But it's also a symptom of a terrible trap we've set for ourselves.
Consider the joy a little kid has the first time he spends his own money to buy an ice cream cone. This isn't something he does every day, it's not something he has to do, it's not something he's trying to get over with. Instead, the entire process unrolls in slow motion. It's consumption, no doubt about it, the last step in a long industrial/agricultural/marketing system. But at least this last step is special beyond words.
Now, consider the mall. The mall, today.
For the three billion people on Earth who have never experienced air conditioning, window displays and the extraordinary safety and wealth that the mall represents, a trip to the mall is mindblowing. For the typical consumer, egged on by a media frenzy and harried by a completely invented agenda, today is nothing but a hassle.
All that time, all that money, all those emotions spent for not one good reason.
It's more about what you didn't get on sale, or how many more people you need to "cross off" or just how much shiny but useless stuff you can grab faster than the next person. A reversal of 100,000 years of not enough to a brief few decades of more, more, more.
Every person reading this today has access to more wealth than the last King of France did. An astounding array of choices, a bounty of available connections and emotions.
Don't let someone else scam you into being unhappy.
More than half of the public now want to leave the European Union, according to an opinion poll for The Independent – the first time our monthly survey has shown a majority for "Brexit."
The survey of 2,000 people by ORB, conducted last Wednesday and Thursday in the wake of the Paris terrorist attacks, will be seen as a reflection of public anxiety about the EU's migration crisis.
Some 52 per cent of people say Britain should leave the EU, while 48 per cent want to remain.
When ORB asked the same question in June, July and September, a majority (55 per cent) wanted to stay and 45 per cent to quit on each occasion. Last month, amid widespread media coverage of the refugee crisis, the margin narrowed slightly to 53 per cent in favour of staying in, with 47 per cent wanting out.
The latest survey highlights a stark divide between the generations ahead of the in/out referendum to be held by the end of 2017. Some 69 per cent of 18-24 year-olds want to remain in the EU, while only 31 per cent want to leave. Support for EU membership declines steadily with age among older groups, with only 38 per cent of those aged 65 and over wanting to remain and 62 per cent in favour of leaving.
Some 54 per cent of people who voted Conservative at the May election want to leave the EU, as do 93 per cent of Ukip voters. But a majority of Labour, Liberal Democrat, SNP and Green supporters want to remain.
The overall findings will worry pro-EU campaigners, who admit privately that the refugee crisis is shifting opinion against membership. There are also fears that the Out campaign, funded heavily by hedge funds opposed to EU regulation, enjoys a much bigger budget than the In brigade. "We will have less but are much more likely to spend it better," said one In camp insider, promising a professional effort than its rivals.
Cameron's Quandary
UK prime minister David Cameron really has his work cut out for him now. Just yesterday, German Chancellor Angela Merkel Reaffirmed Her Open-Door Refugee Policy.
She is out of her mind of course, and that's going to give all of Europe a major headache, while making matters especially difficult for Cameron who pledged to work out an agreement with Merkel and French President Francois Hollande that the British could accept.
Hollande may be sympathetic on migration issues, but he will not be sympathetic about financial transaction taxes and London regulations.
Cross issues are now huge and more bickering will not help.
Will Cameron even be willing to put this all to a vote as promised? If polls remain in the Brexit category, I doubt it, unless he is politically forced to do so.
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Thank you as in: I couldn't do it without you. As in: I don't want to do this alone. As in: I was afraid. And mostly: I would miss you if you were gone.
Following today's personal income report in which consumer spending rose only 0.1% month-over-month, the Atlanta Fed GDPNow Forecast for fourth quarter declined by 0.5 percent to 1.8 percent.
"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.8 percent on November 25, down from 2.3 percent on November 18. The forecast for the fourth-quarter rate of real consumer spending declined from 3.1 percent to 2.2 percent after this morning's personal income and outlays release from the U.S. Bureau of Economic Analysis."
The latest Blue-Chip forecast for early November was 2.7%, a highly unlikely number at this stage unless season spending picks up big time.
Reports show stores are not discounting merchandise as much as consumers like, and consumers generally expect to spend less, so odds of a hefty jump in Christmas sales is questionable.
The initial 4th quarter GDPNow forecast started at 2.5% on October 30. It rose as high as 2.9% following the auto sales and jobs reports. It's pretty much been downhill since then.
