Hassan Rouhani hails nuclear deal as turning point for Iran

Also not surprising is that unlike last time when the deal was scuttled in the last minute due to a block by France, this time Obama made a few phone calls to his socialist peer:

• French President Francois Hollande “welcomes the conclusion of the Geneva negotiations on Iran’s nuclear program” in e-mailed statement by his office today.
  “The accord that was reached respects the demands imposed by France on the issues of uranium storage and enrichment, suspension of new facilities, and international control”
• Agreement “constitutes a step toward the ending of Iran’s nuclear military program, and therefore toward the normalization of our relations with Iran”
• “France will continue to work to reach a final agreement on this issue. The intermediate accord reached last night represents an  important step in the right direction”: Hollande

The other negotiating parties hailed the deal. From Iran’s PressTV:

China, Germany and Russia have hailed the deal between Iran and the Sextet over Tehran’s nuclear energy program.

 

After more than four days of intense negotiations, Iran and the five permanent members of the United Nations Security Council plus Germany sealed an interim deal in Geneva on Sunday morning to pave the way for the full resolution of the West’s decade-old dispute with Iran over its nuclear energy program.

 

According to the Iranian Foreign Ministry, the deal allows Iran to continue its activities at Arak, Fordow and Natanz facilities. The agreement also stipulates that no additional sanctions will be imposed on Tehran because of its nuclear energy program.

 

China on Sunday welcomed the deal, saying the agreement with Tehran would “help safeguard peace and stability in the Middle East”.

 

German Foreign Minister Guido Westerwelle also hailed the agreement and said the nuclear deal marks “a turning point.”

 

Russian Foreign Minister Sergei Lavrov also praised the deal and stressed it would benefit all sides. “Nobody lost, everyone ends up winning,” he said.

Kerry’s own spin may not have actually mentioned “peace in our time” just yet, but it was vigorous regardless:

• “We believe very strongly that because the Iranian nuclear program is actually set backwards and is actually locked into place in critical places, that that is better for Israel than if you were just continuing to go down the road and they rush towards a nuclear weapon”
• “The basic architecture of the sanctions is staying in place. There is very little relief. We are convinced over the next few months, we will really be able to put to the test what Iran’s intentions are,” Kerry told CNN chief political correspondent Candy Crowley.
• “When you’re dealing with nuclear weapons, it’s not an issue of trust,” Kerry said. “Verification is the key.”

And the punchline:

• Kerry: If Iran’s nuclear program is really only for peaceful purposes, then “prove it”

Just how does one prove they are not doing something they are not doing? Anyway, all of this is merely more theatrics. As the AP reports, the deal was prepared secretly months in advance following secret talks between the US and Iran:

The United States and Iran secretly engaged in a series of high-level, face-to-face talks over the past year, in a high-stakes diplomatic gamble by the Obama administration that paved the way for the historic deal sealed early Sunday in
Geneva aimed at slowing Tehran’s nuclear program, The Associated Press has learned.

 

The discussions were kept hidden even from America’s closest friends, including its negotiating partners and Israel, until two months ago, and that may explain how the nuclear accord appeared to come together so quickly after years of stalemate and fierce hostility between Iran and the West.

 

But the secrecy of the talks may also explain some of the tensions between the U.S. and France, which earlier this month balked at a proposed deal, and with Israel, which is furious about the agreement and has angrily denounced the diplomatic outreach to Tehran.

 

The talks were held in the Middle Eastern nation of Oman and elsewhere with only a tight circle of people in the know, the AP learned. Since March, Deputy Secretary of State William Burns and Jake Sullivan, Vice President Joe Biden’s top foreign policy adviser, have met at least five times with Iranian officials.

 

The last four clandestine meetings, held since Iran’s reform-minded President Hassan Rouhani was inaugurated in August, produced much of the agreement later formally hammered out in negotiations in Geneva among the United States, Britain, France, Russia, China, Germany and Iran, said three senior administration officials. All spoke only on condition of anonymity because they were not authorized to discuss by name the highly sensitive diplomatic effort.

 

The AP was tipped to the first U.S.-Iranian meeting in March shortly after it occurred, but the White House and State Department disputed elements of the account and the AP could not confirm the meeting. The AP learned of further indications of secret diplomacy in the fall and pressed the White House and other officials further. As the Geneva talks appeared to be reaching their conclusion, senior administration officials confirmed to the AP the details of the extensive outreach.

Politics aside, Bloomberg reports on the actual elements of the deal:

Iran will get as much as $7 billion in relief from economic sanctions over six months under the first-step agreement reached today in Geneva, the Obama administration said.

 

In return for Iran limiting its nuclear program, the interim agreement provides for the release of $4.2 billion in frozen oil assets and will let Iran continue exporting oil at current levels, rather than forcing continued reductions by buyers, as would be required under current law, according to a White House statement.

 

The accord also will “suspend certain sanctions on gold and precious metals, Iran’s auto sector and Iran’s petrochemical exports, potentially providing Iran approximately $1.5 billion in revenue,” the administration said.

 

Israeli officials and some U.S. lawmakers have said sanctions should be tightened, not eased, to keep pressure on Iran. Rejecting those pleas, the U.S. and the five other countries negotiating with Iran have agreed to “not impose new nuclear-related sanctions for six months if Iran abides by its commitments under this deal, to the extent permissible within their political systems,” according to the White House statement.

 

The no-new-sanctions pledge will be tested when the U.S. Senate returns for legislative business on Dec. 9 after a Thanksgiving break. A group of 14 senators from both parties issued a statement last week pledging to “pass bipartisan Iran sanctions legislation as soon as possible.”

 

Critics of an interim accord in Congress and in Israel have predicted Iran would reap $20 billion or more in relief. U.S. officials have rejected such estimates and have said the accord won’t lift the most punishing sanctions — those on oil sales and banking. The Obama administration estimated in its statement that Iran will continue to lose $4 billion a month in crude it otherwise would have exported.

Finally, while the cynics may say this was merely yet another attempt to redirect attention from the Obamacare debacle, we will one-up their cynicism and claim all of this was merely an advertising photo op for Nike:

Close up: pic.twitter.com/pGKuPJPdYq

— southpaw (@nycsouthpaw) November 24, 2013

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Pr4Al9sU31I/story01.htm Tyler Durden

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5Jl231Qxu3M/story01.htm williambanzai7