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Thursday, June 27, 2013

Risk of 1937 relapse as Fed gives up fight against deflation

It has set off an emerging market shock and risks "blowback" from a fresh spasm of the eurozone debt crisis, and it is letting all this happen at the same time, before the US economy is safely out of the woods.

It has violated its own counter-deflation strategy, tightening monetary policy even though core PCE inflation has fallen to the lowest levels in living memory and below levels deemed dangerous enough in the past to warrant a blast of emergency stimulus. It is doing so even though the revival of bank lending has faded.

The entire pivot by the Federal Open Market Committee is mystifying, almost amateurish, and risks repeating the errors made by the Bank of Japan a decade ago, and perhaps repeating a mini-1937 when the Fed lost its nerve and tipped the US economy into a second leg of the Great Depression. "It’s all about tighter policy," was the lonely lament by St Louis Fed chief James Bullard.

The Fed seems to be acting in the belief that the US economy will shake off this year's fiscal tightening - 2pc to 3pc of GDP - and that a housing recovery is now entrenched. The sharp fall of Wall Street's homebuilders index would suggest caution. Unlike the surging Case-Shiller index of house prices, it looks forward, not three months backwards.

The Fed could have kept policy steady, welcoming the shake-out in frothy markets over the past month as a useful "fire-drill" for future QE exit, without pushing its point too far. It chose to escalate.

It raised the unemployment target from 6.5pc to 7pc. It concocted feeble excuses to explain why it was ignoring a plunge in 10-year TIPS that serve as a proxy of long-term inflation worries. While still pretending that the pace of QE exit would be dictated by the health of the economy, it in fact set a date that disregards the economy. "Policy actions should be undertaken to meet policy objectives, not calendar objectives," said Mr Bullard acidly in his dissent.

That the Fed should tighten even as it cut its own growth and inflation forecasts for this year is a bizarre state of affairs. "A more prudent approach would be to wait for more tangible signs that the economy was strengthening before making such an announcement. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence," said Mr Bullard.

Tim Duy from Fed Watch said the bank seems to be looking for any excuse to extricate itself from QE "as soon as possible". Its reflexes have changed. It aims to press ahead with bond tapering come what may, retreating only if growth really tanks and news is shockingly bad.

This is not just a debate over whether or not to reverse QE, or whether markets have become addicted to Fed amphetamines. It is whether we still knows what on is going in the heads of those who command our destiny, those who have, with other central banks, bought up almost the entire $2 trillion issuance of AAA bonds worldwide over the past year, and therefore have become the market themselves.

The young Fed governor Ben Bernanke warned in his famous 2002 speech - entitled Deflation: Making Sure "It" Doesn't Happen Here - how corrosive it would be if America began to slither down the same slope as Japan. "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted," he said.

Mr Bernanke then said that the Fed should maintain a safe "buffer zone" of 1pc to 3pc inflation to protect against shocks that could push the economy into a deflation vice. The chances of this happening are "remote indeed", he assured us, because the Fed would deploy all means to prevent it ever happening. "The US government has a technology, called a printing press [or, today, its electronic equivalent], that allows it to produce as many US dollars as it wishes at essentially no cost."

Does Mr Bernanke's pledge still hold, now that he is talking down the relevance of PCE inflation at 0.7pc? Or has he taken to heart warnings from ex-governor Frederic Mishkin that the Fed itself risks becoming trapped if QE continues into 2014? Has he buckled to pressure from his own Advisory Council, who now warn that QE is doing more harm than good? Has he simply been outnumbered?

The Left-Keynesians are furious - "A grave error of policy," said Berkeley professor Brad De Long - but so too are the monetarists, usually linked to the free-market Right.

US monetarist David Glasner says the Fed risks a "reprise of 1937", an episode largely forgotten because the re-armament spending soon came to the rescue. Industrial output fell 30pc to 40pc, back to the levels of late 1933. The peak to trough contraction in GDP was 11pc. Unemployment jumped to 19pc.

The Fed Minutes of 1937 are worth reading, a window into error as it unfolded. As late as June that year the Fed still thought "there was little evidence at the present time of a recession, and that it was the general expectation that in any event recovery would be resumed by Fall [Autumn]".

