The Wall Street Examiner » Latest Business Headlines http://wallstreetexaminer.com Get the facts. Mon, 30 Mar 2015 22:07:09 +0000 en-US hourly 1 What Will End the 34-Year US Treasury Bond Bull Market? http://wallstreetexaminer.com/2015/03/what-will-end-the-34-year-us-treasury-bond-bull-market/ http://wallstreetexaminer.com/2015/03/what-will-end-the-34-year-us-treasury-bond-bull-market/#comments Thu, 26 Mar 2015 03:08:00 +0000 http://wallstreetexaminer.com/?guid=58180c8adbf2c4a72267b657555c2777 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

I see #1 and #4 as the most likely triggers of a rise in Treasury yields.

 
U.S. Treasury bonds (10-year and 30-year) topped out above 15% in late 1981, and have traced a sawtooth pattern down ever since. The 10-year bond now yields 1.92% and the 30-year yields 2.51%.
 
 
 
Correspondent Mark G. recently asked a question that is on many minds: what might finally produce an end to the 34-year US Treasury Bond bull market? Here is Mark’s commentary on the question:
 
10 Year T-Bond interest rates are falling again after a minor rally. This leaves me pondering a nearly 20-year old question: what might finally produce an end to the 34-year US Treasury Bond bull market? Neither the beginning or end of three different US QE programs, plus Japanese and ECB QE programs, have served to do this. Nor did oil price booms to $140/bbl, or price crashes to $42/bbl WTI with threats of further decline. Or any other commodity or possible index of commodities. Various FOREX levels so far have also been only correlated over the very shortest of terms. Stock market bull bubbles and bear crashes have also come and gone without lasting effect. War, peace, Cold War, Cold Peace ditto.
 
My background education and experience says that before this T-Bond bull market can end the US T-Bond sellers will have to routinely overwhelm the buyers.
 
As Mark observed, the price of bonds (along with all other securities) is established by supply and demand. For prices of any financial security to fall, sellers have to routinely overwhelm buyers.
 
Demand is one factor; supply is the other. If the security is scarce, then even modest demand can push the price up. If the security is in surplus, demand can be overwhelmed by supply.
 
So the only way that the yield on Treasuries (or any other security) can rise is if supply overwhelms demand. If there are no buyers of bonds at a low price, the yield must rise to entice buyers to part with their cash.
 
If demand soaks up the initial issuance but more issuance hits the market, the yield will rise as demand for more bonds simply isn’t present at low yields.
 
The central banks have manipulated the market for sovereign bonds by creating new money out of thin air and buying bonds. The goal is to suppress interest rates. And since central banks can create as much money as they want, whenever they want, there is no limit to how many bonds they can buy.
 
Rising yields once acted as a limiting factor on governments’ issuing more bonds to fund their fiscal deficits. But since central banks have created trillions of dollars out of thin air to buy as many bonds as the Treasury issues, rates can be suppressed for as long as central banks are free to create trillions out of thin air.
 
If we put these dynamics together, we can sketch out a few possible conditions that would have to be met for U.S. Treasury yield to rise:
 
1. The Federal Reserve (the central bank of the U.S.) would have to be restrained from printing money to buy Treasuries. This could be informal political constraints (i.e. widespread public distrust of the Fed based on its role in exacerbating wealth inequality) or it could be the Federal Reserve’s charter and powers are limited by acts of a Congress that is hostile to its counter-productive money-printing and financial repression.
 
2. The supply (issuance) of new bonds rises to levels that overwhelm demand. Were the U.S. government to run enormous deficits, the supply might well overwhelm demand, especially if the Fed were no longer free to print up another $3 trillion to buy bonds.
 
3. Other sovereign-debt markets that are currently being sold in favor of U,S. Treasuries would have to become more attractive in yield, liquidity and safety than Treasuries. Right now, oligarchs around the world have already suffered losses of 15% to 25% on their wealth not held in U.S. dollars.
 
The rush to sell other currencies and assets to buy dollars and Treasuries has enabled the Fed to end its quantitative easing/bond buying programs; the demand from overseas buyers has been strong enough to push yields down to historic lows, even without any Fed purchases.
 
