Upside-Down World: Non-Agreement Agreements, Negative Interest, Tesla Vs. Apple

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A ceasefire between Russia and Ukraine is scheduled to start February 15, which apparently means that Putin’s little green men still have 2 days to grab as much land as they can. The agreement follows a 17-hour, four-way meeting between Russia, Ukraine, France and Germany in Minsk. The new deal revived a failed September ceasefire agreement, with commitments from each side to pull back heavy weapons, as well as greater autonomy for separatist regions in eastern Ukraine. IMF chief Christine Lagarde also announced today that Ukraine will receive about $40B in funding over the next four years.

Along with the new cease-fire agreement, that won’t actually end the fighting, there was a non-agreement agreement between Eurozone finance ministers to put off decisions on Greece’s bailout terms until next week. Greek officials were unable to reach a deal over its bailout program yesterday, but will return to Brussels on Monday to try to end the deadlock.

Meanwhile, Sweden’s central bank cut its main interest rate into negative territory and announced a bond-buying program this morning. Sweden now joins Denmark and Switzerland and the European Central Bank in negative rate land. So, now, if you want to make a deposit in Sweden, you have to pay. The reason is lowflation, which is another name for mild deflation. Countries around the world are seeing a sharp slowdown in price growth. In fact, much of Europe is in outright deflation right now, including Sweden if you go by its headline national consumer price index.

Falling prices are great if you are planning to buy something as an individual consumer, but it is problematic for countries or continents. Consumers put off purchases because hey, the price will be cheaper next week. So, nothing gets sold this week. Rinse, lather, repeat next week. Suddenly, there is no economic growth. Negative interest rates are supposed to penalize saving and prompt people to spend and invest instead. The Swedish Central Bank is creating new money electronically and using it to buy government bonds, in an effort to push more money into the economy and weaken the currency, which is another attempt to juice exports while pushing consumers to spend rather than save.

The Swedish Central Bank made a huge mistake in 2010 by raising interest rates to combat high unemployment and low inflation. That didn’t work, so now they turn negative and print money to buy government bonds, and that is supposed to work. In fact, Germany is printing money and buying German government bonds as well, and that is supposed to work; except of course in Greece, where nobody wants to print money to buy Greek bonds, despite outright deflation and depression. Economics is not particularly complicated but economic policy can be insane.

The ECB and the European Monetary Union have no one to blame but themselves. They deployed the monetary policy machinery to uphold the interest of creditors, and they thought the Greeks would remain subservient, but that hasn’t happened. What’s happening to Greece today will happen to Italy tomorrow and then Spain and then Portugal. In Italy, they have the Five Star movement; in Spain, Podemos. They make Syriza look conservative.

Germany thinks it can shut down Syriza here and now, and shut down any further dissent. But the Eurozone is like a house of cards, and if they pull out Greece from the deck, the most likely outcome is that everything falls.

Retail sales fell in January for the second month in a row as drivers spent a lot less on gasoline and didn’t appear to use that savings elsewhere. Retail sales declined by a seasonally adjusted 0.8% last month after a 0.9% drop in December. Sales at gas stations slumped 9.3% to mark the biggest pullback since 2008. Sales fell at auto dealers, home-furnishing stores, grocery chains, department stores, apparel retailers and outlets that sell sporting goods. Internet stores and restaurants, two of the largest retail categories, were among the few sectors to boost sales. Instead of spending the savings at the gas pump, Americans are saving a little; the saving rate increased to 4.9% in December.

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Moon Kil Woong 5 years ago Contributor's comment

By the way, Ukraine is a testament of how idiotic, daft, weak, and foolish the US and Europe's are right now. They have been, are, and will be lied to and manipulated until Ukraine is either theirs or is a broken fractured ember (more than they are already due to their disgustingly weak diplomacy). Sadly this will only Encourage Russia and Putin to engage in more behavior much like Hitler was appeased before World War II. Will we ever learn?

The US must at least be equally strong and firm as the aggressor. We are acting like timid rabbits to ISIS and Putin. One can not expect either one to behave any differently given out behavior.

Moon Kil Woong 5 years ago Contributor's comment

Switzerland was fine doing what it did. In reality, and sane person would get out of the Euro before they implement QE. That will become all to apparent in the future. Likewise, no one ever expected Greece to abide by anything. Their economy makes less sense than the USSR before it collapsed. It is fiscally unsound in every way imaginable.

I agree with you on TBTF banks. Sadly TBTF means too big to have to abide by the laws.

Elon Musk will work on anything he gets loans, money, and/or incentives by taxpayers to start or run. Sadly he is the modern day entrepreneur. Your money, your risk, my glory. I don't doubt Tesla will drop much like Space X almost went bankrupt. Musk always looks to where government funding crosses his pocket. The public is dumb to think he will be there or fund these ventures when they hit the wall. No now he wants more government funding to make high speed transit across the US for even more government funding.