As Greece reverses the old austerity policies we might take pause for thought. Pensions cuts will be restored and for those who receive 700 or less euros per month that 13th month payment will be restored. Prescription costs will drop from five euros to one. The minimum wage will be restore to a gross of 751 euros per month and union wage agreements will be restored. There will be rehiring in the public sector. And finally the children of immigrants who were born and raised in Greece will be given Greek nationality and perhaps the parents and a few others as well. So it’s damn the empty coffers, full spending ahead. Of course the real problem is that the currency is the euro and not the drachma. Unfortunately the central bank of Greece cannot print any euros as they must be imported from Germany (That is where some of the paper currency is printed for the EMU) and, more importantly, holding bonds issued from the government are not likely to effect much economic development. In short, Greece still needs to be economically self sufficient or have positive net trade accounts, something I do not believe that country has ever seen since Alexander’s smash and grab empire. I am touched that Greece believes the sanctions against Russia aren’t in the interest of Greece, a good way of securing some of those rubles so much in demand by the rest of the world. And why not put the touch on Putin when there is a seventy percent probability that you will default on your bonds?
The Baltic Dry index has reached 666, the record low for this time of year and an indication of very little bulk carrier shipping. That means the economies of the world has, for the most part, slowed down. And while the old Saudi king has died and gone to that big sand pile in the sky, the new king is providing a little hope to oil speculators that prices will rise. I would not count on it, nothing has changed unless the Russians and Norwegians agree to pump less oil. Unfortunately Russia needs all the rubles it can print it is going to carry on a proxy war with the Ukraine. Unless Putin has an iron grip on the Army his fellow autarks are going to force him to reign in the fighting and take a smaller land grab. I would believe Putin wants it all even though history has shown that the majority of Ukrainians do not like Russians and never have. Besides, he would have to spend money Russia doesn’t have and can’t get to build the Ukraine back to some sort of normal operations. It’s bad enough that Russia will have to carry the Crimeans for a very long time (they are actually Russian and that area was given to the Ukraine about 1956, if memory serves). Meanwhile Norway has a housing bubble the likes of which it has not seen and the government is starting to panic. The fall in the price of Brent crude is very worrisome since the breakeven point for their wells is above 50 dollars a barrel. What so many individuals do not understand is that oil is not sold like gasoline at the filling station. It is sold on contract. Most contracts are of short duration and futures. Some speculators and corporations have bought long term future contracts at high prices and must buy the oil at those prices. The truck stop Flying J did that last year, I believe and promptly went bankrupt because of the lower gasoline prices. It is an unlawful practice to sell below cost. Nigeria can’t cut their production because of all the past expense of repairs, pirates, and political unrest. The Venezuelan oil practically belongs to the Chinese who may try to repossess it, the current government of the free shit army having borrowed billions from the Chinese knowing they had no way to repay those loans. No, oil supply is not being curtailed anytime soon and the demand will not go spiking up soon either. We have setled in for at least a world wide recession if not depression.
Yes, I know, the BLS (Bureau of Lies and Statistics) has heralded the lowest unemployment applications since 2005. We are on the road again to economic recovery, except we’re not. People, look at the only chart that matters, the labor participation rate. The rate is still going down. Combined with the fact that you don’t get to file for unemployment unless you had a job less that six months ago doesn’t seem to sink into the minds of the talking heads on the boob tube. The BLS unemployment statistics do not tell us how many people are out of work and looking for employment. It also doesn’t tell us how many people could only find low wage part time unemployment and are therefore under employed. It only tells us how many people who were eligible to file for unemployment and did so. We are not in a recovery. Consumer spending and credit are below normal. Retail sales are below normal. Manufacturing is down, inventories are lower. Commodities are low in price. New home construction is very low. Commercial construction is very low. Only Apple iPhone sales are up and that is in China. So where is this recovery? Oil patch workers are being laid off, the rig count continues to drop, drilling companies in the US and Canada are starting to fold. Did I miss something? Did everyone find a pot of gold buried in their back yards?
Of course our Federal Reserve doesn’t miss a trick. It has plans to raise rates this year as a guard against inflation. Let me see, food prices are spotty. Pork is about where it was in 2005 but beef is still rising with out relief. Gasoline prices are down but my price per gallon for water has risen. The price of my electricity has risen per kilowatt. Luxury home prices are rising higher because foreign, meaning Chinese, investors are buying them. Low end home prices are steady. College costs are still rising for no apparent reason other than the educational institutions hold a monopoly on pieces of paper. Hospital costs are rising for no real reason other than the fact the federal government has given them a pass exempting them for Wright-Patman and a few others. Oh, by the way, the state laws are still on the books that do not allow any business to act in a monopolistic manner, to engage in deceptive practices, and otherwise conduct business in a manner calculated to cause grievous harm to the consumer. You might think about expressing your concerns that medical costs are totally out of line with your state attorney general.
Will the Federal Reserve raise rates? You have got rocks in your head if you think they will. The balance sheet at the fed is way over one trillion dollars in assets. These assets, the result of quantitative easing, are US treasuries (10, 15, 20, and 30 year bonds), MBS (mortgage back securities purchased from banks and the banks must repurchase on demand), and various other securities such as major corporation stocks and bonds. All the bonds are very low interest rate type. NOw hat happens when the Fed raises its interest rates? Remember, the fed cannot raise the interest rates that a bank demands for loaning money or gives on passbook savings or provides as certificates of deposit. It can only raise the rates that it lends over night to the banks and at the discount window. Right now those rates are approximately zero or one quarter percent. A rise in interest rates means a decrease in yield or simply put, while the coupon rate will stay the same the amount paid for the security will decline. If you want to buy a six percent coupon AAA bond it will cost you $110 or $1100 per thousand. The quote is always in hundreds the denominations in thousands. A six percent coupon means that you would be paid $1800 over 30 years to hold that bond. And when it is redeemed you get back $1000. That means your yield is only $800 since you paid a premium of $100 for the bond. Actually, I don’t believe anyone is issuing AAA bonds at 6%, more like 2 or 3 percent maximum. You can see then that if you hold a 30 year treasury for which you paid a premium and only get 2.25 percent as your coupon, you are not making much or a return on your money. And if new treasuries jump to 3.25 percent the price at which you may be able to sell your treasury bond will be less than its par value. This is why the manner in which the Fed did the quantitative easing was most stupid, particularly over the long run. It never put money into the general economy it only put money into the asset markets. The economy does not grow by accumulation financial assets, it grows by producing goods and services which creates employment. The minute the Fed tries to raise rates they will have to immediately lower them again. The treasuries are bought from primary dealers who may have contracts to repurchase those same treasuries at par value. If so, you destroy the dealers when you raise rates. So you either have to sell your inventory of assets before raising rates or you destroy your financial system. What happens when you sell your assets if you are the Fed? Banks that did the repo agreements may collapse because they don’t have the fund to honor their agreements. You sell below par on many of the bond assets. The corporate stocks will be sold at a loss. And if you are selling, who is buying the new treasuries? Who is buying the new corporate bonds? You kill the equity markets and the liquidity for investment. That is all that QE did, put liquidity into the investment market and by withdrawing QE you take the liquidity out of it. Do you think Bozo the Clown could have done a better job running the Fed for the past 20 years?