This trend would have to reverse for Treasuries to be sold in favor of some other sovereign bonds.
 
4. The phantom wealth in risk-on assets would have to dissolve on a global scale, forcing owners of unleveraged assets such as Treasuries to dump their Treasuries en masse to raise cash to pay down U.S.-denominated debt and to to fund their lavish lifestyles.
 
Once the markets for yachts, super-sports cars, etc., dry up, these assets go bidless: nobody wants a costly-to-maintain yacht or super-car at any price. Real estate may retain more of its value than oligarch toys, but real estate is famously illiquid; the margin call must be paid in days, and finding a buyer for luxe real estate takes longer than days.
 
That leaves precious metals and the amazingly liquid Treasury bonds as assets that can be sold in a hurry to cover debts being called due to the collapse of risk-on bubbles in equities, junk bonds, real estate, art, yachts, super-cars, etc.
 
I see #1 and #4 as the most likely triggers of a rise in Treasury yields. The collapse of phantom-wealth bubbles could occur in the next year or two, or be delayed for another 5 to 6 years. But the implosion of phantom-wealth bubbles is assured by the internal dynamics of bubbles. 
 

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The Undebtors: Sworn Enemies of the Vampires of Debt http://wallstreetexaminer.com/2015/03/the-undebtors-sworn-enemies-of-the-vampires-of-debt/ http://wallstreetexaminer.com/2015/03/the-undebtors-sworn-enemies-of-the-vampires-of-debt/#comments Tue, 17 Mar 2015 02:13:00 +0000 http://wallstreetexaminer.com/?guid=514abbc55a98500ab6d0447382738a05 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

Those who refuse debt, regardless of the sacrifice, are starving the parasitic, exploitive machine; those with debt are feeding it.

 
We hear a lot about debtors, and very little about undebtors. I define an undebtor as an individual or entity that has sworn off debt or considers debt a necessary evil that must be paid off as quickly as possible regardless of the sacrifices required to do so.
 
Undebtors are created by these conditions:
 
1. People with cultural/familial values that eschew/fear debt.
 
2. People who have been crushed by debt in the past and refuse to repeat the experience.
 
3. People who recognize debt as the status quo’s favored instrument of oppression, control and exploitation.
 
4. People who understand that paying off debt is the easiest way to earn a zero-risk significant return on one’s money.
 
If you pay off a 12% credit card, that’s the equivalent of earning 12% on your money.
 
There’s no mystery as to the low profile of undebtors in the mainstream media: undebtors are the equivalent of the cross to the vampire-parasites peddling debt.How can banks and other financial parasites make money off the undebtors? They can’t, and therein lies the problem for the status quo, which lives off the blood of debt extracted from debt-serfs.
 
The profits skimmed off debt fuel the speculative gambles that benefit Wall Street, and fund the politico lackeys and toadies who enforce the power of banks and Wall Street.
 
Debt also funds insurance companies and pension funds. Remember, every student loan dragging a starving student into servitude is owned by a pension fund or insurer as a solid, high-yield asset and every subprime auto loan that is extracting a pound of flesh from a marginal borrower feeds Wall Street’s profit machine.
 
People talk about starving the machine. You want to truly starve the machine? Get out of debt and stay out of debt, regardless of the sacrifices needed to do so. I personally know many immigrants to the U.S. who paid off 30-year mortgages in four years or less. How did they do it?
 
1. Everyone in the family 16 or older worked.
 
2. Everyone’s earnings went to pay off the mortgage.
 
3. No money was squandered on cable, dish TV, eating out, new clothing, costly vacations, etc. Zip. zero, nada.
 
There was a saying in the 1960s–you’re either part of the solution or you’re part of the problem. Those who refuse debt, regardless of the sacrifice, are starving the parasitic, exploitive machine; those with debt are feeding it.
 
Yes, I have debt, too, but we are doing everything in our power to pay it off as soon as possible. That’s all anyone can do. But it’s important to do so, starting now. 
 

