Courtesy of The Automatic Earth.
Theodor Horydczak Snow Globe 1935
Alright, alright, let’s do a little timeline again first. It’s common knowledge by now that Khrushchev gave the Crimea to Ukraine in 1954. But nobody really cared that much, they just figured it happened because Khrushchev was himself Ukrainian and drunk at the time he did it. It never seemed to matter one way or the other because Ukraine was part of the Soviet Union anyway. As can be seen in this great little video of how European borders have shifted through the past 1000 years.
It wasn’t until 1991 that Crimea became part of a de facto foreign nation (something Khrushchev would never have allowed), as the just as drunk western stooge Boris Yeltsin let Ukraine split from what was then called the CIS, and take Crimea with it. In case you’re old enough to remember the footage of the heroic Yeltsin standing on top of a tank in front of the parliament building, bravely liberating his people, you’re going to have to re-assess that memory.
Today, the western objective of separating Russia from its Black Sea port for good is gone for good. And it’s fittingly ironic that Michael Gorbachev, the man stooge Yeltsin needed to oust, now calls the Crimean desire to join Russia a correction of a Soviet-era mistake.
So do you think western politicians have yelled and screamed themselves into such a stupidly tight corner that they’re going to go all-out on Putin now? Joe Biden calls it land grabbing. The headlines say “Putin annexes Crimea”. Well, guys, not from the point of view of the Crimeans who voted over the weekend to join Russia. That’s not how you usually define either land grabbing or annexation. You tried to install a stooge in Kiev, and you fumbled well before the endzone.
And we get it: you don’t want to lose face. But what are you willing to sacrifice for that? And what does it matter anyway? European stocks are up and Wall Street opens higher, and isn’t that what you guys are all about in the end? Or is the catch perhaps exactly there? In the fact that markets don’t care what you say or what sanctions you come with? Or are you even simply just busy overshouting your own domestic problems? Like this maybe:
Bloomberg’s Evan Soltas addresses the issue of lost US productivity growth in Is This the Best the Economy Can Do? , and concludes that it’s lost forever, because any excess capacity has simply vanished. Bad news for America if he’s only half way right.
Also on Bloomberg, Megan McArdle writes in The Coming Real Estate Bubble :
I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?
What are we to think indeed? Well, that we are blowing bubbles like we never have before, that’s what.
The entire western world, plus Japan plus China, is participating in unparalleled bubble blowing, but perhaps no country as much as the UK. The Cameron government never tires of pointing out how great the economy is doing, spurred along by “neutral” OECD numbers saying the UK grows faster than any other nation, but when you get to look at details, the picture changes.
The Guardian says UK Living Standards Have Fallen Across The Board Since 2010 . That should be clear enough: there is no recovery in Britain, at best there’s one “just around the corner”. But don’t bet on that either. The most galling possible action of a government that claims large scale recovery is to throw even more taxpayer money at a housing market that’s already been thrown into overdrive with taxpayer money. While even the Bank of England has issued the warning that UK housing is in a bubble, Cameron et al announce an extension of Help to Buy until 2020, with a potential cost of $10 billion or more.
The net effect is even less affordable homes, homebuilders’ shares up 81% in a year, and people being forced to plunge ever deeper into debt just to be able to live somewhere. And while in general I’m all for rewarding stupidity in kind, for a government to lure its citizens into the poorhouse is immoral. Cameron is much more concerned with Londongrad Russian billions from luxury home sales and City IPO deals being lost to sanctions than he is with the welfare of his own people, and the British people will pay dearly for this lack of a conscience. There won’t be many places in the world where the future looks bright, but Britain is going to scrape the gutter.
Meanwhile, even the BoE admits that Britain’s Banks Will Carry On Being ‘Too Big To Fail’ (Telegraph) . Maybe we should look forward to having one of them fail, and being bailed out with taxpayer funds. Maybe that’s the only way people will see the deep dark forest for the crippled trees.
One thing the BoE – inadvertently – does right is provide the fodder for our good friend and economics professor Steve Keen to take down Paul Krugman by another foot or so (yeah, that makes him awfully small by now). Even if it’s a theoretical more than a practical thing, The BoE’s Sharp Shock To Monetary Illusions is quite funny, certainly if you know how deep Krugman’s foot is already in his mouth. I’ll leave you with Steve:
Economic textbooks teach students that money creation is a two-stage process. At the start, banks can’t lend because of a rule called the “Required Reserve Ratio” that specifies a ratio between their deposits and their reserves. If they’re required to hold 10 cents in reserves to back every dollar in deposits, then if deposits are $10 trillion and reserves are $1 trillion, the banking sector can’t lend any money to anyone.
Stage one in the textbook money creation model is that the Fed (or the Bank of England) gives the banks additional reserves — say $100 billion worth. Then in stage two, the banks lend this to their customers, who then deposit it right back into banks, who hang on to 10 per cent of it ($10 billion) and lend the remaining $90 billion out again. This process iterates until an additional $1 trillion of deposits are created, so that the reserve ratio is restored ($1.1 trillion in reserves, $11 trillion in deposits).
That model goes by the name of “Fractional Reserve Banking” (aka the “Money Multiplier”), and depending on your political persuasion it’s either outright fraud (If you’re of an Austrian persuasion like my mate Mish Shedlock) or just the way things are if you’re a mainstream economist like Paul Krugman. In the latter case, it lets conventional economists build models of the economy that completely ignore the existence of banks, and private debt, and in which the money supply is completely controlled by the Fed.
In this new paper, the Bank of England states emphatically that “Fractional Reserve Banking” is neither fraud, nor the way things are, but a myth — and it rightly blames economic textbooks for perpetuating it. The paper doesn’t beat about the bush when it comes to the divergence between reality and what economic textbooks spout. In fact, as the paper explains it:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. (p. 1)
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits… (p. 1)
•Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks… (p. 2)
•While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality… (p. 2)
•As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. (p. 2)
Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.
