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Q&A on Greece

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On Sunday, 5 July, voters in Greece will head to the polls on an utterly unique referendum on a proposed bailout. The process is non binding, the question itself is strange, and the consequences of it are completely unknown.

What does any of it mean? The short answer is that Greece, and all of Europe, are in completely uncharted territory at this point. The five year crisis has gone from slow simmer to a full boil in the hot summer sun. Greece is calling Europe’s bluff, and Europe is not backing down.  The only thing we can be sure of is that there will be a resolution shortly, one way or the other. What exactly that means is itself completely up in the air as well.

Here are a few questions and answers on the Greek Crisis based on a variety of news sources.  Follow the links for more information in each question.

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TPP: A Slow Death?

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Trans-Pacific Partnership, or TPP. It sounds like a great idea on the surface of it – lower trade barriers and require trade partners to improve working conditions in developing nations. There’s only one problem with it – no one knows what it is. That’s partly due to it being negotiated in secret and partly due to the fact that the negotiations are not done.

But many are against it for a wide array of reasons that span left and right. On the right, there is a good chance the sovereignty of the US will be diminished based on treaty obligations that, based on discussion, reach very far. On the left there seems to be yet another assault on good US jobs. And that secrecy? There are rumors that it will remain secret long after the treaty is passed.

It’s time to take a step back and sort out what TPP is and what is actually true about it.

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GDP Down? Take It With a Little Seasoning

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The first revision for Gross Domestic Product (GDP) for the first quarter (1Q15) came out negative. The economy is contracting! Is it time to panic?  The White House attributed the slowdown to weak exports, which are quite well known to be a problem.  But is that all?

As we have commented on at length before, the GDP numbers are full of fudge, so it may be hard to know just what to make of them. A cynic would say, and probably does say, that they the Bureau of Economic Analysis (BEA) is making the numbers up as they go to make everyone happy.

Perhaps you are a bit too diabetic to handle all the fudge, either, but this problem is a bit more savory than sweet. It’s all about the seasoning – or, rather, the “seasonal adjustment”.

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Betting on Low Interest

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When will the Fed raise interest rates? If you ask investors, the answer is “Not this year”. Bets have been placed on bond futures which imply that the Fed Funds Rate will be no higher than a quarter of a percent at the end of the year – hardly any rise at all.

But if you ask the Fed, it’s going to come soon. Why doesn’t anyone believe them?

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From Net Collector to Payer

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We’ve discussed many times before how the Federal Reserve sets the interest rates for everything from used car loans to mortgages to savings accounts across the US. The task has always fallen to the Federal Reserve Open Market Committee (FOMC) and its “Fed Funds Rate”. As far as anyone can tell they perform a calculation based on the prevailing conditions as to what the optimal rate should be. They balance out the need for more jobs (favored by cheap money, or low rates) with a desire to keep inflation in check (with high rates) and a rate is published. From that baseline for the cost of no-risk money a premium is added by a bank based on the risk (low for a mortgage, high for a used car) or subtracted (the value of savings) and all is good.

Except for one small detail – that mechanism has been horribly broken since 2008 when every calculation suggested the optimal rate was below zero. As long as rates are near zero and there’s a flood of cash in the financial world (not that you are getting any) we have what’s known as a “liquidity trap”. And the way interest rates are going to be set in the near future is going to turn on some far more obscure things such as the “Reverse Repo Rate”.

Yes, it’s complicated.

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