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http://wallstreetexaminer.com/2015/03/240216/ http://wallstreetexaminer.com/2015/03/240216/#comments Mon, 16 Mar 2015 14:23:23 +0000 http://wallstreetexaminer.com/?p=240216

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Brookings IDs Trade Deficits as Sign of U.S. Advanced Manufacturing Weakness http://wallstreetexaminer.com/2015/03/brookings-ids-trade-deficits-as-sign-of-u-s-advanced-manufacturing-weakness/ http://wallstreetexaminer.com/2015/03/brookings-ids-trade-deficits-as-sign-of-u-s-advanced-manufacturing-weakness/#comments Mon, 02 Mar 2015 20:49:23 +0000 http://alantonelson.wordpress.com/?p=2361 This is a syndicated repost courtesy of RealityChek. To view original, click here.

I gotta hand it to the Brookings Institution. It’s been putting out some genuinely valuable research on domestic manufacturing – and I’m not just saying that because Brookings scholars share my view that American industry remains in struggle, not renaissance mode. Two aspects of its newest manufacturing report are especially worth highlighting: the sectors it includes in its definition of “advanced industries,” and its recognition that industries running global trade deficits are industries in trouble.

Brookings isn’t the only outfit that tries to define advanced manufacturing. For example, the U.S. government has tracked trade in “advanced technology products” since 1989, and most analysts – and everyday Americans – would probably rattle off very similar lists of such sectors if asked. Nearly everyone would include information technology hardware, and the sharper you are, the likelier you’ll be to include industries like pharmaceuticals and aerospace and advanced materials.

But Brookings’ list is so broad and unconventional that it looks like those in my import penetration reports – including steel and autos and home appliances and chemicals and electrical equipment and industrial machinery. These and many others are typically and sneeringly dismissed by the economic conventional wisdom as “smokestack.” But they  require lots of capital as well as research and development, engineering, and product design in order to compete successfully. In fact, Brookings includes several sectors that I’ve left out, either because of small size or my sense that they simply were not capital- and technology-intensive enough – like consumer electronics and lighting equipment and shipbuilding and the big miscellaneous manufacturing category. I’ll need to reexamine them at some point.

Just as surprising is Brookings’ emphasis on trade balances as measures of an industry’s health. Most economists will tell you that economy-wide trade balances don’t really matter or, as is the case with the current U.S. administration and all of its recent predecessors, simply ignore any trade-related data except on exports. Worrying about trade balances on the industry level is considered a hallmark of neanderthalism.

But the Brookings study actually turns the conventional wisdom on its head, contending that the economic damage done by trade shortfalls in individual industries should be less controversial than the damage done by broader deficits. It specifies that these deficits “can symbolize lagging competitiveness or they can stem from the distortionary economic policies of competing nations.” And it warns:

Regardless of their origins, advanced industry trade deficits pose a serious threat to the country’s long-term prosperity. Because most innovation builds on existing technologies and is evolutionary in nature, the concentration of advanced industrial activity and know-how outside of the United States puts the nation’s ability to own the next-generation of critical technologies into question. Reducing the trade deficit in advanced industries is essential to slow the erosion of U.S. innovative capacity.”

Moreover, some of the statistics it presented surprised even me – especially for those service sectors I don’t track closely. For example, did you know that in 2012, the United States ran only a modest trade surplus in telecommunications services, and deficits in R&D and computer services? And that American trade in software was only roughly balanced? I sure didn’t.

Most of the Brookings study’s recommendations for strengthening advanced U.S. industries center on domestic reforms. But the authors do insist that “The United States should seek not only multilateral trade agreements but also true market openings and regulatory harmonizations that reduce both tariff and nontariff barriers that advanced industry exporters face in foreign markets. Countries that engage in unfair trade practices should be held accountable.”

This description of the Brookings findings doesn’t begin to do them justice. Especially fascinating are the numbers on the geography of manufacturing activity in the United States down to the level of small and medium-sized cities. But with Congress debating the future of U.S. trade policy “even as we speak,” the study’s reminder that trade deficits matter and can threaten the nation’s industrial and technological leadership are the points that policymakers today most urgently need to hear.

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The Subsidized Private Sector Has Dominated Post-Recession Job Creation http://wallstreetexaminer.com/2015/03/the-subsidized-private-sector-has-dominated-post-recession-job-creation/ http://wallstreetexaminer.com/2015/03/the-subsidized-private-sector-has-dominated-post-recession-job-creation/#comments Sun, 01 Mar 2015 23:27:19 +0000 http://alantonelson.wordpress.com/?p=2355 This is a syndicated repost courtesy of RealityChek. To view original, click here.

