Stiglitz: Leaving the Euro Painful but Staying in More Painful; Eurozone Breakup Recap

Nobel prize winning economist Joseph E. Stiglitz has come to the right conclusion Leaving the Euro Painful but Staying in More Painful.



Partial Transcript

Question: I want to probe you a bit on that small mistake of the euro. UYou seem to suggest there is nothing that cannot be solved with more European solidarity and I agree with that intellectually. But if you are politically realistic, I don't think it is going to be forthcoming. I don't see large checks being written by German politicians to subsidize for example, the Spanish or Greek unemployed. So if you think about that perspective, and put yourself in the shoes of a 30-year old Spaniard or Greek head of household who has no prospect of employment, would it not be better is countries left the eurozone altogether?

Stiglitz: As I said in my talk the reality is, if the reforms I described were made, Germany would not have to write large checks. It more likely to pay a high cost for not making these reforms.  ... But I think your description of the reality of the way the dialog is going in Germany is absolutely correct. And that is one of the reasons I am a little depressed about the future of Europe. It's going to be a hard row to persuade Germany to make these reforms even if they would cost less. And that leaves Spain and Greece with an important debate, a policy question, what should they do if the reality is there won't be these reforms. To me the real risk is the following: Europe is going to dangle out just enough hope that Spain and Greece and the other periphery countries will say, they are going to come to our assistance. .... But they are going to dangle enough hope that people won't want to leave the euro, but in fact, there will be so little reform there will be literally no time soon the countries will emerge from depression. SAo my advice would be along the lines of what you are hinting at: They should probably face the reality that there is not going to be political reform that will make the euro viable for the periphery ... that internal devaluation won't work, that leaving the euro will be painful, but staying in the euro will be more painful.

Among economists, there is an easier solution, that many people have argued, that Germany should leave. If Germany leaves, the value of the euro will go down, the competitiveness of the southern 
countries would become substantially enhanced. They can design a set of economic policies that work for a large group of countries, and owing money in euros they will be able to repay money in euros. Germany is in a better position to absorb the consequences of a breakup in that fashion.

End Transcript

Better if Germany Leaves

I am in total agreement with the unknown questioner regarding the political reality: Germany will not pony up the cash, nor the banking union and fiscal unions required to make the euro work.

On November 9, 2011 in Breakup Inevitable, but How? I offered the following comments.

Eurozone Breakup Inevitable, But How?

The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.

It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.

It's important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can't and won't over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.

On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.

On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.

Eurozone Math; One Size Fits Germany; Door Number Two

People accuse me of blaming Germany. The blame goes to the architects  of the fatally flawed euro and the politicians who signed up for the mess.

Blame also goes to the ECB. I have written about that on numerous occasions as well. For example, please consider my April 11, 2013 post Eurozone Math; One Size Fits Germany; Door Number Two.

Reader "JB" thinks I am blaming Germany for what is happening. That's not exactly correct, but let's take a look at what "JB" has to say via email.

Hi Mish,

I read your blog daily. We are generally on the same page. We even agree that in all probability the eurozone will break up. However, You cannot blame the Germany, the German government, or the German people for doing the right thing. Germans can accept austerity. The phrase "tightening the belt" is an axiom in the German language. ....
JB

Hello JB, I think you misunderstand my message. I am not biased against Germany, and I am in favor of "austerity".

By "austerity" I mean shrinkage of public sector jobs and pensions, and liberalization of work rules.

I am against tax hikes, especially those imposed on Spain, Greece, and Portugal by the nannycrats in Brussels. What the nannycrats call "austerity" is nothing more than devastating tax hikes coupled with minimal, if any work rule reforms.

My message is primarily a function of math.

Eurozone Math

• Germany was the primary beneficiary of the ECB's "one size fits Germany" interest rate policy.
• It is mathematically impossible for every country to be an exporter like Germany
• It is mathematically impossible for one interest rate to work when there is a multitude of fiscal policies
• It is mathematically impossible for the euro to survive without a transfer mechanism of some sort from Germany to peripheral Europe, and Germany will not allow any transfer mechanisms
• It is mathematically impossible within the realm of the euro for Spain to be more like Germany, unless Germany is less like Germany
• Germany has ruled out everything that could possibly make the eurozone work.

Euro Architects and Politicians to Blame

I do not blame Germany. I blame all the architects of the euro. I also blame all the politicians making matters worse by trying to force their will on the markets. In that sense, I do blame Merkel, but I also blame Hollande, Sarkozy, Trichet, Draghi, and everyone else involved in this mess, past or present.

One Size Fits Germany (Until it Doesn't)

The math of the matter is Germany benefited from the Euro and from the ECB's "one size fits Germany" interest rate policy more than any other country.

As a direct result of the unstable eurozone treaty, sovereign interest rate imbalances, Target II imbalance, and trade imbalances are out of control. Germany and the other European creditor countries are owed money that cannot be paid back.

Door Number Two

The eurozone cannot work as is, and Germany is going to pay the price in one of two ways.

1. Germany Forgives Loans to European Debtor Nations
2. The debtor nations exit the eurozone and default

German taxpayers do not want to bail out the rest of Europe. And if I was a German taxpayer I would have the same stance. Without assigning blame to Germany, the math is what it is: unsustainable.

Pick your poison. Is it door number one or door number two? Odds overwhelmingly favor door number two.

Even diehard supporters of the eurozone now see it cannot work. For example, please see Eurointelligence Founder Wolfgang Münchau, Once a Staunch Euro Supporter, Now Welcomes the Anti-Euro Party "Alternative for Germany".

Soros On Board

George Soros is still a eurozone supporter, but he understands it cannot work without eurobonds. I do not believe the eurozone can work with eurobonds as I expect tensions will be high. Soros' second-best alternative is for Germany to exit the eurozone.

That has been my #1 idea for a long time. I explained it recently in Illusions of Stabilization.

Failed Experiment

The Eurozone is a failed experiment. Structural flaws were too great initially, and they have increased over the years. No currency union in history has ever survived unless there was also a fiscal union. Current politics says it cannot happen, on meaningful terms.

Breakup Inevitable, But How?

A breakup is inevitable, just as it has been from the beginning. The key is to manage a breakup in the least destructive manner.

Breakup Options

Option 1: If Germany (and the northern states) left the eurozone, the Deutschmark (and respective currencies) would immediately be credible. The downside to Germany (and the northern states) is debts to German banks would not be paid back in Deutschmarks but rather deflated (but not worthless) Euros.

Option 2: The second option is a piecemeal, destructive breakup. Should Greece and Spain leave first, those countries might experience a complete loss of faith in currency resulting in hyperinflation. The Northern states would be paid back in worthless notes, if they were paid back at all.

Germany Suffers Regardless

Note that Germany and the Northern creditor nations suffer regardless. Either they keep ponying up bailout money, there is a managed breakup, or a piecemeal destructive breakup. It would be best for all involved if Germany left the eurozone and went back to the Deutschmark.

There are no other options, and no other choices. Meanwhile, imbalances grow and German taxpayers keep funneling tax dollars to the Southern states to keep them afloat.

Merkel Not a Savior

Many Germans view Merkel as a hero for her tough stance on Cyprus.

However, Merkel is neither a savior nor a hero. Her stance is always one of political necessity. Every step of the crisis she has made politically expedient decisions such as caving in to Sarkozy and providing funds for Greece but not for Cyprus.

Sentiment in Germany in favor of holding the eurozone together is strong provided German taxpayers do not have to pony up another dime. The irony is Germany was the main beneficiary of the ECB's "one size fits Germany" interest rate policy that destroyed Spain and peripheral Europe.

