The Fate of the Russian Economy May Rest With One Man. Hint: it’s not Putin.

Recently, rumors surfaced of Alexei Kudrin’s potential return to the Russian government early in 2016. Kudrin served as finance minister from 2000 to 2011. Under his watch, the Russian economy grew at least 4% annually every year except 2009 – the year of the Great Financial Crisis.

Left axis is GDP right axis is oil price. Two-axis chart used for illustrative purposes.

Left axis is GDP right axis is oil price. Two-axis chart used for illustrative purposes.

During the first eight Kudrin years, GDP growth was not as closely connected to the price of oil –specifically, the growth of the price of oil – as it was before or after. The trend resumed after the economy rebounded from the 2009 Crisis, but then Kudrin left and the 90s began to return (and have now come back in full effect).

The question of course, is if Kudrin comes back, will he have the authority necessary to his job properly? If he is granted that authority, then expect military spending growth to get put on hold, some of the counter-productive self-imposed sanctions to be lifted or loosened, and there might even some real pro-business reforms. If not, well, he probably won’t stay around until the 2018 election. Then again, he probably won’t take the job unless he gets the authority he needs – although this is Russia and he might get an offer he can’t refuse.

Regardless of the outcome of the Kudrin situation, Putin is fast running out of time (read: money) to fix the economy. The Russian security state may be strong, but the loyalties of siloviki become increasingly fleeting once the paychecks start being inconsistent.

Oil price data from:

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Why There Hasn’t Been Much of an Economic Recovery In Three Charts

M1V_Max_630_378

From the St. Louis Fed:

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money. There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. Consider M1, the narrowest component. M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

M2V_Max_630_378

The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.

MZMV_Max_630_378

MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler’s checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy.”

In short, money is not being spent that often. All of those helicopter airdrops of cash by the Federal Reserve? They’re not going into the real economy and are not being spent on stuff by real people (who increasingly don’t have any money). If they were, the above three graphs would bear some semblance to that of the money supply below:

money-supply-may-2012

This is where our friend Mr. Income Inequality comes in. Taking the social justice argument out of the picture (let’s say it got sent to a labor camp, it’d be fitting), a huge concentration of money at the top will inevitably slow down the money supply because even the most frivolous-spending rich person will only spend so much per year, with the rest going into savings/investments/etc (why do you think the stock market keeps hitting record highs?). That money is not creating jobs, growing businesses, or even being spent on dumb shit. All it’s doing is making some guy with an insane amount of money even more money – something the Fed and our government are effectively encouraging with their current policies.

Until that money is brought into the real economy through some means like increased capital expenditures, taxation and public spending, direct payments to taxpayers – pick a method that jives with your ideology – the velocity of money and the real economy will continue to kind of suck. You simply can’t have a consumer spending-based economy if most consumers are broke and jobless. Good thing the unemployment rate went down! Oh wait…

 

labor-force-participation-rate-2013

Labor Force Participation Rate, Currently 62.8%. Source: BLS

Shit.

#AskJPM: JPMorgan Draws X-Pac Heat With Social Media Experiment Gone Awry

I was going to write about how we all need to take a breath when it comes to this whole Obamacare thing, but then JPMorgan decided to hijack the news cycle by pulling one of the biggest public relations fails in recent memory by deciding to hold a hashtag chat with Vice Chairman Jimmy Lee on Twitter at #AskJPM.

I can visualize the series of phone calls, meetings, power points, and oversize checks that led to the social media guy convincing the custom-suited brass of JPM in my mind. It’s full of corporate jargon and hot air – basically, not all that interesting. The problem here is that this is a strategy for a popular celebrity or a consumer product company, not a scandal-ridden bank that could easily be the country’s most hated corporation.

The hashtag quietly sat there for a few hours…and then went viral, becoming a trending topic, but nowhere near in the way JPMorgan intended, drawing what I can best describe as a galactic level of X-Pac Heat:

askjpm-twitter-popular

HuffPo, among lots of others, has some more good ones.