The next monthly Labor Department jobs report (for February) comes out this Friday, and analysts of all kinds will be looking to see if it maintains the employment-creation momentum seen over the past year. In fact, average monthly job creation has been so strong for the past year (259,000) that it’s produced the best such performance since the late-1990s.

The private sector’s record during this period has been slightly better, adding just under 261,000 net new positions per month. But as I’ve written previously, the phrase “private sector” is typically used in an overly fast and loose way, for it includes areas of the economy – notably health care services – where levels of demand and therefore employment are propped up by massive government spending.

During the recession, this “subsidized private sector” played a role in the national employment picture that was jaw-dropping. As the private sector conventionally defined was losing more than 8.8 million jobs on net, the subsidized private sector (which also includes social service agencies and for-profit educational institutions) actually gained 895,000 workers.

Since the recovery began, in the middle of 2009, the “real” private sector has caught up. In fact, it’s grown employment on net by 11.19 percent – slightly faster than the 10.13 percent increase in subsidized private sector jobs. But when you look at employment developments since the recession began more than six years ago, it’s clear that they’ve been positively dominated by hiring in the economy that is only partly related to free market forces.

Specifically, private sector employment conventionally defined is now 2.57 percent greater (representing 2.984 million jobs) than when the last recession began, in December, 2007. But take out the subsidized private sector, and the gain is a rounding error – 0.009 percent, or only 87,000 jobs.

For what it’s worth, economists are expecting this Friday’s jobs report to show that 235,000 net new positions overall were created in February (including government jobs at the federal and state levels). Another harsh winter is the main explanation given for this somewhat subpar number. But if you want to know how the current recovery is really proceeding, keep your eye on the real private sector numbers – which are easily derived from the tables provided by the government. You can be sure I will.

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New GDP Numbers Confirm U.S. Trade Policy as a Growth and Recovery Killer http://wallstreetexaminer.com/2015/02/whats-left-of-our-economy-new-gdp-numbers-confirm-u-s-trade-policy-as-a-growth-and-recovery-killer/ http://wallstreetexaminer.com/2015/02/whats-left-of-our-economy-new-gdp-numbers-confirm-u-s-trade-policy-as-a-growth-and-recovery-killer/#comments Sat, 28 Feb 2015 21:39:22 +0000 http://alantonelson.wordpress.com/?p=2352 This is a syndicated repost courtesy of RealityChek. To view original, click here.

As Congress’ debate over President Obama’s trade agenda heats up, yesterday’s revised government figures on the gross domestic product (GDP) have made the economic costs of current U.S. trade policies clearer than ever. They show that U.S. trade flows slowed growth during the last three months of last year and for the full year more than first estimated. As a result, they have undercut the current sluggish economic recovery to a greater extent than previously thought.

Here are the trade highlights from yesterday’s official figures, which update initial estimates published last month of the GDP and economic growth for the fourth quarter of 2014, and the full year.

>The revised fourth quarter GDP 2014 figures show that the growth slowdown at the end of last year was spurred mainly by a rebound in the inflation-adjusted U.S. trade deficit to its highest level ($476.4 billion on an annualized basis) since the third quarter of 2010 ($498.4 billion). Last month’s first look at fourth quarter 2014 GDP pegged the annualized trade deficit at $471.5 billion

>Whereas trade flows added 0.78 percentage points to the third quarter’s strong 5.00 percent annualized real growth, they subtracted 1.15 percentage points from the fourth quarter’s much lower 2.17 percent real GDP advance. The advance figures from last month showed that the trade deficit’s after-inflation increase cut only 1.02 percentage points from the fourth quarter’s 2.62 percent annualized growth estimate.

>On a full-year basis, whereas a narrowing of the U.S. trade deficit added 0.22 percentage points to real GDP growth’s 2.20 percent real growth in 2013, the gap’s widening subtracted 0.23 percentage points from last year’s 2.39 percent growth in real terms. That’s a bigger bite than the 0.22 percentage points subtracted from the 2.42 percent 2014 growth figure released last month.

