Bizarro World Finance

This last week, the yield on a 2-year Irish Government bond turned negative, garnering a rate of -0.007%. That means that if you want to loan the Irish government some of your money, you have to pay for the privilege of doing so. Negative interest rates are not exactly new, but in the case of Ireland it’s particularly bizarre. Just three years ago, amid a potential default crisis, the same bonds were yielding 23%.

What changed? The short answer is no one knows. Shiela Kinsella, an Economics Professor at the University of Limerick, was exasperated. “The market is still in an irrational stage. It’s telling me that markets are lumping the same countries in again, and it’s just proof that nothing is ever learnt.”

Why did this happen? Investors in the Eurozone still can’t find anything to invest in as the European Central Bank (ECB) started a weak bond-buying program to goose investment. It’s a last ditch attempt to goose the economy and produce much needed jobs. But all it has created so far is a Bizarro World in finance.

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Eurocrisis II: The Hot One

Pity poor Europe. 2014 was supposed to be the year that they finally put the Eurocrisis behind them, culminating with a stress-test of banks to prove they could weather the next downturn. There has always been hope for a little bit more growth, too, showing that the forced marriage of nations had benefits beyond just staying together for the kids’ sake.

Then, it all blew up in Ukraine.

Like the previous crisis Europe faced as a freshly united single entity, this one was partly their own making. Ukrainian President Yanukovych was clearly fishing around for about $15B to stabilize his country – and when Europe couldn’t offer reasonable terms he went over to Russia for it, sparking this whole conflict. Europe eventually had to offer the new, less legitimate government the same aid when things turned again. But unlike the previous Eurocrisis, this is an external conflict that will test their determination to stand together to face a more horrible threat – war.

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Velocity and Inflation

Since 2008, the Federal Reserve has more or less printed over $3.2 Trillion in three rounds of “Quantitative Easing”, now tapering off to zero. Many have speculated that this has to result in inflation for the simple reason that there are more US Dollars out there than ever before. That’s based on the most fundamental principle of any market, supply and demand –more of these things called “Dollars” around and the value has to drop, meaning it takes more of them to make a reasonable exchange with something real.

It hasn’t worked out that way. Inflation remains less than 2% per year as it has since the financial crisis that started in 2007. How on earth can that be?

The answer is that the number of US Dollars in the world is only one part of the equation. The “velocity of money”, or the number of times they turn over in the economy, is equally important. Data since 2007 shows what every freelancer and job seeker knows – it’s a tough world out there, and people are pretty slow to let go of the dough they have.

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Professor Bernanke, Again

I think most of us would agree that people who have, say, little formal schooling but labor honestly and diligently to help feed, clothe, and educate their families are deserving of greater respect – and help, if necessary – than many people who are superficially more successful. They’re more fun to have a beer with, too. That’s all that I know about sociology.
– Ben Bernanke

President Obama has made it clear that next January, when his term is up, Chairman Bernanke is going to be replaced.  It’s not like the big guy is being fired, though.  “Ben Bernanke’s done an outstanding job,” Obama said in an interview with Charlie Rose.  “He’s already stayed a lot longer than he wanted or he was supposed to.”  What else would he want to do than to be arguably the most powerful man in the world?  Simple.  The title “Professor Bernanke” always suited him much better than “Chairman Bernanke”.

That’s just about the only thing that his admirers and critics can agree about him  – although the former might laugh it out while the latter would say it though clenched teeth.

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You Were Worried About China?

The best way to destroy the capitalist system is to debauch the currency.
– Vladimir Lenin

Barataria was a bit skeptical about Japan’s “Abenomics” back in January.  The first results are in, and they are amazing.  Their economy grew by a developed-world-leading 3.5% in the first quarter, and the stock market is up 28% in 2013.  It’s been called a “wealth shock”, and it’s very welcome in a nation that has been flat for two decades.   What could possibly go wrong?  Just about everything – and it’s likely to affect us here in the US.  Ready for really cheap electronic gadgets?  How about stagnating employment?

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Gold Down for the Long Run?

“The long run is a misleading guide to current affairs.  In the long run we are all dead.”
– John Maynard Keynes

A step back can be very illuminating, especially in economics.  History teaches us an awful lot when we are willing to pay attention to what it says to us (which is almost never).  The long run is also a good way to get away from current fashions, trends, and all the ways that everyone can fool themselves.  Of course, as Keynes tells us, you run the risk of making a completely different mistake in the process.  At least no two economists ever agree on anything, so there’s plenty of wiggle room.

It’s the bigger version of your typical financial reporting – “Stocks fell today on news that blah blah blah …”  when in fact it was just a drippy grey April day in New York and everyone felt lousy.

A decade-plus trend, the increasing price of gold, is coming to a spectacular end.  This may mean something very important – if it’s not the last gasp of the last bubble to work its way through our system.

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Jubilee – Cancel Debt!

There has been a lot of good economic news lately, at least compared to the very bad news of a few years ago.  But that doesn’t mean that there aren’t bad things worth keeping a close eye on – especially those that predict future action by the Federal Reserve.

The velocity of the US Dollar – the number of times per year that money turns over through the economy – continues to drop without an end in sight.  This is a worrying sign because it suggests that most of the economic growth we are seeing comes from money that is being more or less printed by the Fed.  It also suggests that there will be another round of quantitative easing, or even more money printed.  There has to be a better way – and this wouldn’t be Barataria if we didn’t take a stab at how.

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