Is a global currency war coming?

The Swiss National Bank (SNB) shocked markets on Thursday by announcing that it would no longer hold the value of the Swiss franc down at 1.2 per euro, although it would lower interest rates from -0.25 to -0.75 percent. Mayhem ensued. The Swiss franc immediately shot up as much as 39 percent against the euro, before settling at "only" up 17 percent on the day. This is basically the biggest single-day move for a rich country's currency, as economist David Zervos points out, in the last 40 years. And it's sent Switzerland's stock market down 10 percent, as its suddenly more expensive currency will cripple its exporters by making their goods more expensive abroad...

Now let's back up a minute. Why was Switzerland pushing its currency down, and why has it stopped now? Well, in four words, it's the euro crisis. Back in 2011, you see, what looked like the imminent end of the euro made people want to move their money to the safety of Swiss banks...

Switzerland is still stuck in deflation, with prices falling 0.3 percent, and a stronger currency is only going to make that worse. Now, they tried to offset this by charging people even more to hold their money in Switzerland—aka negative interest rates—but that wasn't nearly enough to stop the Swiss franc from going vertical... 

More at the link and more at this Bloomberg Business Week article.  This is a big deal for those outside of Switzerland who purchase Swiss products and for those who have their mortgages demoninated in Swiss francs.

It's also the first time I remember encountering negative interest rates.  How does that work?  You deposit your money and they take a little away each week?

Addendum:   I posted the above in January of 2015.  This past week I saw an article in the telegraph entitled Sweden cuts rates below zero as global currency wars spread:

Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe’s escalating currency wars...

The move comes as neighbouring Denmark takes ever more drastic steps to stop a flood of money overwhelming its exchange rate peg to the euro and tightening the deflationary noose. The Danes have cut rates four times to minus 0.75pc in a month to combat fall-out from the European Central Bank’s forthcoming QE...

Exchange rate mayhem in Europe is matched by a parallel saga in Asia, where Japan’s vast monetary stimulus and barely disguised efforts to drive down the yen are causing heartburn in China...

The Riksbank insists that the only motive is to stave off deflation but there are widespread suspicions that Sweden is in fact protecting its industrial and export base. It is no stranger to controversy. The oldest central bank in the world, it took radical action early in the 1930s to liberate Sweden from the constraints of the Gold Standard. Its prescience shielded the country from the worst of the Great Depression.

Stephen Lewis from Monument Securities says the emergency actions are getting out of hand: “The chief threat from a global currency war is that it will lead central banks to take up monetary stances so extreme that they damage the smooth functioning of financial markets. It is remarkable that they should be closing their minds to the possibility that they are undermining the basic motive to save and invest as they blindly wage their currency wars.”

This isn't front-page news in mass media.  One hopes it doesn't become such...

Please feel free to offer advice in the Comments as to what an ordinary person should do in such circumstances.

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Ukraine's currency is collapsing

As reported in the Washington Post:

Ukraine, to use a technical term, is broke. That's what you call a country whose currency has lost half its value in just two days.

The problem is simple: Ukraine has no money and barely any economy... The hyrvnia fell from 16.8 to 24.4 per dollar, and then again to 25.3 on Friday, on this news that the government wouldn't intervene it in anymore. In all, it was a 50 percent decline in 48 hours...

Why is Ukraine so doomed? Well, it's been mismanaged on a world-historical scale by oligarchs who, for decades, have skimmed billions off the country's nonexistent growth. That last part's not hyperbole. It seems almost impossible, but Ukraine's economy has actually shrunk since communism ended in 1991. Or since 1992. Or even 1993. And now its not-so-cold war with Russia is destroying the little that's left. It's not just that the rebel strongholds in the factory-heavy east have deprived Ukraine of a quarter of its industrial capacity. It's that it can't afford to fight against what's still it's biggest trading partner—Russia. Think about that. You don't usually trade a lot with the country you're going to battle against, but Ukraine's economy is so dependent on Russia's that it still trades more with it than any other. That means anything that hurts Russia, like lower oil prices or sanctions, just redounds onto Ukraine, and puts it in an even bigger financial hole.

TYWKIWDBI gets about 150 visits/month from readers in Ukraine.  I would love to hear your thoughts in the comment thread for this post.

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Meet Carmen Segarra - whistleblower

From The Guardian:

Segarra, a former employee of the New York Federal Reserve, was fired after she refused to tone down a scathing report on conflicts of interest within Goldman Sachs. She sued the Fed over her sacking but the case was dismissed by a judge without ruling on the merits because, he said, the facts didn’t comply with the statute under which she had filed. Segarra is now appealing.

Before she left she secretly recorded her bosses and colleagues, exposing their “culture of fear” and servility when dealing with the very banks they were supposed to be regulating. The Fed is the government agency charged with overseeing the financial sector – a task it singularly failed to achieve in the run-up to the recent financial crisis. What emerges from Segarra’s tapes – released by the investigative website ProPublica – is a supine watchdog wilfully baring its gums before a known burglar so that he may go about his business unperturbed.