>2014 remains the first year during which the trade deficit worsened, and therefore slowed growth, since 2011.

>Since the current economic recovery began in the middle of 2009, the trade deficit’s increase has cut cumulative real GDP growth by 5.68 percent – a price that was almost entirely paid by the U.S. private sector and its workers. According to last month’s preliminary forth quarter and full-year 2014 figures, the trade hit to the inflation-adjusted recovery was 5.38 percent.

>Moreover, this trade deficit worsening has taken place despite the remarkable recent improvement in the nation’s energy trade.

>Indeed, the U.S. non-oil goods trade deficit’s increase in real terms, according to the latest (December and full-year 2014) trade figures has cut the cumulative growth of the current weak American recovery by 15.87 percent. Worse, virtually all of this lost growth has come in the private sector.

>The non-oil goods trade data is especially important because these are the trade flows that are most strongly influenced by trade agreements and related policy decisions. The dramatic trade deficit worsening and resulting GDP hit strongly indicate that the new trade agreements being pushed by President Obama – which are modeled on current trade deals – will further undercut growth, and by extension, job-creation.

>The revised GDP figures pushed the increase in U.S. real exports since the first quarter of 2009 to 38.12 percent from 37.98 percent. Nonetheless, they still fall way short of President Obama’s commitment to double them by the end of 2014. Future revisions cannot possibly upgrade this dismal performance significantly.

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A Wile E Coyote Moment On The Charts http://wallstreetexaminer.com/2015/02/a-wile-e-coyote-moment-on-the-charts/ http://wallstreetexaminer.com/2015/02/a-wile-e-coyote-moment-on-the-charts/#comments Thu, 26 Feb 2015 04:04:08 +0000 http://wallstreetexaminer.com/?p=238062 The market has come to a dead stop a little below resistance and a little above support.

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Yellen Showing a Learning Curve on Trade? http://wallstreetexaminer.com/2015/02/yellen-showing-a-learning-curve-on-trade/ http://wallstreetexaminer.com/2015/02/yellen-showing-a-learning-curve-on-trade/#comments Wed, 25 Feb 2015 22:00:10 +0000 http://alantonelson.wordpress.com/?p=2342 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Fed Chair Janet Yellen made some minor trade-related headlines (in the greater scheme of things) when she reportedly told the Senate Banking Committee that she opposed including enforceable disciplines on currency manipulation in trade agreements.

Actually, Yellen said no such thing. In response to a question from Tennessee Republican Senator Bob Corker following her latest semi-annual testimony to Congress on monetary policy, Yellen stated that she would “really be concerned” about such a move, but she by no means told the lawmakers anything like “Don’t do it!”

But what I found at least as interesting as those remarks were others in which she indicated – and not for the first time – that her views on trade and its effects on American labor markets have undergone some real changes since the 1990s – including the period when she served on President Clinton’s Council of Economic Advisors.

Before this government service, Yellen joined many other leading academics in endorsing Congress’ passage of the North American Free Trade Agreement (NAFTA). Their joint 1993 letter predicted, “The agreement will be a net positive for the United States, both in terms of employment creation and overall economic growth. Specifically, the assertions that NAFTA will spur an exodus of U.S. jobs to Mexico are without basis. Mexican trade has resulted in net job creation in the U.S. in the past, and there is no evidence that this trend will not continue when NAFTA is enacted.”

In 1998, as a White House economist, Yellen wrote a journal article displaying similar confidence. Appropriate titled “The continuing importance of trade liberalization,” Yellen’s piece concluded a staunch defense of standard trade theory and its relevance to practice by declaring, “Trade liberalization might adversely affect a small fraction of American workers in their role as producers, but it benefits all workers in their role as consumers. The bottom line is that the benefits of increased openness and increased international trade are wide ranging: more efficient utilization of resources, faster productivity growth, higher quality goods, and lower prices, all of which raise living standards.”