Wholesale trade, retail trade, existing home sales, all knocked off points.
Back-to-school spending was weak, housing starts have been weak, existing home sales are weak, manufacturing has been weak, recent spending reports have been weak, and Christmas sales appear "tepid" at this point.
Auto sales have been the one consistently bright spot, in this otherwise treading water economy, but what cannot go on forever, won't.
Today's Personal Income and Outlays shows consumer spending once again on the "soft side" despite solid income growth.
Income was in-line with expectations of a 0.4% gain. However, spending came in with an anemic 0.1% gain month-over-month. The Econoday Consensus Estimate for consumer spending was 0.3%, in a range of 0.2% to 0.5%, so economists once again were way overoptimistic.
Moreover, the core PCE (personal consumption expenditures) price index, the Fed's preferred inflation measure, came in at 0.0% whereas the consensus estimate was 0.2% in a range of 0.1% to 0.2%. The PCE price index was another big miss for economists.
Highlights
The core PCE is the Fed's most important inflation reading and it is not showing rising pressure, coming in unchanged in October, vs an expected gain of 0.2 percent, with the year-on-year rate at 1.3 percent which is also unchanged. Consumer spending also proved soft, up only 0.1 percent vs expectations for a 0.3 percent gain. Spending shows flat readings across categories including only a small gain for services which usually are strong.
The income side is better, hitting expectations at a 0.4 percent gain with wages & salaries showing an outsized gain of 0.6 percent. And the outlook for future spending is solid with a strong 3 tenths rise in the savings rate to 5.6 percent.
Turning back to inflation readings, the overall PCE price index remains nearly dead flat in a reminder that fuel prices remain very low and should give a boost to durable spending during the holidays. The PCE price index is up only 0.1 percent, vs Econoday expectations for a 0.2 percent gain, with the year-on-year rate at a very telling and extremely low plus 0.2 percent.
Though income data in this report do point to consumer strength ahead, the spending data are not a strong start at all for the fourth quarter. These results, especially the core price readings, will not lift the odds for a December rate hike.
Recent History Of This Indicator
The core PCE price index is the Fed's favorite inflation reading and Econoday expectations are calling for a 0.2 percent gain in October in what would be substantial enough to further build expectations for a December rate hike. Readings on personal income and personal spending are also expected to rise, at respective consensus forecasts of plus 0.4 percent for the former, reflecting wage and workweek gains in the October employment report, and plus 0.3 percent for the latter in what, combined with steady incremental gains in service spending, would be in line with gains for core retail sales.
Another Overoptimistic Forecast
All-in-all this was another hugely overoptimistic estimate by economists. Wage gains were in-line with expectations, but wage gains are easy to forecast given data that comes out of monthly job reports.
A Reuters/Ipsos survey found more people planned to cut holiday spending than increase in every category surveyed: clothing, jewelry, electronics, food and toys, and that 46 percent felt they could wait longer in the season to buy because of faster shipping.
Appliances, entertainment items, infant products and hardware showed narrowing discounts, MarketTrak reported, while promotions for apparel, toys and electronics were getting bigger.
Kurt Jetta, head of retail industry researcher TABS Group, found the discounts underwhelming.
"The fact that retail has been so weak coming in to the season would suggest they may need to ramp up efforts to make up for this later," Jetta said. Consumers were cautious going into the holidays, with sales at Macy's, Nordstrom Inc and Best Buy missing expectations in recent quarterly results. Target's online sales fell due to a drop in demand for electronics.
The Reuters/Ipsos survey of 4,639 adults from Nov. 12-23 found 28 percent of consumers expected discounts of 50 percent or more on most items, 36 percent hoped to see promotions of at least 33 percent while 49 percent expect a minimum discount of 20 percent on most products.
A survey for Boston Consulting Group found 70 percent of consumers would spend the same or less as last year, describing the consumer outlook as "tepid."
"Consumers have been trained to know that they can wait, and they will wait and that will force the retailers to continue to be promotional," said Joel Bines, managing director at AlixPartners.
Unreliable Polls
Polls are notoriously unreliable. Typically consumers spend more than they expect, on junk they do not need and cannot really afford.
Yet, manufacturing reports have been dismal, and retail sales tepid other than autos.