Sentiment Does Not Change the Math

Sentiment does not change the eurozone math, but it does impact the way the eurozone breaks apart.

Expect a piecemeal, destructive breakup.

Some will blame Germany. I blame a mathematically unworkable treaty that was flawed from the beginning. I also blame all the politicians who supported the idea even though it was fatally flawed.

Late to the Party

Those just now coming to the conclusion the euro cannot possibly work are late to the party.  Yet, many, if not most, still have not figured this out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine Limits Withdrawals to 15,000 Hryvnia per Day (about $1,500); Hryvnia Up 14%

Hoping to halt or slow capital flight and stop the run on banks, the Ukraine central bank limited foreign currency withdrawals to 15,000 Hryvnia per day as noted by FxStreet earlier today.

Hryvnia vs. US Dollar



Taking into account today's 14% rise, 15,000 Hryvnia is about $1,556.
 
Capital controls and/or other interventions seem to have stopped the slide in Hryvnia. For how long?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Eurozone in Deflation; Monetarist Mouthpieces Will Scream

Forget all the talk about CPI or as they call it in Europe HIPC (harmonized index of consumer prices) floating just under 1%.

The true measure of inflation is credit expansion. And for the second month, credit contracted in the Eurozone.

Reuters reports Euro zone lending contraction compounds ECB headache.

Lending to households and firms in the euro zone fell again in January and money supply growth remained subdued, adding to pressure on the European Central Bank to take action next week to support the economy.

The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a fresh government bond purchase program, but the measures have so far not managed to unclog lending to the real economy.

Euro zone inflation is also running at only 0.8 percent - far below the ECB's target of just under 2 percent.

Loans to the private sector fell by 2.2 percent in January from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in December.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 1.2 percent, picking up slightly from 1.0 percent in December.

Monetarist Mouthpieces Will Scream

Credit contraction news will have all the monetarist mouthpieces screaming yet again.

Ignore them.

Stepping on the gas pedal with QE will not do a damn thing except create an even bigger asset bubble in European equities.

When bubbles pop - and they always do - the only thing monetarists will have to offer is still more monetary stimulus.

On January 27 I stated Deflation Will Return: Europe First, Then US.

Here we are.

For a discussion as to why the monetarists are dead wrong about what to do about the situation, please consider ...

1. What the Crisis Taught Us: More Bubbles! We Need Bigger Bubbles to Combat Deflation!
2. Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another

Throwing money at problems has never once in history solved anything over the long term.

Nonetheless, monetarist mouthpieces who do not understand history will be screaming for more currency intervention.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Inside Ukraine: Mish Reader Who Speaks Ukrainian and Russian Challenges Western Media View of Events

I received an interesting email regarding Ukraine from reader Jacob Dreizin, a US citizen who speaks both Russian and Ukrainian.

Jacob comments on media bias and offers the "full scoop" on Ukraine.

First, let's take a look at events that happened earlier today.

Pro-Russia Gunmen Seize Crimea Parliament

Bloomberg reports Gunmen Seize Crimea Parliament as Ukraine Backs New Premier.

Gunmen occupied the parliament in Ukraine’s Crimea region as lawmakers in the capital approved a new cabinet after last week’s ouster of Viktor Yanukovych.

About 120 trained and well-armed men took over the parliament and government buildings in Simferopol, according to Serhiy Kunitsyn, a lawmaker for former boxing champion Vitali Klitschko’s UDAR party. They raised the Russian flag.

Fistfights broke out yesterday near Crimea’s parliament as hundreds of demonstrators demanded a referendum on breaking the region off from Ukraine and joining Russia. They were met by several thousand Tatars, chanting “Crimea isn’t Russia!”

The proposed Crimean referendum has no legal basis, Unian said, citing the Central Election Committee. The Constitution requires a nationwide referendum to change territorial status.

Crimea’s Parliament Seeks Referendum on Region’s Future

The Financial Times reports Crimea’s Parliament Calls for Referendum on Region’s Future

Ukraine plunged further into crisis on Thursday after unidentified pro-Russian gunmen seized Crimea’s regional parliament, prompting legislators there to call a referendum on the autonomous peninsula’s future.

The raid in Simferopol, Crimea’s capital, intensified east-west tensions over Ukraine. Fears mounted that separatists could prevail in the largely pro-Russian peninsula after a pro-western leadership assumed power in Kiev after last week’s toppling of president Viktor Yanukovich.

Hours after scores of armed men seized Crimea’s legislature, Vladimir Konstantinov, the Speaker, said an extraordinary parliament session had voted to hold a referendum on the peninsula gaining more autonomy on May 25 – the date already set for snap presidential elections across Ukraine.

Mr Yatseniuk told the national parliament as his government was sworn in that the country was “on the brink of collapse and being torn apart”. He called for members of the UN Security Council to preserve the nation’s territorial integrity.

The escalation of events in Crimea and Mr Yanukovich’s claims still to be in power pose a severe challenge to Ukraine’s new leaders even as they grapple to stabilise the country’s tottering economy. Joking grimly about his role yesterday, Mr Yatseniuk said he would be leading a “government of suicides”.

Hryvnia Plunges Another 9.8% Today



Clearly things are not going well. A default looms. Now let's hear what reader Jacob Dreizin has to say.

Ukraine - The Full Scoop

Hi Mish,

The last Ukrainian government was awful, but as someone who speaks the language and has been reading the local news for hours each day, I want you to know there are two sides to this story.

The Western media is not reporting accurately and in a balanced way as to what’s going on in Ukraine, both in the run-up to the fall of the regime, and now, in the aftermath.

There is a “reign of terror” in Kiev and some other areas right now.

Offices and even private homes associated with the former ruling party and its communist allies have been ransacked or burned by militias even though Yanukovich’s mansion has been left alone.

An independent member of parliament who critiqued certain positions of the main nationalist party was assaulted and had to go to hospital with a concussion.  Also, some public officials in the central/western regions have been detained and beaten-up. 

Other pro-Russia citizens have been rounded up and taken away by militias, with no warrant.  We have no idea if, how, or where they are being held.

The ultra-nationalist umbrella groups that direct the militias have just announced they will essentially take charge of Central Elections Commission HQ and monitor its work during the upcoming national vote.  How fair will the vote be?

Riot police returning to their bases in western Ukraine were forced to attend public assemblies in which they had to get on their knees and beg forgiveness (whether or not they were involved in any abuses.) Some have already fled their homes and are living as refugees. 

Also, one of parliament’s very first post-revolution decisions was to revoke the right of local governments to do business in non-Ukrainian languages, such as Russian. Another law has been proposed to effectively ban the broadcast or rebroadcast of television or radio from Russia.  There are still other proposed bills aimed at provoking and oppressing the Russian or Russian-speaking population.

Lastly, while the new legal authorities are investigating the killing of around 70 protestors, no one is looking into the deaths of at least 13 policemen (at least 10 from gunshot wounds) or several ruling party workers who were killed in an attack on their office.

It’s much easier to pretend this is about democracy, human rights, the peoples’ choice, etc. while looking the other way now that “our guys” have won. We have seen this movie before. And I fear it will only get worse from here.

Yes, the former government led by President Viktor Yanukovych was corrupt. But the leading opposition figure, who was just released from jail was named by U.S. Federal prosecutors as an unindicted co-conspirator in the massive corruption schemes of a former Ukrainian prime minister who served time in U.S. Federal prison for money laundering and other charges after having made off with what is believed to be hundreds of millions of dollars, much of it not yet recovered.

