What The Government Cant Do For You: Asks

Showing posts with label Asks. Show all posts

Sunday, March 24, 2013

Reader Asks "Where"s the Money?"

Reader Robert at Americans for Limited Government asks an interesting question.

Robert writes …

Hello Mish
We are led to believe that taxing Cypriot deposits in the amount of 5.8 billion euros will make the banks solvent. I have a question: Why the need for capital controls after “recapitalization”? How can deposits be used for taxation but not withdrawals?

Robert

I believe that’s a rhetorical question. Robert knows the answer. Even with the EU kicking in 10 billion euros (a loan not a gift), the money is not there.

If the banks were sufficiently capitalized, there would not be a need for capital controls.

End of the Single Currency in All but Name

Jeremy Warner at the Financial Times has an interesting article on this very subject. Warner says If capital controls are introduced in Cyprus, it is the end of the single currency in all but name.

With the European Central Bank threatening to pull the plug on Monday by denying further liquidity support, and showing absolutely no sign of blinking, Cypriots have little choice in the matter. The present plan is only slightly more palatable than the last. The two most problematic banks are to be restructured, with uninsured creditors taking a 40 per cent hair cut. That gets the Cypriot authorities some of the way towards the €5.8bn they need, or is that €6.7bn? Reports suggest the beastly Troika has upped the ante. In any case, the balance, whatever it might be, is going to come from “taxing” uninsured deposits above €100,000 in other banks in the way originally proposed.
However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

This is precisely what happens in a fractional reserve lending system when faith is lost. And faith certainly has been lost. Why shouldn’t it be lost? The entire global financial system would be recognized as insolvent if even 25% of the people tried to get their deposits.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Reader Asks "Where"s the Money?"

Saturday, March 23, 2013

Reader Asks "Where"s the Money?"

Reader Robert at Americans for Limited Government asks an interesting question.

Robert writes …

Hello Mish
We are led to believe that taxing Cypriot deposits in the amount of 5.8 billion euros will make the banks solvent. I have a question: Why the need for capital controls after “recapitalization”? How can deposits be used for taxation but not withdrawals?

Robert

I believe that’s a rhetorical question. Robert knows the answer. Even with the EU kicking in 10 billion euros (a loan not a gift), the money is not there.

If the banks were sufficiently capitalized, there would not be a need for capital controls.

End of the Single Currency in All but Name

Jeremy Warner at the Financial Times has an interesting article on this very subject. Warner says If capital controls are introduced in Cyprus, it is the end of the single currency in all but name.

With the European Central Bank threatening to pull the plug on Monday by denying further liquidity support, and showing absolutely no sign of blinking, Cypriots have little choice in the matter. The present plan is only slightly more palatable than the last. The two most problematic banks are to be restructured, with uninsured creditors taking a 40 per cent hair cut. That gets the Cypriot authorities some of the way towards the €5.8bn they need, or is that €6.7bn? Reports suggest the beastly Troika has upped the ante. In any case, the balance, whatever it might be, is going to come from “taxing” uninsured deposits above €100,000 in other banks in the way originally proposed.
However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Reader Asks "Where"s the Money?"

Thursday, February 21, 2013

Congress Asks Bernanke For Full Risk Analysis On Fed"s Soaring Balance Sheet

Several days ago we wrote about what we defined as the Fed’s “D-Rate” – the interest rate at which the cash outflows from payments by the Fed on its Excess Reserves will surpass that cash inflows from its asset holdings, a very troubling day because as we further explained, from that point on the Fed would be “printing money just to print money.” In other words, with every passing day, the Fed is getting ever closer to the point where the inflation it so very much wishes to unleash will force it to essentially request a technical bailout from Congress (and certainly will halt all future interest remittances to the Treasury), and the longer this takes, the lower the breakeven interest rate becomes, until one day it is so low the tiniest rise in rates will immediately put the Fed into the red. It now appears that Congress itself, the ultimate beneficiary of the Fed’s free money policy as nearly half of all US spending is funded by the Fed’s monetization of the deficit at ultra low rates, is finally catching on to what is the ultimate rock and hard place for Ben Bernanke. In a letter penned by the Chairman of the House Oversight & Government Reform Committee, Jim Jordan, says that he is “troubled by the corresponding effect that the Federal Reserve’s expanding portfolio could have on current and future economic growth” and has asked the Fed what its “future plans to unwind the [$ 3 trillion and rising at $ 885 billion per month] portfolio” are.

