ECB officials have taken a strong stance against government stimulus to support the economic recovery, arguing that austerity is the better means to boost confidence, investment and spending. That has put them at odds with many economists in the U.S. who have warned against pulling the plug on stimulus too soon.
Liabilities of shadow banks, or institutions without access to central bank loans or permanent federal guarantees, still exceed the traditional banking system’s three years after the financial crisis began, according to a report from the Federal Reserve Bank of New York.
BREAKING NEWS UPDATE 4:55 PM: OaklandBeat just reported: “80 Oakland Police officer layoffs to happen at 5 p.m. today after union, city fails to reach contract agreement.”
“I came here to build an organization, not downsize one,” said Oakland Police Chief Anthony Batts at a recent discussion of the pending city layoffs of 80 police officers as part of the city of Oakland’s attempt to manage what still looms as an $8 million or more deficit, even after cuts.
ATHENS—As Greece slashes spending to avoid default, it hasn’t moved to skimp on one area: defense.
We already know that the eurozone money markets seized up violently in early May as incipient bank runs spread from Greece to Portugal and Spain, threatening the first big sovereign default of our era. Jean-ClaudeTrichet, the president of the European Central Bank (ECB), talked days later of “the most difficult situation since the Second World War, and perhaps the First”.
You’ll see so many blog posts and columns talking about the low interest rates and high unemployment of our times, thus arguing in favor of further fiscal stimulus.
MEMPHIS — For two decades, Tyrone Banks was one of many African-Americans who saw his economic prospects brightening in this Mississippi River city.
June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.
(Reuters) - France admitted on Sunday that keeping its top-notch credit rating would be “a stretch” without some tough budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit.
Much has been said about the lack of monetary tools available to the Greeks in their fight to remain a solvent sovereign. While not entirely similar to the Greek situation, Argentina’s currency board regime in the 1990s is a good example of the importance of independent monetary policy. This cautionary tale goes as follows:
After an inflationary period in the late 1980s, Argentina created a currency board arrangement in which the Argentinean peso was pegged to the U.S. dollar. During the peak periods of hyperinflation, Argentineans had begun to reject the peso and demand the U.S. dollar instead.
This was sent to me by a friend stating “I’d love to see your take on this.” My take: any idiot on the internet can write about investing - I’m proof positive of that. There are benefits to the democratization of platform, and there are risks; most of the risks center around quality of information. In my view, this article contains low-quality information.
I’ll be attacking the article in three parts, one for each of its segments, highlighting its failure to consider the three central principals of investing.
Certificates of Deposit …There is virtually no risk involved and the only downside is you can’t make any withdrawals until the account matures, or else face early withdrawal penalties.Let me start by re-iterating the core principal of investing:
The value of an investment decision is not the return received. The value of an investment decision is the return received relative to the risk assumed.
Everything has a risk. Think of it like this - let’s assume I have a job offer to file papers and I have a choice where I file them. I am offered $25,000 to file papers in an office building and $25,000 to file papers over an active volcano on a rope bridge. Those are extremely different risks to earn the same amount of cash. I’d be an idiot to do the volcano option, right? Making a good decision produces “alpha.”
So let’s begin to attack this article’s recommendation of CD’s with that ridiculous assertion that CD’s carry “virtually no” risk. Of course CD’s carry risks, and they’re larger than you think. Here’s a couple key risks:
1.) Liquidity risk. It’s equivalent to the withdrawal fee.
2.) Currency/inflation risk. The purchasing power of a CD denominated in USD floats relative to the supply of USD and the demand for USD in a variety of contexts. It changes every second relative to commodities, stocks, and other currencies.
3.) Interest rate risk. You take a withdrawal fee on your CD because banks know that interest rates change all the time. If I buy a 1-year CD in January at 1% and rates are at 5% in June, ouch.
4.) Default risk. Banks fail all the time - especially since 2008. Fortunately, almost all banks are FDIC members, so up to $100,000 your CD is insured (assuming you hold no other assets at the bank). Up to $100,000, your CD is not the risk of the bank - it’s the risk of the FDIC.
Note: This is where things get scary, where the government is blamed for some things, and where there is a difference between stated reality and actual banking industry mechanics.
What does the FDIC do? It bails out failing banking institutions, who don’t have enough liquid capital relative to their assets. One problem: the FDIC had nowhere close to the required capital to cover the national banking system’s insolvency exposed by the banking collapse in 2008. That’s why a $700B bailout package had to be created, and why a $500B Treasury line of credit was set up for the FDIC to draw on after it ran through its own pathetic $52B.
But the Treasury is empty - America has massive national debt and a current accounts deficit. So the FDIC is insuring all FDIC-insured CD’s up to $100,000 with - you guessed it - air. Well, not air. It’s actually insured by the “full faith and credit of the United States.” That means our super-duper AAA-rated Treasuries!
So unless your bank is safer than the US Government (hint: no), up until $100,000 your CD has the same default risk as a Treasury sold by the You-Nighted States of America. It’s denominated in the same currency as a CD. It has similar interest risk, too, because CD rates are implicitly related (simplifying, people) to Treasury rates. And buying/selling a Treasury is going to be cheaper than the withdrawal fee on a CD. So to determine if CD’s are a good idea (will generate alpha) up to $100,000, you need to compare the following investments:
- CD of size X over period Y held to maturity purchased effective Z.
- Treasury security of size X over period Y issued Z held to maturity.
Assuming you’re going to hold them to maturity, Treasuries offer you the ability to sell at any time (more liquidity), effectively the same risk, and (in all likelihood) a better rate than a CD. In this environment they are almost always a better investment, thanks to Sheila Bair and Tim Geithner.
Spain lost its AAA credit grade at Fitch Ratings amid a fiscal crisis that prompted the European Union to forge an almost $1 trillion bailout package for the region’s weakest economies.
Only months after most economists forecast that the recession could be viewed safely through the rearview mirror, the European fiscal crisis poses an unsettling new challenge for the United States economy.
UK TELEGRAPH reporting that the United States’ money supply is plunging at 1930s level pace…
A must read story proving that some of the more critical elements of the ‘Great Recession’ are perhaps just beginning…
Public spending cuts and tax rises in advanced economies are required by next year at the latest to deal with “very unfavourable government debt dynamics”, the Organisation for Economic Co-operation and Development warned on Wednesday.
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