After a decade-and-a-half’s worth of experience with NAFTA-inspired trade deals and related policies, Yellen’s tune sounds different. Last August, speaking to the annual central bankers’ conference in Jackson Hole, Wyoming, the Fed chair attributed sluggish wage growth during the current economic recovery to “changing patterns of production and international trade.” Indeed, she cited a paper commissioned for the conference that emphasized the toll taken on workers by “the offshoring of the labor-intensive component of the U.S. supply chain.”

In yesterday’s appearance before the Senate Banking Committee, Yellen made that latter point herself. (These remarks start a little after the 46-minute mark.) Again explaining the current recovery’s anemic wage inflation, she mentioned as one of the “longer-term structural factors” likely playing a role “the fact that many labor-intensive activities in the global production chain are being increasingly outsourced….” (If only some alert legislator would point out that many higher value links in these supply chains have been offshored as well!) And she expressed no optimism that trade-related developments would ever bring any relief to a trend that’s been at work “over the last decade or so.”

Yellen’s recent pronouncements on prospects for future increases in the federal funds rate makes clear she’s become acutely sensitive to matters of time and how its passage is described. She might consider that describing outsourcing helping to undercut wages over the last decade or so means that this process started right about the time NAFTA ushered in the current phase of U.S. trade liberalization policy.

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How to Borrow Cheaply from a Government-Owned Bank http://wallstreetexaminer.com/2015/02/how-to-borrow-cheaply-from-a-government-owned-bank/ http://wallstreetexaminer.com/2015/02/how-to-borrow-cheaply-from-a-government-owned-bank/#comments Wed, 25 Feb 2015 10:00:13 +0000 http://moneymorning.com/?p=177511 This is a syndicated repost courtesy of Money Morning. To view original, click here.

The free market for banking services in the United States isn’t a free market at all.

The truth is the biggest commercial banks in America operate with virtual impunity as a government-subsidized, government-protected oligopoly.

So, why don’t we drop the pretense that government-owned banks don’t belong in a free market economy and create a network of honest state-owned banks to compete with so-called private banks?

We should. In fact, we have an almost 100-year-old U.S. bank as a model to copy.

Yes, regulated banks have access to government support. But perhaps there are ways to exploit relationships with government-owned banks to take advantage of their capital ratios and risk evaluations to optimize your investments to ensure a rich risk/reward ratio.

A Single-Bank American Branch Is Proving the Model

It’s the Bank of North Dakota, the only state-owned bank in America. The unique one-branch bank was founded in 1919 under a simple one-page charter. It has no automated teller machines and no investment bankers. But it’s more profitable than Goldman Sachs and JPMorgan Chase & Co., with a return on equity 70% higher than either of those immensely profitable institutions.

The Bank of North Dakota’s Standard & Poor’s credit rating is double-A-minus, and according to The Wall Street Journal, “That is above the rating for both Goldman Sachs Group Inc. and J.P. Morgan, and, among U.S. financial institutions, second only to the Federal Home Loan Banks, rated double-A-plus.”

And no, the bank isn’t profitable just because of North Dakota’s newfound shale oil wealth.

In a Feb. 23, 2015, article titled “This Publicly-Owned Bank Is Outperforming Wall Street,” noted attorney, would-be California treasurer, and the founder and president of the Public Banking Institute Dr. Ellen Brown says the bank is healthy and profitable.

The reasons she indicates are “The BND’s costs are extremely low: [it has] no exorbitantly-paid executives, no bonuses, fees, or commissions; only one branch office; very low borrowing costs; and no FDIC premiums (the state rather than the FDIC guarantees its deposits).”

Brown goes on to say “These are all features that set publicly-owned banks apart from privately-owned banks. Beyond that, they are safer for depositors, allow public infrastructure costs to be cut in half, and provide a non-criminal alternative to a Wall Street cartel caught in a laundry list of frauds.”

That a state-owned bank exists in a Republican stronghold is surprising. What’s not surprising is the bank’s model.

While BND offers some retail banking services and in 1967 was the first bank in the country to make federally insured student loans, it’s essentially a “wholesale” bank. It makes loans to companies in partnership with community banks in the State.

BND gets the bulk of its deposits from the state of North Dakota. The state deposits its tax revenues, fees, and cash balances with the Bank. In turn, BND provides loan monies to partnering community banks who know their customers and make “local” loans.