Feel free to use my name. I put in my time in uniform, and I’m not afraid that some pro-war, pro-intervention chickenhawks might call me a traitor for supporting the “wrong” side. I have earned my right to say whatever I want.

All the best,

Jacob Dreizin

Ukrainian Language Usage

Comments by Jacob got me interested in who speaks what, where? Here is an interesting chart from Wikipedia on usage of Russian Language vs. Ukrainian language.



The problem is obvious.
There is a serious chance Ukraine splits in two. If it doesn't issues can fester for years, if not decades.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Weekly Unemployment Claims "Unexpectedly" Rise; Claims in Recession Pattern?

Weekly unemployment initial claims unexpectedly rose to 348,000 this week.

The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but the underlying trend suggested no shift in labor market conditions.

Initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 348,000, the Labor Department said on Thursday. Claims for the prior week were revised to show 2,000 fewer applications received than previously reported.

Economists polled by Reuters had forecast first-time applications for jobless benefits slipping to 335,000 in the week ended Feb. 22, which included the Presidents Day holiday.

While last week’s increase pushed them to the upper end of their range so far this year, it probably does not signal labor market weakness as claims tend to be volatile around federal holidays.

Weekly Claims Since 1967



Recession Pattern?

Once claims bottom then start to rise, the above chart shows a recession usually follows. The only exception was 1993, smack in the middle of an internet boom.

It's impossible to know if claims have indeed bottomed, but a secondary pattern shows this is an area in which claims bottomed five out of the last six times. If claims bottomed again now, it would make six out of seven.

This "unexpected" event coincides with numerous other "unexpected" events, nearly all of them weaker than expected.

String of Unexpected Events

• The unexpected rise in initial unemployment claims followed
• The Philly Fed Unexpected Contraction which followed
• The unexpected decline in industrial production (the most since May of 2009),  which followed
• The unexpected decline in retail sales which in turn followed
• The unexpectedly weak jobs report in February
• Which followed a Huge Miss in ISM; Largest Decline in New Orders in 4 Years
• Which followed a Big Miss: Nonfarm Payrolls +74,000 vs. 205,000 Expected in January

Reuters said this "probably does not signal labor market weakness". I suggest weakness is nearly everywhere you look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Are Drone, Workerless Ocean Freight Ships Coming? What About Jobs? Insurance? Inflation?

Here is the question of the day: Are drone, workerless ocean freight transport ships coming?

If shippers can pull it off, the cost saving would be immense. But what about the job losses? Insurance? Inflation?

Let's explore the questions with a look at the Bloomberg article Rolls-Royce Drone Ships Challenge $375 Billion Industry.

In an age of aerial drones and driver-less cars, Rolls-Royce (RR/) Holdings Plc is designing unmanned cargo ships.

Rolls-Royce’s Blue Ocean development team has set up a virtual-reality prototype at its office in Alesund, Norway, that simulates 360-degree views from a vessel’s bridge. Eventually, the London-based manufacturer of engines and turbines says, captains on dry land will use similar control centers to command hundreds of crewless ships.

Drone ships would be safer, cheaper and less polluting for the $375 billion shipping industry that carries 90 percent of world trade, Rolls-Royce says.

The European Union is funding a 3.5 million-euro ($4.8 million) study called the Maritime Unmanned Navigation through Intelligence in Networks project. The researchers are preparing the prototype for simulated sea trials to assess the costs and benefits, which will finish next year, said Hans-Christoph Burmeister at the Fraunhofer Center for Maritime Logistics and Services CML in Hamburg.

Even so, maritime companies, insurers, engineers, labor unions and regulators doubt unmanned ships could be safe and cost-effective any time soon.

Crew costs of $3,299 a day account for about 44 percent of total operating expenses for a large container ship, according to Moore Stephens LLP, an industry accountant and consultant.

The potential savings don’t justify the investments that would be needed to make unmanned ships safe, said Tor Svensen, chief executive officer of maritime for DNV GL, the largest company certifying vessels for safety standards.

While each company can develop its own standards, the 12-member International Association of Classification Societies in London hasn’t developed unified guidelines for unmanned ships, Secretary Derek Hodgson said.

“Can you imagine what it would be like with an unmanned vessel with cargo on board trading on the open seas? You get in enough trouble with crew on board,” Hodgson said by phone Jan. 7. “There are an enormous number of hoops for it to go through before it even got onto the drawing board.”

100% Guaranteed to Happen

Anyone who does not think drone, workerless ships will happen, cannot think clearly.

Skeptics did not think the auto would replace horses or trains. Skeptics thought flight was impossible. Even simple constructs we now take for granted such as coffee on airplanes was once considered ridiculous.

So yes, driverless cars and workerless ocean ships are 100% guaranteed. The only question is "what timeframe?"

I do not have an answer to that question, but let's not bury our heads in the sand over what is inevitable.

Furthermore, it's likely workerless ships arrive before driverless trucks hit mainstream.

After all, the ocean is a vast place and there are no road or other constraints except in docking. If landing is a major concern, how difficult would it be to helicopter in crews specifically for the final landing?

What About Jobs?

Let's get a grip on the problem of jobs. Yes, many will vanish. But others will appear. I cannot name one technological advancement in history that did not ultimately create more jobs than it destroyed.

Examples

• Lightbulbs replaced candles
• Cars replaced horses
• Trains replaced the Pony Express
• Personal computers
• Internet replacing libraries

Can someone tell me why it's supposed to be different this time?

What About Inflation?

Therein lay the problem. Driverless cars, the internet, and other price-deflationary advances have outstripped central banks ability to inflate prices and wages.

Try as they might, central banks have only managed to foster asset bubbles (they don't even see) not the 2% price inflation they want.

Yet they keep trying. Prices went up but not as much as central banks want. Wages rose less than prices, especially for those on the bottom end. Home prices soared so Congress initiated countless affordable home programs. Then home prices crashed and Congress and the Fed acted to prop up home prices.

No one really wanted affordable homes, they just wanted ill-advised affordable home programs. Now people scream about income inequality and for higher minimum wages.

This all stems from one bad idea - central banks fostering inflation.

One Bad Idea Leads to Another, and Another

In the effort to produce 2% inflation, One Bad Idea Leads to Another, and Another

That construct is corollary number six of the greater "Law of Bad Ideas".

Can the Fed Prevent Boom-Bust Cycles?

Heck no, the Fed causes them! For details, see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

Also consider Deflation Theory Reality Check.

Losing Battle

Such are the challenges the Fed faces, and they are losing the battle because the advancement of technology is inherently price-deflationary. Technollogy has overtaken the Fed's (central bankers in general) ability to inflate consumer prices.

Here's the irony: Ridiculous efforts to prevent price-deflation cause asset bubbles that inevitably collapse, which in turn bring the very conditions central banks wish to prevent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com      

Job Creation and Destruction: Do Small, Medium, or Large Corporations Account for Job Growth?

The hunt for jobs is on. But where is the job growth? Is job growth in small, medium, or large corporations?

Unfortunately, that question is insufficient to answer the question. One must also factor in job destruction and the closing of businesses.

With that in mind, please consider the Wall Street Journal report: Say It Together: Young Businesses, Not Small Ones, Drive Job Growth

It’s not size that matters — at least when it comes to job creation. The age of the company is a bigger factor.

The Federal Reserve Bank of Chicago’s Jason Faberman on Monday became the latest in a long line of economists to unpack the misconception – promoted frequently by elected officials — that small businesses are the key to creating new jobs in the U.S.

It’s a subset of small firms—young, innovative companies—that lead in job creation. “It’s the new guys, not necessarily the small guys, that generate growth,” he said at the National Association for Business Economics policy conference in Arlington, Va. “The focus for policymakers shouldn’t be on small business job growth, but on new business formation.”