But then again, the Fed Minutes in the Spring of 2008 were no better. Then too they were talking tough - enough to push up long rates by 50 basis points - even though we now know that the US was already in deep recession. Robert Hetzel from the Richmond Fed says in his bookThe Great Recession that the FOMC's refusal to respond to a collapse in the money supply led directly to the Fannie, Freddie, Lehman, AIG disaster that followed.

But if the Fed has erred again this time, it can't hold a candle to the Bank for International Settlements (BIS). This club of central bankers - now entirely in thrall to the Bundesbank, and the liquidationist doctrines of the Chicago Fed circa 1931 - demanded a halt to QE this week, as well as rate rises, yet more fiscal tightening, and an even faster pace of credit deleveraging for good measure.

The American Nobel fraternity likes to accuse our own George Osborne of holding such views. This is calumny. Britain's fiscal tightening is a calibrated 1pc of GDP each year, and it is offset by £375bn of QE. The Osborne view and the BIS view have nothing in common.

One thing is certain, if such a nihilist cocktail of BIS contraction were imposed on the world in its current condition, it would kill recovery altogether, throw millions more out of work, and probably extinguish a few democracies along the way. Hungary is half gone already.

It would cause debt trajectories to explode, and therefore prove self-defeating on its own terms. The ultimate outcome would be a chain of sovereign defaults and bank crashes. This is one way to achieve a cathartic debt jubilee and wipe the slate clean, I suppose, but by stone age methods, with stone age results. The US whittled down the debt burdens left from the Second World War (120pc) by gentler means, and so did the UK (200pc).

The BIS is, of course, right to warn that QE as currently implemented is fuelling asset bubbles, with junk bond yields falling to record lows, and a new rush into "covenant lite" debt for leveraged buy-outs. But it recoils from the awful implication of its analysis - awful for the BIS and central banks, that is - which is that other forms of QE should be found to inject stimulus directly into the veins of the economy, such as building roads or nuclear power stations.

Takahashi Korekiyo pursued just such a radical expirement in the early 1930s, turning the Bank of Japan into an arm of the treasury and forcing it to fund government spending until the economy was on its feet again. It worked like a charm. Neville Chamberlain tried a lesser variant in Britain, with success. The US Treasury took over the Fed in the 1940s.

Lord Turner, former head of the defunct Financial Services Authority, proposes such a plan today, should recovery falter. His softer version would preserve the independence of the Bank of England, allowing it to decide the right level of fiscal financing.

This is complex territory, and may prove an idle debate if the US does indeed achieve the Holy Grail of "escape velocity". But if it doesn't, and if the reason for abjuring low-inflation monetary stimulus is because it causes dangerous asset bubbles, then for goodness sake do it without causing asset bubbles. Little is beyond the wit of man. Unless you are a defeatist.


High war alert in Israel while Russia evacuates Tartus

Shortly after the DEBKA aired a special video on the Syrian war’s widening circle, Moscow announced Wednesday June 26, that the evacuation which had begun Friday of all military and diplomatic personnel from Syria was now complete, including the Russian naval base at Tartus.

“Russia decided to withdraw its personnel because of the risks from the conflict in Syria, as well as the fear of an incident involving the Russian military that could have larger consequences,” said a defense ministry official in Moscow. He stressed that a 16-ship naval task force in the eastern Mediterranean remains on post and arms shipments, including anti-air weapons, would continue to the Syrian government in keeping with former contracts.

In another sign of an impending escalation in Syria, the Israeli Golan brigade staged Wednesday an unannounced war maneuver on the Golan, attended by Prime Minister Binyamin Netanyahu and top army chiefs. In London, Prime Minister David Cameron called the government’s National Security Council into session in Downing Street on Syria. Opposition leader Ed Milliband was invited to attend the meeting, a custom observed only when issues of the highest security importance are discussed.

Earlier Wednesday, DEBKAfile carried the following report in its special video presentation under the heading: Putin and Obama cross swords on Syrian. What Next?

The sullen confrontation between Presidents Vladimir Putin and Barack Obama at the G8 Summit in Northern Ireland last week condemned Syria to five months of escalating, unresolved vicious warfare – that is until the two leaders meet again in September.

For now, tempers are heating up between Washington and Moscow on Syria and other things too, notably the elusive American fugitive Edward Snowden.
US and Israeli intelligence watchers see the Syrian crisis entering seven ominous phases:
1. A five-month bloodbath centering on the battle for Aleppo, a city of 2.2 million inhabitants.