The Bank of North Dakota doesn’t compete with community banks, it augments them. It channels state money into the local economy through partnering banks who earn fees and profit commensurately.

Here Are Two (Rare) European Banking Systems That Work

Two other countries that Americans respect because of their economic and banking prowess, Germany and Switzerland, have successful state-owned or state-controlled banks that are similar in structure and function to the Bank of North Dakota.

Germany, a country of 82 million people, became the world’s biggest exporter in 2003. It lost that title to China, with a population of 1.3 billion people in 2009, but it remains the engine of European growth thanks to its exports.

Economists and German manufacturers credit Germany’s state-controlled, cooperative Sparkassen (savings banks) and the country’s Landesbanken (state-owned, regional, predominantly wholesale banks) with the country’s exporting success. These banks serve Germany’s Mittlestand, or small to medium-sized businesses, which acting alone or as a network are the backbone of the German export juggernaut.

Sparkassen, which originated in 1778, operate regionally as savings and commercial banks under the auspices of local authorities. Shareholders of regional Sparkassen are either single cities where they operate or multiple cities convened into an administrative district. These savings banks operate in restricted geographic areas, but can act as a cooperative when making larger loans. Depositors are protected under a Joint Liability Scheme.

Germany’s Landesbanken, more wholesale than retail banks, are predominantly owned by the country’s savings banks through regional associations. The seven Landesbanken, besides acting as clearing banks for the Sparkassen, make loans themselves and perform commercial banking services on behalf of public and private enterprises.

Like the Bank of North Dakota, both Sparkassen and Landesbanken are effective in serving “local” businesses. And like BND they efficiently and effectively funnel back profits and taxes to the government bodies that control them.

It was only during the credit crisis that Germans came to realize their Landesbanken had overreached their regional focus. In search of yield in foreign mortgage-backed securities to compete with more aggressive German universal banks like Deutsche Bank and Commerzebank, losses on Landesbanken speculative holdings devastated the once conservative system. While the Landesbanken have recovered, the big private banks have been hit with repeated lawsuits and are sitting on untold billions of dollars of still-underwater assets.

For its part, the Swiss public banking system, based on shared ownership with regional Cantons that oversee the partially private shareholder-owned banks, operates similarly to BND and German public-owned or controlled banks.

In Switzerland – not unlike Germany’s big private banks who amassed $600 billion of toxic assets heading into the 2008 credit crisis – it was big private Swiss banks, like UBS, that suffered huge losses and still deal with repeated and ongoing fraud charges by global regulators.

The Swiss National Bank, Switzerland’s central bank, unlike America’s Federal Reserve System, is operated for the benefit of its minority private shareholders and its majority shareholders, Switzerland’s twenty-six Cantons. The SNB, for the past 100 years has paid its shareholders and the Cantons an annual “dividend.” For the most part, the SNB pays out 6% of its net profits. Last year the Cantons split about $1.15 billion.

The Bank of North Dakota, and both German and Swiss publicly owned or controlled banks prove that private banks aren’t the only free-market solution to providing critical banking infrastructure to big, modern Western economies.

The Too-Big-to-Fail Banks Are Effectively Government Subsidized

All America’s too-big-to-fail banks are currently government subsidized now, so, they’re not free-market competitors.

The implied government safety net these banks enjoy, which proved to be a lifesaver in the financial crisis, draws depositors. It provides them with cheap funding, lowers the cost of capital-markets funding operations, provides innumerable protections from regional bank competitors, and systematically undermines community banks across the country who don’t have the economies of scale to pay for the increased regulations big banks brought upon the entire industry.

William K. Black, Associate Professor of Law and Economics at the University of Missouri-Kansas City and a former bank fraud investigator, recently said of the TBTF private banking oligopoly, “Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians – at the ultimate expense of the taxpayer.” He added, “In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions. Government-owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians.”

Dr. Brown, author of the critically acclaimed book Web of Debt and its 2013 sequel The Public Bank Solution has a lot more to add. In her correspondence to me yesterday she wrote, “Public sector banks lend counter cyclically, making more loans when private banks are pulling back. Public banks are also safer for depositors, avoiding bank runs and bail-ins. Public depository banks are not merely revolving funds. They can leverage the local government’s capital at 10 to 1, backed by the government’s own deposits.”