Nearly 90% of U.S. firms employ 19 or fewer workers. Those smaller firms create jobs at nearly twice the rate of larger companies. Controlling for the age of the firm, Mr. Faberman found the strongest job growth came from firms that were less than four years old.

Small or Large vs. New

The above article says job growth is not small vs. large, but rather old vs. new.

But what about job destruction?

Job Creation and Destruction by Firm Age and Size

To help answer the question, please consider the following interactive map from Tableau  Software.

Tableau Chart of Job Creation vs. Destruction

The above Tableau interactive map is from The Pattern of Job Creation and Destruction by Firm Age and Size by the Federal Reserve Bank of Atlanta.

Here is a snip.

Colors represent age categories, and the sizes of the dot represent size categories. So, for example, the biggest blue dot in the far northeast quadrant shows the average rate of job creation and destruction for firms that are very young and very large. The tiny blue dot in the far east region of the chart represents the average rate of job creation and destruction for firms that are very young and very small. If an age-size dot is above the 45-degree line, then average net job creation of that firm size-age combination is positive—that is, more jobs are created than destroyed at those firms. (Note that the chart excludes firms less than one year old because, by definition in the data, they can have only job creation.)

The chart shows two things. First, the rate of job creation and destruction tends to decline with firm age. Younger firms of all sizes tend to have higher job-creation (and job-destruction) rates than their older counterparts. That is, the blue dots tend to lie above the green dots, and the green dots tend to be above the orange dots.

The second feature is that the rate of job creation at larger firms of all ages tends to exceed the rate of job destruction, whereas small firms tend to destroy more jobs than they create, on net. That is, the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line.

Apart from new firms, it seems that the combination of youth (between one and ten years old) and size (more than 250 employees) has tended to yield the highest rate of net job creation.

Appearances vs. Reality

It's not small vs. large but rather old vs. new in conjunction with small vs. large.

But what about the influence of regulations, of unions, of Fed policies, of local taxes, federal taxes, and currency manipulations everywhere one looks?

Since regulations and tax laws overwhelmingly favor large corporations over small corporations (thanks to huge campaign contributions from the former vs. latter), I ask a simple question: Are the Wall Street Journal and Fed reports totally worthless?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine Hryvnia Down 17% in Two Weeks as Run on Banks Intensifies; 7% of Bank Deposits Withdrawn in 3 Days

Ukraine's currency, the Hryvnia, has fallen nearly every day for two weeks straight.

US$ vs. Hryvnia



On February 13 the Hryvnia went for 8.41 to the US dollar. Today it sells for 10.15 to the US dollar. That is a decline of 17.14% in two weeks.

Ukraine Seeks Help From IMF

Reuters reports Ukraine Asks IMF for Help on New Financial Aid Program

Ukraine has asked the International Monetary Fund to help prepare a new financial aid program, its central bank chairman said on Wednesday, adding that the new government would soon have its own anti-crisis program ready.

Stepan Kubiv [Ukraine's new central bank head] told reporters the bank was taking measures to stop capital flight from Ukraine, which has spiraled since protesters took to the streets in November against President Viktor Yanukovich's rejection of an EU trade deal.

7% of Bank Deposits Withdrawn in 3 Days

CNBC reports Risk of a Bank Run Heightens in Ukraine

Fears of a bank run in Ukraine are rising, as central bank reserves sink and some 7 percent of bank deposits were lost in just 3 days.


Yuriy Dyachyshyn AFP Getty Images

Ukraine's reserves currently sit at $15 billion, according to the country's newly appointed central bank governor, Stepan Kubiv. Kubiv said 7 percent of deposits, or 30 billion hryvnias ($3.3 billion), were lost between February 18-20, when the violence in the country reached its zenith and snipers opened fire on protesters.

Goldman Sachs has estimated the country's foreign currency reserves have declined to $12 - $14 billion.

The slump also hit the Russian rouble, which hit a fresh five-year low versus the dollar.

The lead sentence in the above article is a bit curious. A run on Ukrainian banks has clearly started. The fear is not that a run starts, but rather that it does not soon stop.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Saxo Bank's Steen Jakobsen Warns of Global Economic Vacuum, China Slowdown, Germany Growth Negative, 30% S&P Correction

Steen Jakobsen, chief economist at Saxo Bank in Denmark, sent an interesting email yesterday regarding China, Germany, the European debt crisis, and equity prices.

Steen is one of the speakers at Wine Country Conference II, May 1-2 in Sonoma, California.

What follows is from Steen, I dispense with my usual blockquote style for ease in reading.

Economic Vacuum

China’s flag is waving strongly these days, the direction of the economic- and political winds have changed but the present multitude of macro changes is yet to be recognized by consensus and the market.

My conclusion is this:

• China will slow-down to 5% growth over next two-three years.
• China will start devaluing their currency in response to Abenomics and weaker terms of trade
• China will no longer be the world’s biggest investor and importer of investment goods.

The changes will during 2014 mean that:

• Germany growth will go negative quarter-over-quarter in Q4 (from Q3)
• World growth will come down from the recent 3.7% to less than 3.0%
• The recovery will once again be postponed and the synchronic monetary policy of the major central banks will be questioned, leading to all time new lows in interest rates
• Deflation will take hold in Europe and become a major risk in the US
• This final third crisis in this cycle will mean equity needs to be sold off. This comes after commodities sold off in the US banking- and housing crisis, followed by fixed income during the late stage European debt crisis now I see a 30% correction in H2 of 2014 after a high is registered between 1840/1890 in the SPX.

I simply believe that China leads the world. They took the burden of world growth in their hands during the peak of the crisis in 2008/09 through the biggest fiscal expansion ever seen (550 billion US Dollars), then they increased their investment to GDP ratios securing export orders for major European and US exporters until late 2013, but since the Third Plenary Session of the 18th CPC Central Committee in November 2013 the main objectives for the political elite in China have changed from growth and export to rebalancing, fighting graft, reducing pollution and betting a small crisis now is better than a big one later.

I have already spent considerable amount of ink explaining why China is proactively seeking a small crisis rather than a big one and how China can no longer afford to keep its investment to GDP levels excessive but now China seems to have engaged in a fundamental change to its FX rates – attempting to weaken the CNY [Yuan].

China is a long term critic of Abenomics and the ensuing devaluations as Japan and Korea remains its key competitors in the export market, but until last week China held their FX tight and tightening but now things have changed:



Source: Bloomberg LLP & Saxo Bank

With the present geopolitical tension between China and Japan this chart is cause for concern for all of us: China no longer will play ‘nice’, they are this time ignoring “best practice” of playing paying lips service to the US-Sino relationship. Clearly Obama once again receiving the Dalai Lama in the White House is not helping the situation. That the rally in USD-CNY happened almost to the day Obama hosted the Dalai Lama is of course a pure coincidence! (They met Friday February 20th!)

China is not happy these days: The domestic economy needs rebalancing with the risk for upsetting the population and the bureaucrats. Overseas, Japan’s Abe is insisting on a stronger Japan, the US is clearly ignoring China advice on the Dala Lamai and overall the G-20 meeting had the developed world blaming the recent slow-down on the EM.

Not a good month for monetary coordination and friendly summits. The political crisis is biting ironically at a time where stock markets across the world is reaching 5, 7, and in the case of the UK 14 year highs! My old economic theory: The Bermuda Triangle of Economics is still in place: Slow growth, high unemployment and high stock market valuations kept in place by a policy where the 20% of the economy which is the listed companies and banks gets 95% of all credit and access to subsidies while the 80%, which creates 100% of all jobs, the SME’s [Small and Medium Enterprises] get less than 5% of credit and less than 1% of the political capital.

