If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.
What’s the big deal? Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.
Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit. OMG!!!
Not to worry. Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.
Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus.
Low Inflation Is the Problem
How many people do you know who are worried that the rate of inflation is too low?
If you know anyone who thinks the most important step forward for today’s tepid economy is to raise the inflation rate to 2%, there’s about a 100% chance that person is a central banker.
Central bankers are the folks who have been running the economy in recent years and, based on their logic (or, more accurately, illogic), it’s a wonder there still is an economy.
Everything wrong with the U.S. economy today is even worse in Europe. Unemployment has been so high, it’s as if every month is August. For the Eurozone as a whole, the Read more
Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.
A lot can happen in 2,500 years.
Back in its day, Greece ruled the world – albeit, it was a much smaller world. But that was a long, long time ago. So long ago, we routinely refer to the Greece of those days as “ancient Greece;” the only thing it has in common with the Greece of today is its geography.
Greece has gone from Alexander the Great to Alexis the Not-So-Great. That would be Alexis Tsipras, leader of the Coalition of the Radical Left, who was elected prime minister in January. Tsipras’ plan for bringing his country back to solvency is to pretend its debts don’t exist and to keep on spending. After all, that worked so well for Argentina.
After being bailed out twice by Eurozone leaders, Greece is no closer to solving its economic problems. The only difference now is that it has more debt. If Greece were a person, you’d cross the street if you saw him approaching, because you know he’d bum money off of you and use it to bet on the ponies.
The Eurozone’s bailouts were contingent upon Greece following an austerity program. But Greeks have had enough of austerity and elected Tsipras as the anti-austerity candidate. So after two bailouts, Greece is still an economic failure – and it’s all Germany’s fault, since Germany actually wants Greece to stick to its austerity program and pay back its loans.
“Separation is forever.” Alistair Darling, former Chancellor of the Exchequer
Any time you divide one number by another number, you end up with a smaller number.
And so it is with Scotland’s vote to succeed from the not-so-United Kingdom, which is scheduled to take place on Sept. 18.
The vote appears too close to call, but even the fact that it’s taking place is disconcerting. As Rupert Murdoch tweeted, “Scottish poll reflects world-wide disillusion with political leaders and old establishments, leaving openings for libertarians and far left.”
Why should we care about what’s happening across the Atlantic? Asking what tiny Scotland has to do with the fate of the U.S. is like asking what tiny Greece has to do with the fate of Europe.
Putting aside the economic impact, this is a time when the world’s democracies need to be united against a growing terrorist threat. Even President Obama acknowledged this week that ignoring the world’s problems won’t make them go away, when he declared war on the Islamic State. (OK, he didn’t call it a war, he called it a “counter-terrorism campaign.” And his predecessors called fighting in Vietnam a “conflict.”)
So, at a time when America is seeking to rally its allies in battle against the Islamic State, one of America’s strongest allies is distracted by an internal split. Consider what The Spectator had to say about the upcoming vote:
It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.
Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting. With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain. The ECB’s target rate of inflation is just under 2%.
Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month. Apparently, as long as someone is following easy money policies, the markets are happy.
The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds). That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.
Forward guidance, as we’ve previously explained, is simply the act of talking about what the central bank will do in the future. Keeping interest rates low, for example, by saying that the ECB will keep interest rates low.
Banks to Pay for Deposits
The most significant action announced by the ECB was to lower the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.
In other words, banks will pay a fee on money they fail to lend out. Whether or not that stimul
Finally, the U.S. Treasury Department has figured out a way to reduce the federal debt – by giving money away.
That may not make sense, but keep in mind that we’re talking about the federal government. And that means that money isn’t just given away; there are strings attached, unless you’re a preferred government contractor or an expert in Medicare fraud.
So consider this shocker. Fannie Mae is scheduled to make a $7.2 billion payment to the U.S. Treasury next month and, when it does, the total payments from Fan and Fred will add up to $192.5 billion, exceeding the $187.5 billion they received from taxpayers.
Granted, a 3% profit over five years isn’t really a profit, but we’re talking about the “toxic twins” here. And their payments are scheduled to continue, much to the chagrin of Fan and Fred shareholders. They can just get in line, though.
That’s not the only government bailout that’s been profitable – the Troubled Asset Relief Program (TARP) required a $250 billion investment for troubled banks, but brought in more than $272 billion, a profit of about 9%. AIG’s bailout was even more lucrative, bringing in $22 billion on an investment of $152 billion, for a 15% return.
At least it sounds like good news.
The U.S. Bureau of Economic Analysis announced that the economy grew at a rate of 2.84% during the third quarter. That’s up significantly from recent growth, which has been below 2%.
But if you find a silver lining in today’s economy, it’s sure to be surrounded by a black cloud. There are a few black clouds in this report:
- Preliminary numbers are almost always wrong. Funny how sometimes they’re overly optimistic.
- In spite of the higher growth rate, consumer spending is at its lowest level since the second quarter of 2011. In a healthy economy, consumer spending usually drives growth.
- Fixed investment, an indication of capital spending, dropped from 0.96% in the previous quarter to just 0.63%.
- Inventory doubled from 0.41% the previous quarter to 0.83% of the 2.8%. An increase in inventory is an underwhelming sign of economic growth.
Interestingly, government grew 0.04%, in spite of sequestration cuts. The numbers predate the 16-day government shutdown.
Observing today’s global economy is like watching Adam Sandler’s best movie. It’s horrible, but it could be worse.
Consider what passes for improvement today:
Europe is no longer in a recession. Under the headline, “Eurozone’s longest-ever recession comes to an end,” the Associated Press quoted Eurostat, the European Union’s statistics office, announcing that the 17 EU countries that use the euro saw their economic output increase by 0.3% in the second quarter of 2013. Over a year, the Eurozone’s growth rate would be 1.1%.
That’s the first quarterly growth for the Eurozone since 2011, but it requires some perspective. China’s growth slowed to just 7% this year and it’s widely regarded as a calamity, signaling that the world’s second largest economy is on the brink of failure. Europe’s economy is growing at a rate of 1.1 % and the party hats are out because some believe that the Eurocrisis is finally over and we’ll never have to hear the term “sovereign debt” again.
Don’t count on it though. The Eurocrisis is far from over. Consider just a few unresolved issues outlined by Fidelity’s Michael Collins:
- Greece is ever closer to collapse, an event that would trigger bank and bond runs in other troubled countries.
- Mediobanca, Italy’s second-biggest bank, warned in June that the country might need an EU rescue within six months because the recession and the credit crisis for large companies are deepening,
Cyprus? Really? The population of Cyprus is just north of 1 million people.
In comparison, the Boston area has a population of 4.6 million. Greece has a population of about 10.8 million. Central Massachusetts has a population exceeding 800,000. Would a financial crisis involving two banks in Worcester shake the financial system the way the financial crisis in Cyprus has?
Of course not. Then again, Worcester is not a tax haven for Russian billionaires, who use Cyprus as their Cayman Islands. Russia has kept many Cypriots gainfully employed through the country’s two largest banks, Bank of Cyprus PCL and Laiki Bank.