The recovery is also very long in the tooth, with the Fed poised to hike interest rates.
All things considered I expect a very weak holiday shopping season. If so, someone is sure to be blue. Will it be retailers or shoppers with buying hangovers? I suspect both.
Black and Blue Fighting
There is always a stampede or two over the latest craze toy or hot promotion that will be thrown into the ashcan six months from now. And someone lands a punch every year, in fights over who had their hands first on the last discounted thingamabob.
The best way to face the hustle and bustle of black and blue Friday is to not face it at all. I recommend a hike, a bike ride, a walk in the park, or golf if weather permits.
Twenty years ago, when I was working on projects with AOL, we were sure that this was the next big thing for a long time to come. It was a profitable natural monopoly, one that could expand to serve everyone's needs. They were the end of the future of the Internet.
When you surveyed people in 1996, most thought AOL = The Internet. They were the same thing, game over.
Then, of course, just four years later, Yahoo cornered the market. It was where everyone started their internet experience. All you needed. That didn't last more than a decade.
We have similar conversations about the form factor and platform of the iPhone. And Facebook, of course, will be the way generations connect online... it's hard to imagine the next thing.
Until it's here.
As far as I can tell, there's always a next thing.
[Even better, it turns out that this thing, the thing we have now, is worth working with, because it offers so many opportunities compared with merely waiting for the next thing.]
In the wake of Turkey shooting down a Russian aircraft over Syria, the immediate impact will be to make negotiations on the removal of Assad all the more difficult. First let's analyze the flight path of the downed aircraft courtesy of Stratfor.
Map of Flight Path of Downed Russian Aircraft
Deadly Few Seconds
The short distances involved and the speed at which fighter jets fly does support the view made by a US official: "They were in Turkish airspace only 2 to 3 seconds".
President Barack Obama said the downing of a Russian fighter jet along the Syrian-Turkish border Tuesday is evidence of an "ongoing problem" with Russia's military operations in Syria, and that Turkey had a "right to defend its territory and its airspace."
Speaking during a joint news conference with French President Francois Hollande, Obama said information about Turkey's downing of the Russian Su-24 was still being collected, but noted that Russian military aircraft are targeting moderate Syrian opposition groups very close to Turkey's borders.
A U.S. military spokesman confirmed that Turkish pilots issued repeated warnings to the Russian plane and didn't get a response. However, the spokesman said it was not immediately clear on which side of the border the Russian jet was flying. Moscow insists the jet never left Syrian airspace.
Moderate Al Qaeda Yet Again
There's Obama once again with more bullsheet about "moderate" Al Qaeda rebels. Nonetheless, it does appear Russia violated Turkey's airspace.
Everyone is supposed to be on the same side here, but it's all a lie. Turkey buys oil from ISIS and that provides the funds for ISIS to buy weapons and maintain fighting.
Both Turkey and the US would rather see Syrian president Assad fall than take out ISIS.
I side with Putin who stated "This event goes beyond the framework of the regular fight against terrorism. today's loss is connected to a stab in the back by accomplices of the terrorists."
Putin noted "a large amount of oil and oil products" entering Turkey from ISIS-held territory in Syria, provides the terrorist group with a "large money supply."
The relationship hinted at by Russian leader after warplane was shot down is a complex one, and includes links between senior Isis figures and Turkish officials.
Turkish borders have been the primary thoroughfare for fighters of all kinds to enter Syria. Its military bases have been used to distribute weapons and to train rebel fighters. And its frontier towns and villages have taken in almost one million refugees.
Turkey's international airports have also been busy. Many, if not most, of the estimated 15,000-20,000 foreign fighters to have joined Islamic State (Isis) have first flown into Istanbul or Adana, or arrived by ferry along its Mediterranean coast.
The influx has offered fertile ground to allies of Assad who, well before a Turkish jet shot down a Russian fighter on Tuesday, had enabled, or even supported Isis. Vladimir Putin's reference to Turkey as "accomplices of terrorists" is likely to resonate even among some of Ankara's backers.
Turkish businessmen struck lucrative deals with Isis oil smugglers, adding at least $10m (£6.6m) per week to the terror group's coffers, and replacing the Syrian regime as its main client. Over the past two years several senior Isis members have told the Guardian that Turkey preferred to stay out of their way and rarely tackled them directly.