Markets and monetary policy

It’s the weather! The reason for the disappointing start to 2014 is all to do with the big cold in the US – well partly, I think most investors/pundits forgets that data coming in for December, January really was “born” 3,6, and 9 month before due to that specific times change in outlook, interest rates and the overall cycle. The slow-down in housing was “expected” in our models as I have constantly conveyed it to you through my economic co-op on econo-physics it has to do with spike in rates in mortgage rates between May and August 2013.

The US Consumer must have known the weather would be bad already last summer looking at this chart of Retails Sales:

 

The US consumer remains 2/3 of the economy but he is still conservative: Spending rose 2.0% in 2013 after 2.2% and 3.4% in 2012 and 2011. This is mainly due to low wage growth. Since 2010 the Average after tax income adjusted for inflation have only been 1.6%.

To reach the magic 3% growth we will need wages to grow 3% on their own! Not likely to happen in world of excess capacity, but never the less the pundits started the year with a 2.9% average expected growth for 2014. One month into the year, revisions came pouring in as Q1 is already reduced from 2.3% to 2.0%. The blockbuster Q4 growth of 3.2% is now expected to come in at 2.4% only!

One has to laugh at how imprecise these measures are – we watch them, take decisions on them but ultimately their reliability is really only valid six months past the first announcement. Talk about reverse engineering!

Strategy

Fixed income: Still see new lows in 2014 – mainly in Q4- into Q1-2015. ETF flow into fixed income has been +16 billion US Dollars year to date, could be largest inflow since 2002!

I mainly like US and Core Europe although Italy and BTP’s have done well with the power change from Letta to Renzi. The bet on rates down goes back all the way to last year.

[Expected] Dividend yield @ 1.89% vs. [current] 2.72% still attracts my money.

Equity: We have had a call for peak in Q1 – admittedly I did not expect 1840 to be broken, but my partner in Economo-physics still see chance of 1870/90 before top is in place.

I submit our updated November 2013 forecast which slightly corrected still stands – The risk reward is now wrong: Upside is 50 S&P points vs. 500 points down-side. Remember a 20/30% correction happens every 4-5 years – a 10% correction twice on average in ‘normal year’.



FX:

Overall the US Dollar should soon find support. The best long term gauge of the US dollar is  World Growth minus US Growth. Why? Because US dollar is the reserve currency and often the currency of choice in trade. When the world growth is slowing (now…) then the US and the US Dollar needs to pull ahead to fill the gap. This is one of the catalysts we need to monitor over the next week or two as the US Dollar Index is right on its support line:



Conclusion:

The world economic flags is still almost in vacuum but some countries are now changing the position of the flag pole to get better wind conditions.

Safe travels,

Steen

Thanks Steen!

Wine Country Conference II

Want to hear a live discussion of what Steen Jakobsen thinks about Europe and China?

Then come to the second annual Wine Country Conference which will be held May 1st & 2nd, 2014.

We have an exciting lineup of speakers for this year's conference.

• John Hussman: Founder of Hussman Funds, Director of the John P. Hussman Foundation which is dedicated to providing life-changing assistance through medical research
• Steen Jakobsen: Chief Economist of Saxo Bank
• Stephanie Pomboy: Founder of MacroMavens macroeconomic research
• David Stockman: Ronald Reagan's budget director, best-selling author, former Managing Director of The Blackstone Group 
• Mebane Faber: Co-founder and the Chief Investment Officer of Cambria Investment Management
• Jim Bruce: Producer, Director, and Writer of Money For Nothing: Inside the Federal Reserve 
• Chris Martenson: Reknown speaker and founder of Peak Prosperity
• Mike “Mish” Shedlock: Investment advisor for Sitka Pacific and Founder of Mish’s Global Economic Trend Analysis

In addition, we expect confirmation from a number of other highly respected fund managers and speakers. This year's event is two days and will include additional "break-out" groups.

For speaker bios, please check out Wine Country Conference Speakers.

This Year's Cause: Autism

$100,000 of the money raised last year came from a generous matching grant from the John P. Hussman Foundation.

Some of us in the industry who have done well are making an effort to help others. John Hussman is at the very top of that list.

One of John's kids has severe autism. This year, all net proceeds will go to support autism programs.

Conference Details

For further details about the 2014 conference, please see Wine Country Conference May 1st & 2nd, 2014

Nothing Like It!

This event is not just another "come and hear someone talk" kind of thing. Attendees and their significant others can expect an educational, fun, and relaxed time.

Last conference, we arranged wine tours. They were a big hit. We will do so again. One of the wine estates we visited had a Bocce Ball court. On a couple of miracle shots, I won both games I played.

Stay an extra day and golf or travel. I did. The conference hotel is a fun place in and of itself.

Unlike many other conferences, you will have easy access to speakers.

Want to chat with me, Steen, John, or anyone else at the conference? You will have an easy chance.

Not only do we have an excellent lineup of speakers, you will have an opportunity to meet with them, have intimate discussions on important investment topics, with a lot of fun on the side, including wine tours and great wine.

There's nothing like it in the investment business. And your money goes to a great cause! What can be better?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Close-Up Look at Illinois' Unemployment Rate, Collective Bargaining, and Right to Work Laws; Illinois Employment Collapse

Michael Lucci at the Illinois Policy Institute has some interesting comments regarding unemployment in Illinois and why it matters.

Via email from Lucci ...

A smaller and smaller percentage of adults are working to support the entire state population. Why does this matter?

Because a booming economy provides the benefits of opportunity and upward mobility. But not only that. Growing the number of taxpayers is essential for funding core government services and pension bills. The only other tools legislators have are tax hikes, which have done more to chase away taxpayers than to fund the government.

The percentage of the working-age population that is employed fell by 5.6 percentage points, from 65 percent in January 2008 to 59.4 percent in December 2013. This percentage, called the employment ratio, has been described by economist Paul Ashworth as the “best measure of labor market conditions.”

The Great Recession hit the jobs market in January 2008. Since then, Illinois has seen a greater decline in its employment ratio than any other state in the Midwest.



Illinois has 380,000 fewer people employed now than before the recession. According to the Bureau of Labor Statistics, unemployment is still up by nearly 200,000 people, and at least 185,000 people have given up and left the labor force.

There is no solution to the state’s fiscal problems without a booming economy and a growing tax base. Job No. 1 for Springfield is to create a business-friendly environment. That begins with cuts to the fourth-highest corporate tax rate and ninth-highest tax burden nationally.

Reforming the ninth most expensive regulatory system and the fourth most expensive workers’ compensation system would lead to welcome opportunities for job seekers.

Indiana and Michigan have led the Midwest in pro-jobs labor reforms by allowing their workers to choose whether to join a union. Illinois is surrounded by states making positive reforms. It’s time for officials to get in the game.

Michael Lucci
Director of Jobs and Growth

Illinois vs. Wisconsin

My slight quibble with the article is Lucci left out Wisconsin for comparison.

Following governor Walker's courageous anti-union stance, Wisconsin’s state budget went from a $2 billion deficit to a nearly $1 billion surplus. And all this happened with hardly any public-sector employees losing their jobs. Wisconsin is poised to offer its people $500 million a year in tax relief. It looks like Walker picked the right strategy.

Illinois is in a bigger mess. The state’s pensions are underfunded by at least $100 billion. Powerful teacher unions can shut down schools to win pay hikes from nearly broke school districts. A temporary tax increase is liable to be made permanent – or worse, replaced with a progressive income tax that will chase more middle-class families and businesses out of our state.