Building Businesses Rather than Bonuses

On the subject of big Wall Street banks’ impact on borrowers, Dr. Brown doesn’t mince words, telling me, “The fees alone paid to Wall Street banks by the city of Los Angeles exceed what the city pays to repair its streets. California school districts have succumbed to capital appreciation bonds on which they will be paying as much as 20 times principal by the time the loans are paid off. Meanwhile, the Bank of North Dakota is making 1% loans to school districts – as well as 1% loans to startup farmers and startup businesses, and 1.7% variable rate for loans to North Dakota students.”

The post How to Borrow Cheaply from a Government-Owned Bank appeared first on Money Morning

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Portman and the Journal Equally Clueless About Ohio and Trade http://wallstreetexaminer.com/2015/02/portman-and-the-journal-equally-clueless-about-ohio-and-trade/ http://wallstreetexaminer.com/2015/02/portman-and-the-journal-equally-clueless-about-ohio-and-trade/#comments Tue, 24 Feb 2015 17:01:30 +0000 http://alantonelson.wordpress.com/?p=2335 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Based on her Wall Street Journal article yesterday, it’s hard to know who understands less about Ohio’s economy and its critical stake in smarter U.S. trade policies – reporter Siobhan Hughes or the state’s Republican Senator, Rob Portman.  

According to Portman, Ohio’s experience still validates “the virtues of trade” provided that existing agreements are enforced more effectively. And he insists that “the U.S. can’t give up on new export opportunities while it tries to do a better job ensuring compliance with trade deals.” Hence he hopes that the bill granting fast track negotiating authority for President Obama will contain “tough currency provisions.” (All this phrasing is Hughes’.)

And according to Hughes, “the complex politics of Ohio” (which presumably reflect an equally complex economy) make Portman’s position reasonable. As she dutifully reports, the Senator’s “prime example is soybeans, which as of 2013 were Ohio’s fifth-biggest export, generating some $1.2 billion, after accounting for no share of the export market just three years earlier, according to the Census Bureau.”

But here’s what neither Hughes nor Portman apparently realize: The manufacturing losses suffered by the state under current trade policies are not even remotely offset by “big gains in agricultural exports, which could be enhanced by new trade deals.” Nor can they possibly be in the foreseeable future. And there’s no need to look at the indicator Hughes seems to favor – manufacturing employment – whose relationship to trade is controversial because it is also powerfully affected by developments in areas like productivity. All you need to do is look at the makeup of the state’s economy and trade flows.

The Commerce Department’s last detailed data is for 2012, but it shows that, after inflation, “farms” like those that cultivate soybeans represented 0.48 percent of Ohio’s output. Manufacturing represented 17.31 percent. Ahem.

It’s true that Ohio’s tiny agriculture sector has been a trade winner lately. According to the official data – also from the Commerce Department, between 2009, when the current national recovery began, through last year, it’s increased its exports by nearly 350 percent, to just under $2 billion. Even better its trade surplus skyrocketed by more than 1,400 percent – to $1.745 billion. So agriculture, as per Portman and Hughes, has contributed on net to Ohio’s growth.

But here’s what’s happened to Ohio manufacturing during this period. Its exports increased by more than 50 percent – to $48.57 billion. That’s more than 24 times Ohio agricultural exports. Yet its imports surged by just under 68 percent – to nearly $61 billion. That’s about 35 times more than Ohio farm exports.

As a result, the state manufacturing trade deficit more than tripled, to $12.29 billion. In other words, this shortfall’s increase of $8.37 billion – which subtracts from state growth – was more than five times greater than the $1.63 billion rise of the agricultural trade surplus. Therefore, the recent increase of Ohio’s manufacturing trade deficit has slowed the state’s growth by more than five times more than the increase in its manufacturing surplus. This produces a “complex” economic choice?

And here’s the kicker: Looking up these dispositive statistics – which can be found herehere, and here – and doing the math took about ten minutes. But it seems like that was too difficult for a Big Media reporter assigned to write about trade and Ohio’s economy, and for a state political leader charged with ensuring that trade policy benefits Ohio voters.

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