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2024-02-28 07:00 by Karl Denninger
in Monetary , 277 references
[Comments enabled]  

No, seriously, that's exactly what she's now promoting (although I doubt she realizes it):

WASHINGTON (AP) — Treasury Secretary Janet Yellen on Tuesday offered her strongest public support yet for the idea of liquidating roughly $300 billion in frozen Russian Central Bank assets and using them for Ukraine’s long-term reconstruction.

“It is necessary and urgent for our coalition to find a way to unlock the value of these immobilized assets to support Ukraine’s continued resistance and long-term reconstruction,” Yellen said in remarks in Sao Paulo, Brazil, where Group of 20 finance ministers and central bank governors are meeting this week.

In other words, steal the funds.

Yellen goes on to say she believes there is a strong international law case for stealing the funds.  Well perhaps there is and perhaps not; I will not pass judgment on whether one can find justification in international law for such an action.

I can and will, however, pass judgment on the immediate and permanent outcome of such an action, because that is both obvious and inevitable.

It will force trade settlement into all bilateral currency forms immediately and permanently.

Now this might not sound so bad and were our government not running a ~7% fiscal deficit right now it might not be.  But we are running a 7% fiscal deficit, and kneecapping having trade settlement performed in dollars -- or Euros -- or Pounds -- or whatever else by taking this action will permanently and immediately force all fiscal deficits (not just in the US) to reflect back into that nation's economy in the form of inflation.

We have, in the United States, benefited to an enormous degree from this temporary sequestration over the last 20 years.  That was unwound to a large degree when the first round of sanctions was laid and now effectively all trade with either side of the Russian / Ukraine conflict is no longer using dollars as a funding currency.

Why does this matter?

Because if that trade goes from $1 trillion a year to $2 trillion a year during the period of time when it increases there is $1 trillion in deficit spending that is effectively "impounded" while the goods are in transit.  It is the increase in such trade that drives this, not the volume (since once the transaction settles those funds wind up back into the flow of commerce in the US.)  But as international commerce has expanded and the dollar and, to a lesser extent the Euro, were used as the currencies while in-transit our nations have enjoyed a sizeable "sink" for deficit spending without having it immediately rebound back into consumer and producer prices.

The inflation of the last few years is directly traceable to the end of this practice, and it was our sanctions that caused it.  The Covid deficit spending was certainly a factor but much of that was absorbed and would have stayed absorbed as trade rebounded post pandemic but for our sanctions activity when the war in Ukraine broke out.

Now Yellen claims that the "frozen" assets were not just sequestered -- she wants to take them.  Most of these funds are in the EU, not the US -- but the problem with the action is that producers and customers have no way to influence or prevent such an action by their government in the future and thus this is an external risk that can only be controlled by not exposing yourself to it; thus you demand payment in your local currency.

Removing this leg of the stool leaves only one way to get inflation under control: Deficit spending must be cut to no more than the increase in productivity in the economy.  When the "PIGS" problems showed up in Europe the EU's response to this was to mandate no more than a 3% fiscal deficit -- which reasonably aligns with productivity.

Meeting this today in the United States would require a cut in federal spending of more than $1 trillion dollars this fiscal year alone, and an escalating amount as existing treasury debt is rolled over at higher rates.  Within the next two to three years the total cut required would be more than two trillion or approximately the entire Medicare and Medicaid spend this fiscal year.

If that's not done?

We will get runaway -- exponentially so -- inflationary pressure and be forced to do it anyway at even greater levels of economic pain.

If you are betting on lower rates at any time in the next decade, given this position of our government, you're going to be sorely disappointed both in the outcome and in asset prices.

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Irrespective of the past when it comes to Ukraine (and I've said plenty about it, as have others) that's water under the bridge and this is here and now, which is what I want to focus on.

I will note that even during war involving the United States -- including the Civil War in which Lincoln won re-election -- America has always held our Presidential and lesser elections, whether some believed the likely outcome was for good or bad.  We have never suspended the right of the people to choose whether to continue with who we had and the path we were on or make a change in leadership (and thus presumably policy) even though the President is the Commander in Chief and doing so means the literal head of our military changes with the inauguration.

Now Zelenskyy has effectively become dictator of Ukraine for however long the war with Russia goes on -- the latest extension of martial law there means the elections that were supposed to happen in March, including for the Presidency of the nation, have been canceled never mind the prior banning of all other political parties and thus potential opposition to current policy by Zelenskyy.  This, of course, could go on for a very long time (it certainly has been longer than many predicted when this began) and it means that if he is willing to continue to prosecute said war (whether others in the nation are or not) all the way to the last living Ukraine citizen the only way to end it is going to be to remove him by force, whether it is through Russia's hand or the hands of his own people.

If there is one time the democratic process has to be respected it is when you are in a war.  Nothing is more-serious as a nation than to make and maintain that decision; it literally can be the end of your country, no joking here, with your land being overrun and your sovereignty ceasing to exist.  In the nuclear age when you are either by proxy or directly fighting with a nuclear-armed power all such conflicts can lead to your annihilation.