Lucci may have left out the Wisconsin comparison, but his associate Paul Kersey didn't.

Please consider Kersey's take: Wisconsin’s labor reforms reach three-year mark: Should Illinois have followed Walker’s lead?

Union-Busting is a Godsend

Here is my take: Actual Wisconsin results prove Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

It's time to implement national right-to-work laws and put an end to public union collective bargaining nationally.

I salute governor Scott Walker for leading the way. Senator Rand Paul wants to do the same thing nationally. I also salute Senator Paul's efforts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

You Too Can Make Millions "Flipping" Houses

I have been under constant barrage of unsolicited phone calls recently. The phone calls typically begin with the same lie: "Mr. Shedlock you told a colleague of mine a few months ago to call you back when we have a really good investment opportunity".

Given that I never ask anyone to call back, they are known liars from the start. Depending on what kind of mood I am in, I may hang up immediately or listen long enough to hear what kind of nonsense they are peddling.

I asked one of the liars the name of his colleague that called. He answered George. I said "George who?".

The caller got exasperated and replied "Washington".

The predominant thing these guys are peddling is the opportunity to lose a lot of money fast, frequently in the oil or natural gas industry. But lately the charlatans have pestered me with real estate opportunities, shorting gold, and buying microcap stocks I have never heard of (most likely the classic pump-and-dump) variety.

This is the kind of thing that happens at market tops. Everyone wants in, and the fraudsters come out in force to take advantage.

Nonetheless, I offer my standard warning: Just because this activity happens at peaks, does not mean this is the peak.

Sentiment typically gets more extreme than anyone thinks possible.

Social Media Bubble

Facebook recently paid $19 billion for WhatsApp, a company with 55 employees and no revenue.

Supposedly this is a good deal because WhatsApp is growing fast. It is growing fast because it has a cute texting app that it gives away for free.

How many customers would it have if it starts charging? Enough for a $19 billion valuation? Not a chance.

Pater Tenebrarum has interesting discussion in his commentary "Social Media Bubble".

Flipping Yet Again

Meanwhile, this farcical ad popped up on my screen just today.



Want to know what "As seen on TV" means?"

Typically it is a sleazy phrase that means they ran an ad somewhere on TV, at least once.

Such ads usually run on an obscure channel at 3:00AM. But hey, it's "as seen on TV". They never said "in a show".

Please note the little asterisk that reads "results based on effort".


I have a simple question: didn't we try this before?

Addendum:

I have a few minor corrections.

I said "WhatsApp has no revenue". I should have said "WhatsApp has essentially no revenue." It did have $20 million in revenue. For that $20 million in revenue it got a $19 billion buyout - $950 for every $1 of revenue.

The revenue stems from the fact that WhatsApp charges a tiny fee for its service, but only after the first year of free service. That is my second correction. I should have said "essentially free".

Rest assured competition will drive price down to the break-even point or nearly so.

Finally, I never heard of "Than Merrill". The ad reads OK provided you know who "Than" is. Regardless, the ad is ridiculous hype..

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine Government Delays Vote, Currency Hits Record Low, Default Feared; Ukraine Asks for $35B, Bank Runs Underway

The Ukrainian Hryvnia fell to a record low today with warnings from Russia regarding defaults.

Russia had pledged bailout loans to Ukraine, but following the overthrow of president Viktor Yanukovych, Russia suspended the bailout. Ukraine now needs money from elsewhere.

Russia Warns of Ukraine Default

Bloomberg reports Ukraine Delays Government Vote as Russia Warns of Default.

Acting President Oleksandr Turchynov pushed back a parliamentary vote to Feb. 27 from today as he attempts to win agreement with protest leaders who orchestrated the revolt. 

With Yanukovych on the run after weeks of anti-government protests turned deadly, Ukraine’s new leaders are grasping for a financial lifeline as Russia weighs the fate of a $15 billion bailout it granted in December. Russia’s deputy finance minister said there’s a high chance Ukraine will default.

While Ukrainian assets have benefited from the momentum for financial aid, government bonds snapped three days of gains. The yield on dollar debt due 2023 was up 30 basis points at 9.554 percent at 5:32 p.m. in Kiev. The hryvnia plunged 6.4 percent to a record 9.8 per dollar, data compiled by Bloomberg show.

Ukraine risks default without “significantly favorable changes” in its political crisis, Standard & Poor’s said Feb. 21 as it cut the nation’s credit rating to CCC, leaving it eight levels short of investment grade.

Russia’s Deputy Finance Minister Sergei Storchak echoed those concerns. Russia won’t be the party to declare default, though it’s under no legal obligation to disburse the remaining $12 billion of the bailout, he told reporters in Moscow today.

Lawmakers yesterday moved quickly to appoint Stepan Kubiv, the ex-chairman of Lviv-based VAT Kredobank, to head the central bank after voting out Ihor Sorkin. Kubiv plans to invite an International Monetary Fund mission, the Unian news service reported, without giving details. The central bank imposed capital controls this month to stem the hryvnia’s slide.

Ukraine Asks for $35B, Bank Runs Underway

The Financial Times reports Ukraine’s interim government asks for $35bn in loans.

Ukraine said on Monday that it needed $35bn in aid over the next two years, including urgent loans within two weeks, but the international community seemed unlikely to start talks on a big rescue package before elections in May.

Yuriy Kolobov, Ukraine’s acting finance minister, said Kiev would pursue the short-term loans from individual countries, singling out the US and Poland as potential lenders.

But Radoslaw Sikorski, Polish foreign minister, said that Ukraine should look to the International Monetary Fund for assistance.

Despite the urgency from Kiev, the IMF is insisting that tough conditions will have to be agreed before any loans are paid out. This is increasing pressure on countries to provide more immediate support bilaterally.

But analysts said there were signs of capital flight, including the start of runs on some Ukrainian banks, draining Kiev’s already meagre dollar reserves. Officially, Ukraine has slightly more than $17bn in reserves, down from an already low $20.4bn at the end of last year.

The hryvnia currency has also hit five-year lows. The country of 46m people must pay back some $12bn of its $73bn debt this year.

Will Aid Come Quickly Enough?

Financial Times blogger Peter Spiegel asks Will Ukraine Aid Come Quickly Enough?

Almost all major economic powers were out on Monday saying that any aid package would have to wait for a full International Monetary Fund programme. But such “stand-by arrangements” can take months to negotiate – and IMF officials have made clear they want a new government firmly in place before those negotiations can begin, so that may mean we’re waiting until after May’s presidential elections.

So will Ukraine make it until then? Analysts are dubious, and the Ukrainian finance ministry’s declaration on Monday that they are seeking bilateral loans from the US and Poland in the next week or two certainly implies that they’re not sure they can make it that long either.

At the beginning of the year, the National Bank of Ukraine reported that it held $17.8bn in reserves. That may sound like a lot, it’s down a whopping $2.6bn from the month before – a 13 per cent decrease. And there are suddenly a lot of demands on the remaining reserves.

First, in order to keep the Ukrainian hryvnia from completely tanking during the crisis, the central bank has had to purchase huge volumes of the currency on the open market. A new report issued today by the Institute of International Finance – the association of all major global financial institutions – said that in January alone, the central bank spent $1.7bn shoring up the hryvnia.

The second, potentially more troubling development is what the IIF believes to be an accelerating run on Ukrainian banks, with depositors demanding withdrawals in dollars. Since the IIF is an association of banks, their data is probably pretty good on this. They figure that reserves probably fell by another $3.5bn-$4bn by the end of last week due to those dollar withdrawals.