The Syrian army plus allies and the fully-mobilized opposition will hurl all their manpower and weapons into winning the city.

Military experts don’t expect the rebels to hold out against Assad’s forces beyond late August.

2. Neither side has enough manpower or game-changing weaponry for winning the war outright.

That is, unless Presidents Obama or Putin steps in to retilt the balance.

3. The US and Russia are poised for more military intervention in the conflict up until a point just short of a military clash on Syrian soil – or elsewhere in the Middle East. US intelligence analysts have judged Putin ready to go all the way on Syria against the US - no holds barred.
The Russian president is meanwhile deliberately goading Washington and raising temperatures by playing hide-and-seek over the former NSA contractor Edward Snowden, charged with espionage for stealing and leaking classified intelligence. At home, he is considered variously as a traitor and a brave whistleblower.

For several hours Snowden vanished between Hong Kong and Moscow – until the Russian president admitted he was holed up in the transit area of Moscow airport and would not be extradited by Russia to the United States.

4. Iran, Hizballah and Iraq will likewise ratchet up their battlefield presence.

5. A violent encounter is building up between Middle East Shiites flocking to Syria to save the Assad regime alongside Russia, and the US-backed Sunni-dominated rebel forces.
It could scuttle the secret US-Iranian negotiating track on its nuclear program, which was buoyed up by the election of the pragmatic Hassan Rouhani as President of Iran.

6. The Geneva-2 Conference for a political solution for the Syrian crisis is dead in the water. Moscow and the US are divided by unbridgeable issues of principle, such whether Bashar Assad should stay or go and Iranian representation.

7. So long as the diplomatic remains stuck in the mud, the prospects of a regional war spreading out of the Syrian conflict are rising. Iran, Israel, Jordan and Lebanon may be dragged in at any moment – if they have not already, like Lebanon.

A small mistake by one of the Syrian warring parties in Syria could, for example, touch off Israeli retaliation and a wholesale spillover of violence.


Stronger eruptions at two Alaska volcanoes

Two Alaskan volcanoes that began minor eruptions weeks ago are showing their strongest seismic activity yet, emitting small amounts of lava and ash along with smoke plumes, the Alaska Volcano Observatory said Tuesday.

The observatory warned of more vigorous activity with the Pavlof and Veniaminof volcanoes, both on the Alaskan Peninsula -- though that will likely just mean more ash.

Pavlof, a snow-covered, cone-shaped mountain, has been erupting since early May. While its activity since then has waxed and waned, seismic activity increased since Tuesday morning and the volcano has started continuously shaking, said David Schneider, a geophysicist with the U.S. Geological Survey.

Some lava is flowing, and the volcano is spewing a cloud of steam and ash that has risen as high as 28,000 feet, said Schneider, at the observatory in Anchorage.


Ireland slips into recession as bailout exit looms

Gross domestic product shrank 0.6pc in the first quarter of this year from the previous three months, confounding analysts' expectations of 0.3pc growth - a shock reading that shows the euro member is recovering from financial crisis much more slowly than previously thought.

Revised data also showed a quarterly contraction of 0.2pc in the fourth quarter of 2012, meaning Ireland's economy has shrunk for three successive quarters and is in its first recession since 2009.

"It clearly shows that we're not immune to what's going on globally. Given these numbers you'd be hard pushed to have growth for the year as a whole," said Alan McQuaid, economist at Merrion Stockbrokers.

Ireland has been one of the few eurozone countries to have eked out mild growth as the currency bloc's debt crisis has unfolded, despite harsh spending cuts and tax hikes imposed to help bring down one of Europe's highest budget deficits.

Though Irish people have not protested against austerity as angrily as those in other indebted states such as Greece and Spain, many have endured salary cuts of up to a fifth and big tax rises. Unemployment has more than tripled to 14pc.


Major Western United States Heatwave To hit

A ridge of high pressure will cause elevated temperatures across most of the Western United States, from Arizona and California, northward to the US/Canada border. This also may bring the first monsoon storms to the region as this abnormally large ridge of high pressure takes hold.

It’s that time of the year again, where a hot desert meets the Summer. Temperatures in the 100s across Phoenix will turn to 115+, with 120+ along the Colorado River Valley as a ridge of high pressure builds in the area.