Concerns continued to grow in intelligence circles that the links eclipsed the mantra that "my enemy's enemy is my friend" and could no longer be explained away as an alliance of convenience. Those fears grew in May this year after a US special forces raid in eastern Syria, which killed the Isis official responsible for the oil trade, Abu Sayyaf.
A trawl through Sayyaf's compound uncovered hard drives that detailed connections between senior Isis figures and some Turkish officials. Missives were sent to Washington and London warning that the discovery had "urgent policy implications".
"Turkey thought they could control it all," said one senior western official. "But it got out of their hands. It has come back to bite them in the heart of Ankara [a double suicide bombing in October that was claimed by Isis] and it will haunt them for a long time."
Merkel Madness
Turkey is guilty as charged. And yet, Angela Merkel wants to strike a deal with Turkey that would allow 75 million Turkish access to the Schengen border-free area from as soon as 2016.
Turkey's downing of a Russian fighter jet in Syria has raised the stakes in an already crowded and complicated conflict. The Nov. 24 incident will also likely undermine efforts to find a solution to the country's protracted civil war.
The destruction of a Russian search-and-rescue helicopter sent to find the downed jet's crew will only aggravate the situation more. Rebels brought down the helicopter with small arms fire, killing one Russian marine, and then destroyed it with a TOW anti-tank guided missile — a weapon built and supplied by the United States. Even though the rest of the crew survived the attack, Russia will not be pleased that another outside party's weapons are being used against it in the fight.
Peace Moves Further Out of Reach
The incident with the fighter jet will no doubt raise the risk of clashes occurring in the airspace over Syria. The United States had made considerable progress in deconflicting Syrian airspace by signing a memorandum of understanding with Russia that laid out procedures to prevent problems from arising as each side carried out airstrikes. But with the Russians angry at the Turks, and the Turks operating in close concert with the Americans — especially in the planned anti-Islamic State operation over northern Aleppo — the United States and its coalition partners may find themselves drawn into the spat between Ankara and Moscow.
The dispute will also undermine ongoing attempts to find a solution to the Syrian civil war, especially since Turkey is an important foreign patron of many of the rebel groups that were expected to have a seat at the negotiating table. With video circulating of Turkmen fighters from these units shooting at the Russian pilots, Moscow probably will no longer accept their participation in the talks. Since some of these groups also belong to the Free Syrian Army and are part of Syria's more moderate opposition, this will make it much more difficult to reach a roster of representatives that all sides can agree on before heading into negotiations. And as long as talks on a power-sharing agreement in Syria remain elusive, the foreign sponsors of the Syrian civil war will be dealing with an increasingly complex battlefield.
Choose Your Friends and Enemies Wisely
Broadly speaking, this mess is precisely what one should expect under the idiotic doctrine "the enemy of my enemy is my friend".
When everyone is everyone else's enemy, everyone becomes everyone else's friend under the practiced doctrine.
Under such a doctrine, we are now friends with Al Qaeda terrorists even though we blew up Iraq on the mistaken premise Saddam Hussein was harboring them.
Al Qaeda is now in our friends group because they seek to overthrow Assad. But ISIS also wants to overthrow Assad.
US response in the region shows the US is more intent on taking out Assad, than taking out ISIS, even though Assad is no threat to anyone except those seeking to overthrow him.
In turn, this proves the US can pick neither its friends nor its enemies wisely! But look on the bright side: It's good for those who seek perpetual war.
Economists expected manufacturing activity in the Richmond Fed region would bounce into positive territory this month.
The Bloomberg Econoday Consensus Estimate was +1 in a range of 0-4, but the reading of -3 came in below any economist's estimate.
Early indications for the November factory sector are soft right now after Richmond Fed reports a much lower-than-expected minus 3 headline for its manufacturing index. Order data are very negative with new orders at minus 6, down from zero in October, and backlog orders at minus 16 for a 9-point deterioration. Shipments are also in contraction, at minus 2, with the workweek at minus 3. Employment, at zero, shows no monthly change but the declines for backlog orders and the workweek don't point to new demand for workers. Price data are subdued but do show some constructive upward pressure.