I listened to This American Life's program on The Secret Recordings of Carmen Segarra.   

Ira introduces Carmen Segarra, a bank examiner for the Federal Reserve in New York who, in 2012, started secretly recording as she and her colleagues went about regulating one of the most powerful financial institutions in the country. This was during a time when the New York Fed was trying to become a stronger regulator, so that it wouldn't fail to miss another financial crisis like it did with the meltdown in 2008. As part of that effort to reform, the Fed had commissioned a highly confidential report, written by Columbia professor David Beim, that identified why the regulator failed in the years leading up to the crisis. Beim laid out specific recommendations for how the Fed could fix its problems. Carmen's recordings allow us to see if the Fed successfully heeded those recommendations more than two years later. What we hear is not reassuring.

It's a powerful indictment of the current system of fake oversight of financial institutions.  I highly recommend it.  You can listen at the NPR link, or download the podcast to CD to play while driving your car. 

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"Resettled Farm Child"

Resettled Farm Child, from the Taos Junction to Bosque Farms project - New Mexico, 1935 by Dorothea Lange.

This is a very evocative photo.  Take a moment to imagine that little girl's life.  She may be alive today, and probably would have some stories to tell that would make modern complaints about the recent recession pale by comparison.

Via Coleurs.

Reposted from 2010 to add information about an excellent video my wife and I watched a couple nights ago.   Dorothea Lange: grab a hunk of lightning is a program in the outstanding American Masters series featured on PBS stations.   We got it from our local library on DVD (ISBN: 9781627890786).  You can also view it online at PBS.  It is a two-hour program featuring the life of a truly remarkable photographer.

Note also - the photo (without the sepia overtones in the embed used above) can be viewed and downloaded from the Library of Congress.

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The plunging price of crude oil is NOT due to fracking

The graph above, from last month, is already outdated; CNBC is reporting this morning that the price of crude is now below $50 per barrel.

Certain special interest groups are attributing this fall to the shale oil production derived from fracking in the United States.  It's not that simple:

The cause of the fall, by $40 a barrel, in petroleum prices since last summer is almost completely on the demand side. Asian economies, especially China, are dramatically slowing, and won’t be requiring as much petroleum to fuel trucks, trains and cars to deliver people and goods around the country. Most petroleum is used to fuel transport...

US journalists seem to feel it obligatory to mention US shale oil production as a contributor to the price fall, since prices are a matter of supply and demand, and US supply has increased by a couple million barrels a day. But frankly that is a minor increase in world terms– global production is roughly 90 million barrels a day. Between Iran, Iraq (Kirkuk), Libya and Syria, enough oil has gone out of production to more than offset the additional American oil. It isn’t that there is more oil being pumped, it is that the world doesn’t want it as much because of cooling economies.

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Luxembourg tax shelters exposed

From The Guardian:

An unprecedented international investigation into tax deals struck with Luxembourg has uncovered the multi-billion dollar tax secrets of some of the world’s largest multinational corporations.

A cache of almost 28,000 pages of leaked tax agreements, returns and other sensitive papers relating to over 1,000 businesses paints a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale.

The documents show that major companies — including drugs group Shire, City trading firm Icap and vacuum cleaner firm Dyson, who are headquartered in the UK or Ireland — have used complex webs of internal loans and interest payments which have slashed the companies’ tax bills. These arrangements, signed off by the Grand Duchy, are perfectly legal.

The documents also show how some 340 companies from around the world arranged specially-designed corporate structures with the Luxembourg authorities. The businesses include corporations such as Pepsi, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx. Leaked papers relating to the Coach handbag firm, drugs group Abbott Laboratories, Amazon, Deutsche Bank and Australian financial group Macquarie are also included.

Lots of details at the link.

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American plutocracy

A new paper by Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman of the London School of Economics suggests that, in America at least, inequality in wealth is approaching record levels...
 
The top 0.1% (consisting of 160,000 families worth $73m on average) hold 22% of America’s wealth, just shy of the 1929 peak—and almost the same share as the bottom 90% of the population.

From The Economist, where the chart is interactive.  The phenomenon is discussed in greater detail in another article there:

Because the bottom half of all families almost always has no net wealth, the share of wealth held by the bottom 90% is an effective measure of “middle class” wealth, or that held by those from the 50th to the 90th percentile...

The 16,000 families making up the richest 0.01%, with an average net worth of $371m, now control 11.2% of total wealth—back to the 1916 share, which is the highest on record...

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How the 0.1% spend their money

YouTube link.

Sotheby's expects the bidding for this "supercomplication" watch to reach $17,000,000.

A video at the Wall Street Journal, which I can't embed, attempts to explain why this watch is worth that much money.  It doesn't address the question of why a person should spend this amount of money on a watch rather than, for example, improving the world in some meaningful way.

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