This ridge will be very large, bringing temperatures 15-20 degrees higher than normal for Arizona, California, Oregon, Washington, Idaho, New Mexico, and Utah. Other areas like Montana, and Wyoming may also be in the outer fridges of the heatwave ridge.

With that heat will bring monsoonal moisture into play, California, Nevada, Arizona, New Mexico, and Utah may see the first monsoonal thunderstorms of the season with this event

The Weather Space

Rebuilding Israel's Temple Mount

I went to visit the Jewish Quarter in the Old City of Jerusalem to see how the preparations for the establishment of the new temple were getting on. For hundreds of Israelis, the task of renewing the temple has become the job of their lives. It is about time, so they believe, to establish the Third Temple in its proper place — right on the site where the First Temple and the Second Temple were once standing before being destroyed.

Yehuda Glick is one of the “elite soldiers of the temple” who dedicate their lives to the mission. Since moving to Israel, he has been preparing for the great day, waiting to see the construction of the edifice that is to become the holiest place on earth for the Jewish people. A black skullcap adorning his head, his Hebrew flavored by an Anglo-Saxon accent, Glick spends his time as a tourist guide, escorting visitors to the Temple Mount.

I met Yehuda at the entrance gate to the Temple Mount. There is no greater thrill in his life than to walk on the soil of the Temple Mount. While he has visited the place hundreds or even thousands of times,, his heart still beats with excitement on each visit. “As far as I see it, an amazing divine move is manifested here,” he explained while we were waiting in line at the gate. “The state of Israel is a part of this divine move, which will culminate in the establishment of the Third Temple.”

How is it going to be built and who will build it? I asked him. A broad smile spread across his face. He may have felt sorry for me or, perhaps, considered the question to be out of place. “The notion that the Temple will be built by itself, under divine directions, is the sort of idea typical of Diaspora Jews,” my interlocutor noted. He had left New York for Israel at the age of 8, settling with his family in Otniel, south of Hebron. “When I started visiting the Temple Mount 15 years ago, you could hardly gather a minyan — the quorum — for prayer. These days, hundreds of thousands of Jews are coming to pray on the Temple Mount. They expect us to rebuild the temple, and God willing, it will be built.”

Hundreds of tourists, most of them Christians, were standing in line under the scorching sun, waiting for the security check that every visitor seeking entry to the Temple Mount is required to pass. Jews are not allowed to bring in scrolls of the Torah, prayer books, copies of the Book of Psalms or any other article of worship that could be used to establish a mystical association between the Temple Mount and the holy Jewish Scriptures. Under the current arrangements agreed on between Israel and the Kingdom of Jordan, Jews visiting the Temple Mount are banned from openly praying on the premises or swaying in worship. One single event of deviation from the set rules could be enough to spark an international incident.

In fact, precisely such an incident occurred while I was waiting at the entrance gate to the Temple Mount. All of a sudden, shouts were heard from inside the enclosure. The policemen standing on guard at the gate went on alert and hurried to lock it. It turned out that a Muslim worshipper accused an Israeli policeman of knocking down a Quran she was holding in her hands. She started yelling "Allahu Akbar!" and within minutes, dozens of worshippers at the scene rushed to her aid, and some of them even tried to attack the policeman. The Temple Mount was closed to visitors right away and the incident was promptly brought to the attention of the top echelons in Israel, the Palestinian leaders in the territories and the Jordanian king's palace.

The commanding officer in charge of the Temple Mount site told me that incidents of that kind were an everyday matter. “The policeman on duty reported that the worshipper had thrown down the book on purpose, to stir up a provocation and, needless to say, I believe him,” he said, adding: “Even a minor event is liable to trigger an international incident.”

As the gates to the Temple Mount were closed, Yehuda and I headed for the Jewish Quarter, where the Temple Institute is located. Hundreds of tourists visit the Temple Institute store daily to see at close hand the preparations for the establishment of the temple. “Fifty percent of the visitors are not Jewish,” recounted Reuven Cohen, the store manager, who immigrated to Israel from England 34 years ago. “The Jews are coming here to look for the roots of the temple, whereas the visiting evangelists are deeply involved in the establishment of the temple. They are well aware that their process of redemption is closely interwoven with ours. They actually believe that the path of return of Jesus Christ to this earth passes through our temple.”