This report along with Empire State, as well as yesterday's manufacturing PMI, are pointing to a downbeat month for the factory sector which is being held down by weak foreign demand, as evidenced in the decline for goods exports in this morning's advance release of international trade data.
Ahead of the release, Bloomberg had this to say: "Regional Fed surveys have been showing improvement in November and the same is expected for the Richmond Fed's manufacturing index."
"Details in this report, as in other manufacturing surveys, did show life in October but there were points of weakness including lack of growth for new orders and extended contraction for backlog orders."
Improvement?
The New York region came in at -10.74 below the lowest Econoday guess of -8.50. The prior (October) release was -11.36, but -10.74 is not an improvement, it's a decline at a lesser rate.
There was an improvement in the Philly Fed region, to +1.9 (See Philly Fed Slightly Positive After Two Months of Contraction) but I labeled that "noise" given the new orders and shipment components were negative and the workweek collapsed to -16.2
No Signs of Life
Diving into the Richmond Fed Report, we see shipments, backlog of orders, and the average workweek all negative for the third month consecutive. New orders were down two of the last three months, and flat the third.
Check out those inventories!
Manufacturers are not only stockpiling raw materials, they have stockpiled finished goods with declining orders, hoping sales will pick up.
Outright Disaster on Horizon
Looking ahead, growth in inventories vs. declining shipments and new orders does not bode well for employment or the workweek. In fact, inventories suggest an outright disaster is on the horizon.
But hey, the six-month look ahead numbers look great.
Absurd Expectations
Unfortunately, history shows those expectations are ridiculous. I analyzed the New York region look-ahead expectations and in 167 months, nearly 14 years of data, there were only five months (just under 3% of the time) in which current conditions exceeded projections made six months previous!
Vladimir Putin has accused the Turkish government of providing financial and military support to Isis, in a furious response to the downing of a Russian fighter jet near the Syria-Turkey border.
Turkey said it shot down the Russian Sukhoi Su-24 on Tuesday morning after it violated Turkish airspace, escalating tensions between international powers with competing aims in war-torn Syria.
Mr Putin warned that the "tragic incident" will bring "serious consequences" for relations between the two countries, and alleged that Turkey had helped bankroll Isis through oil sales.
Turkey has disputed Moscow's version of events. A government official said the crew was given "repeated warnings", beginning from when the jet came within 15km of the Turkish border.
A special meeting of Nato's North Atlantic Council was called for later on Tuesday at Turkey's request, prompting further anger in Moscow.
"Instead of immediately getting in contact with us, the Turkish side immediately turned to their partners with Nato to discuss this incident, as if it was us who downed a Turkish jet and not vice versa," said Mr Putin.
"Do they want to put Nato at Isis's service?"
Alexei Pushkov, chairman of the foreign affairs committee of Russia's lower house, tweeted that Turkey's economic losses as a result of the deterioration of relations with Moscow would "exceed tenfold the profits of those who have established a profitable oil business with Isis".
Turkish media and local activists said the Russian jet came down in Yamadi on the Turkish-Syrian border. However the Syrian Observatory for Human Rights, a UK-based activist group, put the crash site in the Jabal Turkman area of northern Latakia.
Earlier, several parts of the rural northern Latakia region were being shelled from the air during clashes involving regime forces and loyalist militia on one side and rebels and Islamist divisions on the other.
Where is Latakia?
Latakia is the principal port city of Syria, as well as the capital of the Latakia Governorate. Thus, the Russian plane was over Syria, not Turkey when it was shot down.
Two Seconds
US officials told NBC "They were in Turkish airspace only 2 to 3 seconds, a matter of seconds" before the Turkish F-16s attacked.
A U.S. military spokesperson in Baghdad backed the Turkish claim that they warned the Russian pilots they were in Turkish airspace before shooting down the aircraft.
"I can confirm that, yes," Col. Steve Warren told a briefing but could not say whether the incursion was deliberate.
He added that the U.S. did not observe the shoot down, but heard what transpired because the aircraft were operating on open channels.
A spokesman for the rebels in the area told NBC News that some of its fighters had opened fire on the pilots as they fell to the ground, killing one of them. The body was being held by the rebels, said the commander Jahid Ahmed, who added that he had no information on the second pilot.
Ian Shields, a professor of international relations at Anglia Ruskin University, warned the Turkish downing of the Russian warplane has the potential to spark a new Cold War.