What is surprising that Jordan actually gets it:

I am especially concerned that the historically low interest rates brought on by the Federal Reserve’s monetary policy have hampered economic growth by distorting traditional financial incentives.

It gets better:

Younger Americans who have been working to save their income have faced meager returns in bank accounts and larger balance requirements, slowing their overall accumulation of wealth.’ Likewise, older Americans living off of interest-bearing accounts have been forced to move to riskier investments to maintain their standards of living.

And best:

Most strikingly, by maintaining low interest rates, the Federal Reserve has distorted the real cost of the national debt, effectively “incentiviz[ing] the U.S. government to borrow and overspend.”

Jordan is not happy:

The Committee has previously written to you with concerns about monetary policy in the United States. In July 2011, after a meeting between Committee staff and Federal Reserve staff, the Committee requested that you provide all Federal Reserve studies used to determine the value of Federal Reserve assets and “what the potential losses would be based on different unwind scenarios regarding the Federal Reserve’s portfolio…” The Committee also requested that you provide “all estimates and analysis of the potential costs of payment of interest on reserves” that would incentivize banks to maintain excess reserves. In response, you provided only publicly released studies, and you did not provide any precise estimates of the future cost of reserve interest rate payments

As a result…

I respectfully request the following information for the period November 25, 2008 — present:

All public and non-public studies, estimates, analysis, and evaluations of the value of the Federal Reserve’s assets and any potential losses associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;

All public and non-public studies, estimates, analysis, and evaluations of the potential costs of payments of interest on reserves sufficient to prevent inflation associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;

All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the value of the Federal Reserve’s assets and any potential losses associated with future unwind scenarios;

All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the Federal Reserve’s cost of payment of interest on reserves

Well, better late than never. However, we are confident that Jordan will be unhappy with the response whose advance preview we provide below:

Dear Jim,

Please accept this first completely blank napkin as evidence of all the rigorous analysis the Fed has conducted on all the issues you bring up. Also, on the second completely blank napkin we would have written the date on which we expect to begin unwinding the Fed’s balance sheet.

Peace out,

Chairsatan Ben

Full letter below.

Zero Hedge

Congress Asks Bernanke For Full Risk Analysis On Fed"s Soaring Balance Sheet

Wednesday, February 20, 2013

Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else)

In response to Top 1% Received 121% of Income Gains During the Recovery I received a couple of emails from readers that I would like to share.

Reader “Gordon” wondered how it was possible for a group to get 121% of income gains. Here is the example I sent Gordon.

Mary, Tom, and Joe work for the XYZ Corporation. They are the only three employees. Mary’s salary rose from $ 100,000 to $ 200,000. Tom and Joe were informed of hardships in the corporation and their salaries fell from $ 100,000 to $ 80,000 each.

In the above example, net salaries rose by $ 60,000. Mary’s salary rose by $ 100,000 (more than 100% of the total).

Quantifying Inequality

Reader “Z” writes … “Inequality in the US has been rising since the 80s. How do you justify your theory that inflation benefits the wealthy? Not qualitatively, quantitatively.“

First, let’s take a look at inflation as measured by the CPI (any alternative measure of inflation would suffice for this example).

CPI Percent Change From Year Ago

click on any chart for sharper image

Except for a brief period in 2009, price inflation has been positive. The question is “Who Benefited?”

