Bubbling Up...

Each day I scroll through, skim, and read upwards up a few hundred blog posts. Many provide good insights, pose interesting questions or offer notable quotes. Although I wish there was enough time to highlight the best posts each day individually, I don’t believe attempting that feat would be beneficial to myself or readers. Instead, I’m going to try and present a batch of the best links each day with quotes that hopefully spark a desire to click through and read further. Any suggestions of clever titles for these posts would be appreciated. Without further adieu, here are today’s posts that are Bubbling Up...

1) Full reserve degenerates to fractional reserve, absent regulations to stop it. by Ralph Musgrave

“Thus when private banks start “lending money into existence” as the saying goes, inflation ensues, but that inflation does not need to be reversed by periodic severe recessions, as occurs under the gold standard.

Moreover, banks and those they lend to are not greatly concerned about the inflation. Reason is that in making a loan, BOTH bank and borrower become creditor AND debtor. I.e the agreement (at least initially) is: 1. The borrower owes the bank £Y till the loan is repaid, and 2, the bank owes the borrower £Y, which obligation the bank undertakes to transfer to anyone that the borrower chooses – using his/her cheque book. Initially, to repeat, both bank and borrower are both debtor and creditor, so neither are bothered by inflation.”

2) Paul de Grauwe: The ECB Can Save the Euro – But It Has To Change Its Business Model

“It is surprising that the ECB attaches so much importance to having sufficient equity.  In fact, this insistence is based on a fundamental misunderstanding of the nature of central banking. The central bank creates its own IOUs. As a result it does not need equity at all to support its activities. Central banks can live without equity because they cannot default.

The only support a central bank needs is the political support of the sovereign that guarantees the legal tender nature of the money issued by the central bank. This political support does not need any equity stake of the sovereign. In fact it is quite ludicrous to believe that governments that can, and sometimes do, default are needed to provide capital to an institution that cannot default. Yet, this is what the ECB seems to have convinced the outside world.“

Woj’s Thoughts: Political support is complicated by the lack of a fiscal and political union. Although the ECB could set rates on sovereign debt, it cannot ensure those rates flow through to private borrowers or that private credit expansion returns. The ECB can buy considerable time, but alone cannot save the Euro.

3) Biggest EPS Miss Since Lehman, And This Time It's Not The Tsunami's Fault

Citi Credit Weekly - “Undoubtedly, part of the reason that Spain and Greece have come back into focus is that the earnings of US companies continue to be so uneven. With more than half of S&P500 companies having reported, we’re only now starting to get the full picture, and viewed from the top down perspective it’s far less pretty than even last week led us to believe. Relative to expectations, top line revenues have been especially weak, with nearly all sectors surprising to the downside, even as EPS and EBITDA have tended to beat.

But even those sorts of statistics tend to hide the true weakness because equity analysts tend to revise expectations down while earnings season is still ongoing, which explains why some 72% of S&P500 companies manage to beat expectations in a weak quarter.”

Woj’s Thoughts: Quarter after quarter, revenues continue to miss expectations across the board while the majority of earnings beat. Are analysts systematically underestimating margins? Are companies buying back more stock to boost earnings? Or, are clever accounting practices becoming increasingly efficient in displaying earnings growth?

4) Conservatives and the State by Francis Fukuyama

“When I was asked by the editors of the Financial Times to contribute to a series on the future of conservatism, I hesitated because it seemed to me that in both the US and Europe what was most needed was not a new form of conservatism but rather a reinvention of the left. For more than a generation we have been under the sway of conservative ideas, against which there has been little serious competition. In the wake of the financial crisis and the rise of massive inequality, there should be an upsurge of left-wing populism, and yet some of the most energized populists both in the US and Europe are on the right. There are many reasons for this, but one of them is surely that publics around the world have very little confidence that the left has any credible solutions to our current problems.

The rise of the French Socialists and Syriza in Greece does not belie this fact; both are throwbacks to an old and exhausted left that will sooner rather than later have to confront the dire fiscal situation of their societies. What we need is a left that can stem the loss of rich-world middle class jobs and incomes through forms of redistribution that do not undermine economic growth or long-term fiscal health.

But if you can’t solve the problem from the left, maybe you can do it from the right. The model for a future American conservatism has been out there for some time: a renewal of the tradition of Alexander Hamilton and Theodore Roosevelt that sees the necessity of a strong if limited state, and that uses state power for the purposes of national revival. The principles it would seek to promote are private property and a competitive market economy; fiscal responsibility; identity and foreign policy based on nation and national interest rather than some global cosmopolitan ideal. But it would see the state as a facilitator rather than an enemy of these objectives.”