Rebels Down Russian Helicopter with US Supplied Anti-Tank Missile
"It would be bad enough if the US were supplying TOWs to anyone in Syria. But this is Washington and Riyadh handing anti-tank missiles to forces that are firing them at the Iranians who are operating under cover of Russian airstrikes [to fight ISIS]. Just to drive that home: the US is waging war against Iran and Russia with but one degree of separation," commented ZeroHedge.
Perpetual War
Does anyone recall the US took out Saddam Hussein on the false premise, Iraq was harboring Al Qaeda?
The statement Hussein was harboring Al Qaeda was not even true. But after the US took out Hussein and disbanded the Iraqi military, Al Qaeda and ISIS filled the military vacuum, fighting over Iraqi and Syrian territory.
Al Qaeda terrorists became our friends, and ISIS a much in demand enemy. In the case for perpetual war, we need friends to sell weapons to, and enemies to fight.
New Cold War
Ian Shields, a professor of international relations at Anglia Ruskin University, warned the Turkish downing of the Russian warplane has the potential to spark a new Cold War.
I suggest Cold Wars are so passé. No one wants one of those.
Not enough people were killed, not enough weapons were sold, and not enough new enemies were made in the cold war to keep the war machine well oiled.
Perpetual war is the solution, the bigger the better.
Citizens United for WWIII
Citizens United for WWIII, a think-tank led by US Senator John McCain and various presidential candidates of both parties, demands no less than a global hot war, preferably nuclear, including Russia and China.
In case you are wondering, I made up the name Citizens United for WWIII. Unfortunately, the idea is correct, even if the think-tank name does not exist.
Alternative Bank Schweiz (ABS), a small bank in Switzerland broke the negative interest rate on deposits barrier, CHARGING customers to take their money. (emphasis in caps from the article).
The Alternative Bank Schweiz wrote to customers telling them they would face a -0.125 per cent rate on their money from 2016 – and a -0.75 per cent rate on deposits above 100,000 Swiss francs.
The move echoes the Swiss central bank's -0.75 per cent negative deposit rate imposed on financial institutions placing money with it.
Sweden's central bank also introduced negative rates, which currently stand at -0.35 per cent, while the European Central Bank introduced them in part with its -0.2 per cent overnight deposit rate.
The Bank of England's chief economist Andy Haldane delivered a speech in September discussing how Britain could have to consider negative interest rates as an extreme measure in a future crisis.
The big Swiss banks passed on some of the pain from the Swiss central bank's -0.75 per cent rate to their institutional clients, but Alternative Bank Schweiz is believed to be the first retail bank to hit savers with a charge.
The bank describes itself as an ethical organisation focused on backing firms investing in social and environmental projects.
With its balance sheet totalling nearly 1.6 billion Swiss francs last year, most of its activities are concentrated in cooperative housing projects, providing affordable housing and sustainable energy solutions, as well as organic farming.
Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe's central banks have cut key interest rates below zero and kept them there for more than a year. For some, it's a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it's an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world's central banks.
The Situation
With the fallout limited so far, policy makers are more willing to accept sub-zero rates. Having once said that the European Central Bank had hit the "lower bound," President Mario Draghi signaled in October and November that the deposit rate could be cut even further into negative territory. The ECB became the first major central bank to venture below zero in June 2014, and it now charges banks 0.2 percent to hold their cash overnight. Sweden also has negative rates, Denmark used them to protect its currency's peg to the euro and Switzerland moved its deposit rate below zero for the first time since the 1970s.
That means investors holding to maturity won't get all their money back. Banks have been reluctant to pass on negative rates for fear of losing customers, though Julius Baer began to charge large depositors.
The Background
Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area. While it's still too early to tell if they will work, Draghi pledged during the height of Europe's debt crisis in 2012 to do "whatever it takes" to save the area's common currency, signaling the ECB's willingness to be innovative. It chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan.
The Argument
In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there's a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead. Janet Yellen, the U.S. Federal Reserve chair, said at her confirmation hearing in November 2013 that even a deposit rate that's positive but close to zero could disrupt the money markets that help fund financial institutions. Two years later, she said that a change in economic circumstances could put negative rates "on the table" in the U.S., and Bank of England Governor Mark Carney said he could now cut the benchmark rate below the current 0.5 percent if necessary.