I claim it is those with “first access to money” namely banks and the already wealthy. A few charts courtesy of Doug Short at Advisor Perspectives will prove my point.

Nominal US Household Incomes

From the above chart it appears the average and median households income has been growing nicely since 1967. If that’s what you believe, think again.

Real US Household Incomes

In “real” (CPI-adjusted) terms, 50% of households are no better off than they were in 1988. Let’s dig a litter deeper.

Growth in Real Household Income by Quintile

The above chart shows percentage income growth by quintile since 1967. Since 1988, the bottom, 4th and middle quintiles (a combined 60% of households) have negative real income growth. The next chart shows the same thing in a different way.

Real Household Income by Quintile

No matter what your timeframe, only the top quintile did well. And from 1980 until 2000 the top 5% got the lion’s share of income gains.

Ponder on that for a bit, then consider the following charts on total net worth.

Nominal Total Net Worth

Real Total Net Worth

Total net worth includes stocks, bonds, real estate, pensions, etc. I cannot precise quantify quintiles but we all know (at least we should) who has the assets and who doesn’t. The top 5 or 10% have most of the assets, the next 15% or so are OK and nearly everyone else is asset poor and high in debt.

Millionaire Households

The Wall Street Journal has some interesting stats on the Millionaire Population.

According to the Chicago-based Spectrem group, there are now 8.6 million households in the U.S. with a total net worth (minus principal residence) of $ 1 million or more. There are now 1,078,000 households worth $ 5 million or more and about 107,000 people worth $ 25 million or more.
The report also broke down today’s millionaires by occupation and former occupation if retired. Managers make up the largest group, with 17%, followed by educators (12%), corporate executives (7%), entrepreneur/business owners (6%) and attorneys and accounts.

The $ 5 million-plus crowd, is dominated by senior corporate executives (17%) and entrepreneurs/owners (12%).

Household Net Worth

Chart from Spectrem Group

There are about 114 million households. Of that number 8.6 million (7.5%) have a net worth of $ 1 million or more.

37 million households have a total net worth of $ 100,000 or more. Thus, 77 million households (67.5%) have a net worth less than $ 100,000. Counting underwater houses, I suspect most of them live paycheck to paycheck and have minimal if not negative net worth.

So who did inflation benefit? The answer is those with assets and those with first access to money: the banks and the already wealthy.

The poor do not have assets, they have debt.

In spite of the often-heard mantra that “inflation wipes away debt”, I suggest otherwise. Income typically does not keep up with expenses, and most have too few assets to inflate. The poor (last on the credit totem pole) overpay for their assets with cheap credit given to them at precisely the wrong times (as happened right before the housing bust).

Inflation Clobbers Those on Fixed Income

In case you missed it, please consider Hello Ben Bernanke, Meet “Stephanie”, my response to a reader on fixed income attempting to live on Social Security plus interest on a $ 16,000 CD.

If routine price inflation did not benefit the banks and the wealthy at the expense of everyone else, we probably would not have it. The word that best describes the process is “theft”.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish’s Global Economic Trend Analysis

Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else)

Monday, February 18, 2013

Walmart Senior VP Asks "Where are All the Customers? And Where’s Their Money?"; "February MTD Sales a Total Disaster"

Here’s an interesting story from Friday regarding sales at Walmart that just came my way: Wal-Mart Executives Sweat Slow February Start in E-Mails.

Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.
“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company”

Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

“Have you ever had one of those weeks where your best-prepared plans weren’t good enough to accomplish everything you set out to do?” Geiger asked in a Feb. 1 e-mail to executives. “Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

Murray declined to comment and Geiger didn’t return telephone and e-mail messages seeking comment.

Both executives attributed the performance to increased payroll taxes and delayed tax returns, which Geiger called “a potent one-two punch,” according to the e-mails.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Walmart Senior VP Asks "Where are All the Customers? And Where’s Their Money?"; "February MTD Sales a Total Disaster"