According to an investor presentation made by the finance ministry last year, 16.3 per cent of its $73.1bn in national debt must be repaid this year. That’s about $12bn. In its downgrade of Ukraine last week, Standard & Poor’s estimated that it’s closer to $13bn, when you add the debts of the state-owned gas company Naftogaz.

As S&P noted, if the central bank runs short of dollars to defend the hryvnia in the currency markets, that could lead to a rapid devaluation. Indeed, it’s already dropped about 16 per cent since the start of the year. With 46.5 per cent of Ukrainian debt denominated in dollars, and another 3.2 per cent in euros, a rapid devaluation means the value of those debts suddenly goes up, and the cost of refreshing reserves goes up, too.

In other words, not a pretty picture. And one that could get a lot worse very quickly unless someone steps in to stanch the bleeding.

Ukraine Hryvnia



The above chart pegs the value at 9.155 to the dollar.

Recent reports say the hryvnia was down 7 percent at one point Tuesday, to 9.8 hryvnia per dollar.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Bye Bye Mt. Gox: Bitcoin Exchange Website Appears to Have Been Deleted; Value of MtGox Bitcoins Plummets to $135

The "MtGox" bitcoin exchange site that handled a vast majority of bitcoin transactions is now unavailable at best.

More likely, money at Mt. Gox has vanished by fraud.

Yesterday, Reuters reported Mt. Gox's CEO resigns from Bitcoin Foundation.

Today the Wall Street Journal notes Bitcoin Exchange Mt. Gox's Website Appears to Have Been Deleted

The website of embattled bitcoin exchange platform Mt. Gox was unavailable Tuesday and appeared to have been deleted.

Attempts to reach the Mt. Gox homepage yield an answer from the server but display no data, indicating the server is functioning but that the site has no content.

The Tokyo-based bitcoin exchange has frozen bitcoin withdrawals since the beginning of February, stoking fears of bankruptcy from its investors and those in the broader bitcoin community.

Value of MtGox Bitcoins Plummets to $135

Also consider MtGox bitcoin plunges as website disappears

The website of Tokyo-based bitcoin exchange MtGox went down on Tuesday after the value of the virtual unit sank to about a quarter of that on other platforms and Japanese regulators said they were unable to step in.

Visitors to the www.mtgox.com domain got a blank page when they tried to log on, more than two weeks after the firm suspended cash withdrawals as claims swirled of a bug in the software underpinning bitcoin.

Consternation has grown since MtGox stopped processing external transactions on February 7, claiming there was a problem with the program that powers the currency, and allows it to be transferred between users or swapped for goods and services.

The value of the unit on the exchange has gone into freefall since then. Around midday on Tuesday, a bitcoin was worth $135, compared with the $522 quoted by the CoinDesk bitcoin price index, which tracks the price of the currency on major exchanges.

In January a bitcoin was worth more than $900 at MtGox, one of the world's oldest exchanges for the unit.

MtGox, which has not responded to repeated AFP requests for comment, issued a statement last week saying it had moved its headquarters within Tokyo due to "security problems" and was still working on "re-initiating bitcoin withdrawals".

It did not give details of the security problems.

"The move, combined with some other security and technical challenges, pushed back our progress," the firm said Thursday in their most recent public statement.

Earlier this month, the company brought down its system and stopped processing client requests to withdraw money held at its "wallet", citing a problem with the technology.

Problem with technology or a problem with fraud? I strongly suspect the latter.

Rise and Collapse of Bitcoin

Bitcoin rose from pennies to over $1200. But that was only good if you collected it.

Bitcoin Wisdom has some live charts. Here is the Mt. Gox exchange.



It is quite possible that Mt. Gox bitcoins are nearly worthless. If so, some paper millionaires lost it all.

I will also toss out another idea that I have not seen discussed: The bitcoins are still at Mt. Gox, and people are panic selling to fraud perpetrators who purposely shut down the site to induce a panic.

Either way, it's a mess.

I was never at ease with the idea of bitcoins, and this fiasco certainly makes me happy I am not involved with Mt. Gox.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine Aftermath: Hunt for Yanukovich, Russia Denounces Interim Leaders, Documents Reveal Plans to Use Army on Civilians

Let's tie up some loose ends on Ukraine, even as much uncertainty remains.

Documents Reveal Plans to Use Army on Civilians

Financial Times: Papers reveal Yanukovich plans to turn army against protesters

The Yanukovich regime had drawn up plans for a massive crackdown on protesters in Kiev using thousands of police and troops – and the chief of Ukraine’s armed forces on Thursday last week ordered 2,500 army troops into the capital for an “antiterrorist” operation.

That order was never fulfilled, but leaked documents on Monday showed just how close Kiev came to a bloodbath that could have far exceeded the 100 deaths that occurred in clashes with police and snipers in downtown Kiev last week.

As well as the military documents, Ukrainian journalists were on Monday combing through piles of papers found dumped near Mr Yanukovich’s luxury home outside Kiev, giving a fresh glimpse into his lavish spending and lifestyle.

One document apparently found at the log-built mansion at Mezhyhirya, posted online by Mustafa Nayem, an investigative journalist with the Ukrainskaya Pravda website, was a receipt for $12m in cash. Others included receipts stretching into millions of dollars for spending on decor at a gaudy home that has become a focal point of public rage.

But the most chilling were military and security papers. One set revealed that snipers who killed dozens of protesters on Kiev’s central square last Thursday came from Ukraine’s “Omega” special forces.

Hunt for Yanukovich

Financial Times: On the trail of Ukraine’s missing Viktor Yanukovich

Viktor Yanukovich’s whereabouts remained unknown for a third day on Monday, as rumours swirled that Ukraine’s deposed president was hiding out in Crimea, a pro-Moscow stronghold with easy water access to Russia via the Black Sea.

While a few Ukrainian news outlets reported on Sunday night that Mr Yanukovich had succeeded in fleeing the country on his private yacht – the Bandido – by late Monday there were no reports of his arrival at a foreign destination. His options for escape, meanwhile, appeared to be narrowing.

Arsen Avakov, Ukraine’s interior minister, announced early Monday that the new government had opened up a criminal case against Mr Yanukovich for “the mass murder of peaceful citizens”. He added the government had been keeping careful watch over the former president’s movements.

Russia Denounces Interim Leaders

Financial Times: Moscow takes aim at Ukraine’s interim leaders and the west

Russia denounced Ukraine’s interim leaders as dictators on Monday and blasted the western governments that it said helped bring them to power, in a sign that the toppling of President Viktor Yanukovich is triggering a regional stand-off.

The Russian foreign ministry claimed the new leadership was infringing on the human rights of Russians and other minorities in Ukraine. “This is headed towards the suppression of dissent in several regions of Ukraine by dictatorial and sometimes almost terrorist means,” the ministry said in a statement.

Russia’s furious statements came as the new Ukrainian authorities intensified their hunt for ousted president Viktor Yanukovich, who has not been seen since Friday, and tensions rose in Crimea, the Russia-friendly peninsula on the Black Sea.

In the Crimean port city of Sevastopol, home of Russia’s Black Sea naval base, hundreds of pro-Russia protesters massed outside the city’s main administrative building on Monday for more than five hours until the city council agreed to allow Alexei Chaliy, a Russian businessman, to take over immediately as mayor.

Waving Russian flags and wearing the arm bands of Russian Block, Crimea’s leading pro-Russia political party, the crowd grew angry, shouting slogans such as “We won’t let a fascist in!” and “Russia! Russia!”