The articles of worship intended for use in the new temple, once it is erected, are on display in the store. Kits that include guidelines for proper conduct in the holy site are offered for sale alongside a variety of jigsaw puzzles of the temple — some comprising 24 pieces, for 3-year-old children, and others of 100 pieces and even 1,000 pieces — for the older. Hundreds of books, neatly arranged on the shelves, tell the history of the temples — those that were destroyed and the one that is to be built. There are books on the sacred golden candelabrums, books on the houses that served the Jewish priests who performed their duties at the temple, and others on the ritual sacrifices and prayers, as well as on the way of life that will prevail in Israel after the temple is established.

“Last year we had 50,000 visitors,” David Schwartz, who heads the Temple Institute, proudly stated. “The ever-growing interest shown by tourists reflects the feeling that the days of the Messiah are around the corner. You can sense it in the air — in schools, in synagogues, even in the homes of the secular. Everyone feels it coming up.”

While we were talking, hundreds of visiting school students were wandering around the Institute, impressed by the sights. “Yes, that’s true,” Schwartz added. “As you can see, people are looking for meaning to life. They want to achieve something. We are currently at the stage of preparing people for the construction of the temple.”

On display, next to the architectural building plans, are models showing pilgrims getting down from the light rail at the temple gate station. Others are seen parking their cars in an underground garage to be built beneath the temple. Sophisticated elevators would transport the worshippers right into the temple.

Schwartz, Cohen and Glick are all confident that once the Third Temple is erected, the world will become a fundamentally different place. The Lord would then bestow on Earth great abundance and there would no longer be anyone in need of charity.

“Those who do not feel what is going to happen are either blind or stupid, or ungrateful,” Glick noted, clearly annoyed with me, having noticed the skeptical expression on my face. “There has never been anything like that in the history of the human race; the return of an exiled people to its homeland is unique in human annals. It is all written in the Torah. And the last, supreme stage will be the construction of the temple.”

However, there is one far from marginal factor left out. In all those plans and photographs and illustrations and puzzles and books put forward by the Jewish believers, the Third Temple is seen at the center of the Temple Mount, rising high up above it.

But there is no trace there of the Dome of the Rock, as if the earth had swallowed it up.

Read more: http://www.al-monitor.com/pulse/originals/2013/06/buildng-third-temple-jerusalem.html#ixzz2XQibiPXt

Economic Collapse

China to bolster ties with post- Soviet States

BISHKEK, June 26 (RIA Novosti) – Beijing is committed to boosting its defense collaboration with member states of a post-Soviet security group that includes Russia, China’s defense minister said Wednesday.

Joint military exercises as part of the Shanghai Cooperation Organization, which also includes Kyrgyzstan and neighboring Central Asian states, are a “real necessity” for ensuring regional peace and stability and “enhancing political and strategic confidence,” Chinese Defense Minister Chang Wanquan said on an official visit to Bishkek.

Russia has pledged to begin supplying weapons and other military hardware to Kyrgyzstan later this year to help modernize that nation’s armed forces. The measure is based in part on a desire to thwart the spread of Islamic extremism in the post-Soviet region, a senior Russian defense analyst told RIA Novosti.

The Chinese minister on Wednesday also said his country was making active preparations for a series of anti-terrorism exercises, code named Peace Mission 2014, within the framework of the Shanghai Cooperation Organization.

RIA Novosti

The Business of America Has Become War

Egypt's President Morsi warns unrest risks paralysis

Egyptian President Mohammed Morsi has warned that continuing unrest is "threatening to paralyse the country".

In a speech marking his first year in office, Mr Morsi acknowledged making some "mistakes" and offered opponents a say in amending the new constitution.

But the president also threatened those he saw as conspiring against him and trying to "sabotage" democracy.

Troops have been deployed in cities across the country ahead of planned weekend protests demanding his removal.

Ahead of Mr Morsi's speech, deadly clashes broke out in the northern city of Mansoura.

Two people were killed and 170 injured in fighting between supporters and opponents of the government, a health ministry spokesman said.

Understanding The Gold and Silver Price Manipulation.

Money Velocity Chart
Money Velocity: M2 Money Stock 1950 – 2013 (Click on the chart for a larger version)