Mish's Global Economic Trend Analysis

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Oklahoma Recognizes Gold and Silver Coins as Legal Tender Posted: 05 Jun 2014 12:34 PM PDT OpenStates.Org notes Oklahoma SB862 was signed by Governor Mary Fallin yesterday. SB862 recognizes gold and silver coins as legal tender in the state. Here is the Text of SB862. Although the bill recognizes gold and silver as legal tender, it also states "No person may compel another person to tender or accept gold or silver coins that are issued by the United States government, except as agreed upon by contract." Actually, no one should be compelled to take any currency. Shirley & Banister Public Affairs emailed this statement today: Oklahoma joins Utah, Texas, and Louisiana, as states that have removed taxes on gold and silver coins, and nearly a dozen other states are currently considering legislation to recognize gold and silver coins as hard money. The United States Constitution (Article I: Section 10) enables states to declare gold and silver coins as legal tender and gives them the impetus to remove all taxes on gold and silver. APIA is the leading organization promoting sound money and working to uphold this article of the Constitution. "I commend the people of Oklahoma, particular Senator Clarke Jolley and Governor Mary Fallin, for asserting their state's constitutional right to declare gold and silver legal tender," said American Principles in Action Chairman Sean Fieler. "With the Federal Reserve actively suppressing interest rates and eroding the purchasing power of the U.S. dollar, it is welcome news to see one more state give its citizens tax free access to money that holds its value over time." American Principles in Action was the leading group promoting this state legal tender bill in Oklahoma and they continue to work to promote sound money legislation across the U.S. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

ECB Pulls Out Pea Shooter, Fires, Misses Target Posted: 05 Jun 2014 10:20 AM PDT In a widely expected move this morning, ECB president Mario Draghi announced negative interest rates, the first-ever move for a major central bank. The deposit rate in Europe is now negative 0.10%. The ECB also lowered the benchmark rate from 0.25% to 0.15%. In a display of puffery, Draghi announced "we aren't finished here". The Financial Times provided a few more details in its report: ECB unveils extraordinary moves to fight deflation, lift economy The ECB will offer cheap longer-term loans, known as a targeted longer-term refinancing operations, which will resemble the structure of the Bank of England's Funding for Lending Scheme. There will be four TLTROs, all maturing by September 2018, worth up to €400bn. "A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016," Mr Draghi said. The ECB will also continue to provide shorter-term cheap loans to banks at fixed rates until at least the end of 2016. Mr Draghi said the ECB had "decided to intensify preparatory work related to outright purchases" of asset-backed securities, a limited form of quantitative easing. Pea Shooter, Not a Bazooka The TLRTO refinancing operations will not apply to mortgages out of fear of overstimulating housing. Although I believe these actions will have the effect of a pea shooter,  this is not a call for the ECB to do more. The ECB has an irrational fear of falling prices and should not have done anything at all. Contrary to popular myth, falling prices do not cause consumers to delay purchases. The problem is debt, not low prices. For further analysis, please see Deflation Theory Reality Check. We are in this mess because central banks have blown serial bubble after bubble, each with a bigger amplitude. ECB Goals The ECB hopes to spur lending, especially to small businesses, stop deflation, cheapen the Euro, increase exports, and improve economic growth. Will the ECB's Actions Work? In a nut shell no. Negative interest rates were tried before and they accomplished nothing. Denmark tried a -0.2% rate in 2012 and it did not spur lending, nor did negative rates cause customers to pull money out of banks as some feared. As I have noted on many occasions, banks lend if and only if two conditions are met. Banks are not capital impaired Banks believe they have credit-worthy borrowers on a risk adjusted basis What about the housing bubble? Banks knew they did not have credit-worthy customers but they thought they could dump the assets on others. Banks also believed no one would ever walk away from houses. Those were bad assumption and banks seriously misjudged the risks. Banks do see such risks now. In this case, Draghi's moves will not spur lending because the ECB did nothing to make customers more credit-worthy. To top it off, the ECB is tightening capital requirements. Instead of lending more, banks will raise fees to make up for the loss they take on parking money with the ECB. And if the ECB make the deposit rate negative enough, there will be a run on the bank by depositors. All in all, slightly negative interest rates will have a slightly negative impact on lending. The ECB hinted at QE, but in practice will be unable or unwilling to match the scale of Fed QE actions. And Germany will scream every step of the way on any move. Thus, there is no reason to believe future ECB actions will substantially cheapen the euro or increase exports. In short, the ECB's actions cannot possibly accomplish anything except perhaps fuel even bigger asset bubbles in stocks and bonds. Euro 5 Minute Chart It is risky to make assumptions based on price movements in a single day, nonetheless, today's action in the euro was interesting. After opening lower, the euro is now in positive territory. This is arguably an early indication of the Forex market's opinion on the ECB's pea shooter approach. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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