Open House

Financial Times: Open house at Yanukovich’s fabled palace

Ukrainians expressed shock and disgust as the full extent of Viktor Yanukovich’s opulent lifestyle was revealed at the weekend.

Alerted via social media that Mezhyhirya – the president’s fabled luxury estate, was no longer under heavily armed guard, thousands of people made the 15km trip from the capital to take a tour of the mansion and its attractions.

What they found was a 127-hectare site including manicured garden, a golf course, tennis courts, a shooting range, swimming pools and a marina as well as horses’ stables. The purpose-built, five-storey dacha – essentially a large log cabin – was decorated with elaborate furniture and expensive chandeliers hanging from the ceiling.

Photographs on Twitter showed animals in a private zoo, a vintage car collection and a replica galleon on a lake. Visitors and commentators on social media expressed anger and disgust at the excesses revealed.

“I wanted to see where the money he [Mr Yanukovich] has stolen went,” said Oleksander Heruk, 24, a computer programmer who visited the mansion.

“The first thing that shocked me was the colossal scale and tastelessness of the decor. It was shocking how megalomania had overtaken this person.”

House Fit for a Tyrant

Mail Online: House fit for a tyrant: Protestors storm the sprawling, luxury estate of Ukraine's fugitive president which has its own private zoo, golf course and is half the size of Monaco

Mail Online has a series of images and videos. Here are a few images.









Many more pictures and videos on the site. It's amazing there was no destruction or looting. Cheers and best wishes to the citizens of Ukraine.

Unfortunately, many problems linger. Election uncertainty and chants of "Russia, Russia" in Sevastopol could easily lead to further violence.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Germany at Heart of Europe's Political Predicament; Squaring the Circle; When is the Breaking Point?

Germany is at the heart of Europe's political predicament. Although the status quo cannot and will not work, there is no incentive to change.

Germany’s Constitutional Court has strengthened the Eurosceptics and eliminates further moves by Germany towards debt mutualization.

Some think debt mutualization, eurobonds, and combined fiscal budgets are a good idea. Others, like myself, don't. Regardless, and as noted in Rethinking "Paper Tiger", those options remain off the table.

What remains on the table are policies that fuel high unemployment and undermine living standards says Brigitte Granville in Poking the Eurozone Bear.

Some take the sanguine view that the current “lie still” approach is adequate to ensure that the eurozone economy does more than avoid decline. From their perspective, Germany’s decision over the last three years to permit actual and prospective transfers just large enough to prevent financial meltdown will somehow be enough to enable the eurozone finally to begin to recover from a half-decade of recession and stagnation.

But the fact is that these transfers – that is, European Stability Mechanism-financed bailout programs and the European Central Bank’s prospective “outright monetary transactions” (OMT) bond-buying scheme – can do little more than fend off collapse. They cannot boost economic output, because they are conditional upon recipient countries’ continued pursuit of internal devaluation (lowering domestic wages and prices).

Reinvigorating the eurozone economy requires a more radical effort to resolve the interlinked sovereign-debt and banking crises. Specifically, it demands sovereign-debt mutualization through Eurobonds, and thus the elimination of eurozone countries’ fiscal sovereignty, and a full-fledged banking union with recapitalization authority and shared deposit insurance – a far cry from the arrangement that has been agreed.

If Europe’s leaders continue to choose mild palliatives over bold tactics, the best-case scenario is a lackluster recovery, with GDP growing at a 1-2% annual rate. Unfortunately, this best case probably is not enough to prevent future sovereign-debt defaults in countries like Italy, Spain, and eventually even France. In other words, at some point, lying still will no longer be an option.

As it stands, Europe’s political class is committed to internal devaluation in all of the troubled eurozone economies. The alternative approach – dismantling the eurozone to allow for external devaluations – has thus become the playground of hitherto marginal political parties, which are now surging ahead in opinion polls.

In France, the groups concerned – the National Front and the Union of the Left – represent political extremes. In Italy, a more ideologically neutral anti-establishment force may arise, with a much sharper anti-euro focus than Beppe Grillo’s populist Five Star Movement, which emerged last year to become the country’s third-largest political force. As these parties gain traction, the euro’s chances of survival diminish.

In 2011, Edmond Alphandéry, a former economy minister, declared that a eurozone exit by a member country was as likely as a dollar exit by Texas or California. Here, on full display, was the wishful thinking that brought the euro into existence in the first place: its French architects dreamed of a Europe that could equal the US. That was always an illusory ambition, but it continues to cloud European leaders’ judgment.

The single currency’s advocates are right about one thing: political motives have always underpinned the establishment of monetary unions, from Latin America’s in the period from 1865 to 1927 to that between Ireland and Britain from 1922 to 1979. But they are missing a crucial point: politics is also the reason for these unions’ dissolution. When the economic costs and divergences become too much of a threat, the political will to do what it takes to ensure the common currency’s survival collapses.

Voter reaction against the euro may well force the eurozone to stop lying still and take real action. The question is whether that would mean that some or all eurozone countries must go their separate ways.

Germany’s Pyrrhic Victory

Also on Project Syndicate, please consider Germany’s Pyrrhic Victory by Marcel Fratzscher.

The German Constitutional Court has ruled against the European Central Bank’s pledge to buy potentially unlimited quantities of distressed eurozone countries’ government bonds, and has called on the European Court of Justice (ECJ) to confirm its decision. Until that happens, the “outright monetary transactions” (OMT) scheme is effectively dead, weakening the ECB’s ability to act as an effective and credible financial-market backstop at a time when European governments remain unwilling to fill the void.

How financial markets will digest the German court’s ruling remains uncertain. There may be little initial reaction to the news, as there is no immediate threat to financial stability in the eurozone. But the big question is how markets will react in the future to bad news, whether about sovereigns or banks.

The tight feedback loop between sovereigns and banks in eurozone countries has become even more salient in recent years, as banks are holding an ever-larger share of their home countries’ government bonds. The ECB’s impaired ability to address sovereign and currency risks means that it will have to break the feedback loop via the banks – a more difficult and less effective approach that increases the likelihood of a market panic and a deeper crisis.

The German court’s ruling jeopardizes the ECB’s ability to act as an effective lender of last resort, thereby reducing its independence and ultimately undermining its ability to deal with market panics and crises – and thus to fulfil its primary mandate of price stability. The ruling makes it more urgent than ever that European governments establish a viable and effective banking union and strengthen the ESM as a backstop for countries in crisis.

When is the Breaking Point?

Notice the silliness of Fratzscher's last statement. He begs for a viable and effective banking union, when it should be perfectly clear the German constitution court won't allow for one.

Eventually something is going to break, and most likely at the worst possible time. Yet no one can say when. Meanwhile the imbalances continue to grow as complacency rules.

Spain 10-Year Government Bond Yield



That decline in yield looks like a good thing. But it comes with a huge risk. Spain's banks have plowed more and more into its own bonds. When yields rise, those banks are going to be in a huge amount of pain.

Here are some charts from Squaring the Circle.

Sovereign Bonds Held by Domestic Banks



Sovereign Bonds Held by Domestic Banks as Percentage of Assets



As long as yields decline, there are no problems. The crisis will be even bigger than before if and when yields rise. When that happens is anyone's guess. That it will happen is a near certainty.

One way or another Germany is going to pay a huge price. Theoretically, there are two solutions.

1. Germany can pay the price by debt forgiveness and mutualization of debt
2. Germany can pay the price via default when the eurozone breaks apart

If Germany will not allow option number one, the only viable choice is option number two. It would behoove Germany and the eurozone to have this discussion. Instead, Merkel has her head in the sand.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com