At the very core of what defines America, in fact superior and prior to the Constitution itself is the right of the people to choose their representatives in government.  No nation that refuses to do that, especially when under extreme duress as is the case when there is armed conflict, can be said to support in any way the basic precepts of representative government.  All such governments are in fact functionally identical to a dictatorship or absolute monarchy.  

No matter how you feel about Ukraine and Russia generally you can't support this -- and we can't, as a nation that stands on the principle that the people have a right to choose their leadership, fund even one more penny of a conflict where the people of said nation have lost their right, expressed through democratic process, to choose whether to initiate or continue hostilities.

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2024-02-23 07:00 by Karl Denninger
in Social Issues , 202 references
[Comments enabled]  

Many on the right likely cheer Alabama's law on unborn children.  But did you think this through as to how it was structured?

The decision was issued in a pair of wrongful death cases brought by three couples who had frozen embryos destroyed in an accident at a fertility clinic. Justices, citing anti-abortion language in the Alabama Constitution, ruled that an 1872 state law allowing parents to sue over the death of a minor child “applies to all unborn children, regardless of their location.”

“Unborn children are ‘children’ ... without exception based on developmental stage, physical location, or any other ancillary characteristics,” Justice Jay Mitchell wrote in the majority ruling Friday from the all-Republican court.

In 1872 there was, of course, no capacity to take a woman's egg, a man's sperm and combine them a test tube and then freeze the results.  However, under said Alabama law and Constitution as it currently sits, given this decision and said laws, that is a child.

The implications are profound.  The unintentional destruction in this case is of course only part of it.  Now intentional destruction (e.g. a couple who divorces after having said embryos frozen) results in both parties having the capacity to sue as "parents" and what, may I ask, do we do if the two people who used to be married disagree?  One of them is going to sue and by this decision they not only will sue (anyone can always sue) they'll win.

I would expect the consequence of this could easily be that all forms of "assisted pregnancy" become essentially unobtainable.  I'll leave out the obvious problems that arise in the event of actual criminal conduct (e.g. sexual assault, statutory rape and similar) and just leave on the table the issues for couples who have trouble conceiving a child through the ordinary means and now, with this decision, are likely to find that its flat-out impossible to obtain said services in the state at all.

I certainly wouldn't run a fertility clinic given this decision.

Extreme positions, codified into law, made for bad outcomes.

Welcome to consequences.

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2024-02-17 07:00 by Karl Denninger
in Macro Factors , 305 references
[Comments enabled]  

Rolling coal, I tell 'ya, rolling coal....

The Producer Price Index for final demand increased 0.3 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices declined 0.1 percent in December 2023 and advanced 0.1 percent in November. (See table A.) On an unadjusted basis, the index for final demand rose 0.9 percent for the 12 months ended January 2024.

In January, the advance in the index for final demand can be traced to a 0.6-percent rise in prices for final demand services. In contrast, the index for final demand goods decreased 0.2 percent.

The index for final demand less foods, energy, and trade services rose 0.6 percent in January 2024, the largest advance since moving up 0.6 percent in January 2023.

Buried one page down was this ditty:

A 2.2-percent increase in the index for hospital outpatient care was a major factor in the January rise in prices for final demand services.

Uh, didn't we see that in the CPI as well?  We did, we did!  I taw a puddy tat!

Final demand energy was down last month but that's coming back out particularly in gasoline which has been up huge over the last couple of weeks and now is in the survey period, so it will be in the next pair of reports -- like it or not.  All other things being equal this will spike both the next CPI and PPI numbers.

I remain concerned on an economic basis for the Transportation and Warehousing numbers which continue being quite weak with the only exception being the seasonally-expected period from July to October (otherwise known as "Christmas.")

January already sees the figures in the Intermediate unprocessed energy materials -- up 3.8%.  That will roll through, of course, and given what we're seeing at the pump that likely understates the impact.

One interesting element is that the intermediate services demand numbers were driven largely by non-residential rents.  This is a bit of a puzzler given what we're seeing in the commercial real estate space.  It may be nothing more than landlords trying to force higher property taxes and operating expenses on their tenants but that usually is billed out separately and I do not know if the BLS attempts to aggregate that back in.  If so then that would not inure to the benefit of the landlords and might be a false signal.  We'll see.

Intermediate demand service indices were all up as well and indicating more flow-through pressure in the pipelines into the services side of the economy and the CPI. 

This data puts a further nail in the coffin of those expecting rate cuts this year, particularly given that goods and services in the PPI typically lead the CPI by six to twelve months and thus this data forecasts more forward price pressure over the remainder of 2024.

I have to marvel at the market's reaction -- once again, as with the CPI, essentially the entire dive off the number release was recovered.  However, the TNX -- 10 year Treasury -- did indeed rise and so did the IRX (13 week bill yield) so it appears the bond market got the message even if stocks did not.

Right up until an hour or so before people decided "uh, maybe that wasn't so smart particularly given the long weekend."

When the two disagree the bond market is usually right.

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