Economic Distortions
That's actually a balanced synopsis by Bloomberg as far as it went.
But unlike Europe, the US has large money market funds that would be destroyed by negative rates. Banks may be able to hold out for a while by raising other fees, but money market funds would immediately be in trouble.
Customers would withdraw money, put it into banks charging the lowest fees, stuff cash under the mattress, or open safe deposit boxes.
If rates get negative enough, there would be a run on the banks, but arun on money market funds would likely happen first.
Someone Has to Hold the Cash
The central bank thesis is to get people to spend the money. But note the absurdity. Someone must hold every dollar printed at all times.
If you buy a candy bar and eat it, or a coat and wear it, the store that sold those items to you has the money. Mathematically, someone at all times must hold all the money.
What About Velocity?
Reader "Vince" has been bugging me to write about the velocity of money. Velocity purportedly measures the speed at which money circulates in the economy.
I have commented before on the absurdity of the velocity thesis, but this seems like a good time for a rehash.
Velocity = Value of transactions / supply of money The value of transactions = price * transactions = GDP.
Thus, velocity is nothing more than GDP divided by money supply. Here is the equation, two ways.
V = PT / M V = GDP / M
Right now, velocity is falling simply because money supply is increasing faster than GDP.
But what constitutes money supply?
M1, M2, MZM, base money, and true money supply all yield different measures of velocity.
M2 Velocity
M1 Velocity
MZM Velocity
TMS Velocity
So is velocity 1.7, 5.9, 1.5, 1.3 or something else?
If we rearrange the equation, GDP / Velocity = M.
Supposedly we know GDP but what do we plug into the equation for velocity to derive M? Can one independently measure velocity?
The answer to that question is a resounding no.
Since GDP = PT, GDP can rise if prices rise and GDP can go up if transactions go up. GDP can rise if transactions decline, provided prices rise enough. And GDP can rise if prices decline, provided transactions rise enough.
Velocity can rise with rising prices
Velocity can fall with rising prices
Velocity can rise with increasing transactions
Velocity can fall with increasing transactions
Conclusions
Velocity has no life of its own.
Velocity does not cause anything to happen.
Velocity cannot be measured by any independent means.
Curiously, economists are concerned about "falling velocity" as if it means something other than the central banks are printing money that sits as excess reserves.
Inquiring minds may also be interested in Frank Shostak's 2002 article Is Velocity Like Magic? Much of my understanding of velocity comes from that article.
Shostak used the phrase "Velocity has no life of its own." On this Murray Rothbard wrote "It is absurd to dignify any quantity with a place in an equation unless it can be defined independently of the other terms in the equation."
Mario Draghi has dropped his clearest hint yet that the European Central Bank is about to inject more monetary stimulus into the eurozone economy, brushing aside staunch opposition from Germany's powerful Bundesbank.
The ECB president said yesterday that ECB policymakers would "do what we must to raise inflation as quickly as possible". The remark echoed a promise Mr Draghi made during the region's debt crisis in 2012 to do "whatever it takes" to save the single currency.
The ECB is widely expected to unleash a souped-up version of its €1.1tn quantitative easing package and consider cutting one of its benchmark rates deeper into negative territory.
"If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate," Mr Draghi said. "In particular, we consider the APP [asset-purchase programme] to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance."
He added: "The level of the deposit facility rate can also empower the transmission of [QE], not least by increasing the velocity of circulation of bank reserves."
Question for Draghi
I laughed out loud at that last line. If QE increases velocity, then why is velocity declining in the US, in Europe, and in Japan?
By the way, bank reserves do not circulate. Reserves are deposits that are not lent out. One can even argue that money does not really circulate per se, as it has to be held at all times by someone.
Negative Interest Rates Crazy?
Let's return to this statement by Bloomberg: "Crazy as it sounds, several of Europe's central banks have cut key interest rates below zero and kept them there for more than a year".
Negative interest rates are a sign of central bank desperation.
They are a sign central banks are clueless about how the economy really works.
And they are a sign of extreme hubris coupled with extreme stubbornness as Japan has proven over the course of three decades that unconventional measures do not work as economists expect.
It's crazy to keep trying things that cannot possibly work, over and over again.
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