Facing an orgy of disdain, the bank did the obvious thing and cancelled the aforementioned Q&A. There’s certainly no good way to extricate yourself out of a cock-up of this magnitude, but their terse tweet didn’t do them any more favors.

jpmorgan-askjpm-cancelled-tweet

The aforementioned social media guy has most certainly been sacked and Jon Stewart’s writers currently hate their lives, but the real takeway here is that people really hate JPMorgan. This isn’t the usual sort of hate levied publicly at company – McDonald’s failed with a similar stunt, but they mostly dealt with “your food sucks” instead of accusations of everything from open corruption of politicians to laundering money for drug cartels.

Will this materially affect the TBTF bank? Certainly not as much as the multi-billion dollar fines The public’s outright rejection of #AskJPM should be seen as a message of distaste for JPMorgan – and, almost certainly, other Too Big To Fail banks –  something that politicians should be aware of going into 2014 and, since we’re talking about it already, 2016.

Cyprus’ Bank Bail-In and -Out: The Euro Crisis Exits the Danger Zone, Goes Where Dragons Be

South-Park-And-Its-Gone-Meme

Over the weekend, the Euro’s ongoing crisis crossed into a new dimension, one that I don’t think anyone ever saw coming. While most of the attention has been focused on the so-called PIIGS (or the GIPSIs, if you want to be edgy about it), shit had quietly been hitting the fan off the southern shore of Turkey in tiny little Cyprus. With a population of less than a million and a GDP of just $24 billion, Cyprus isn’t actually supposed to matter — and in a sane world, it wouldn’t. But we don’t live in a sane world, we live in this one, and because someone thought it was a good idea to let this island nation that has more in common with Bosnia (it’s been partitioned in two since a dust-up between the Greeks and Turks in 1974) than a North European Social Democracy and is used as an offshore haven by countless Russians (and more than a few Brits) into the Euro. Because of that, Cyprus matters. A lot.

Because it was used as an offshore haven, Cyprus’ financial sector grew to be far bigger than the country’s GDP. As with the afore-mentioned PIIGS, this sector fell victim to the fallout from the Great Recession and despite a Russian loan and other measures, now needs a bailout (or so they say). But like Iceland in 2008, the Cypriot government doesn’t have enough money. Unlike Iceland, Cyprus can’t just let the whole thing be drowned, and not just because the main creditors of its banks are unfriendly Russians instead of Britons and Dutch looking to get a couple extra percent on their savings (though that is actually quite relevant). The main reason why is because Cyprus is in the Euro and thus its fate is tied to the fates of Germany, France, Spain, et al.

Why isn’t Cyrpus just getting a check from the ECB in exchange for some “austerity measures” like Greece or Portugal before it? Simple: there’s an election in a few months in Germany and nobody wants to bail-out anyone else, especially the aforementioned unfriendly Russians. The money still has to come from somewhere and so a plan B was devised: Cypriot account holders get “bailed in” via a confiscatory levy on their accounts (in exchange for their money, they’d get some worthless stake in their bank and possibly a gas voucher) to the tune of 6.75% on accounts of under 100,000 euro — this is the important figure because 100,000 is the threshold for Cyprus’ deposit insurance (their equivalent of the FDIC) — and 9.99% on accounts above that threshold. Naturally, as soon as people heard of this scheme, they lost their minds, in large part because their deposits are supposed to be insured by the government and are thus risk-free.

The various developments since then don’t actually matter because the symbolic dam has been broken by the violation of the trust in the government bank insurance scheme in a country that hasn’t been written off as a corrupt banana republic, mainly because it’s part of a currency union of “trustworthy” countries. Now, you’ve got a breach of the trust in deposit insurance schemes not just in Cyprus, but in the entire Eurozone and possibly the entire “developed” world. After all, if the government can take 6.75 euros out of every 100 in Cyrpus, it can do so in Italy, or Spain, or any other crisis-hit nation.

Side-effects didn’t begin to kick-in right away. The euro slid only modestly against other currencies, partly because Cyprus extended its bank holiday because parliament wasn’t able to pass the bail-in bill (the immediate emptying of ATMs and spreading protests likely had an impact), but don’t be surprised to see people start to freak out in other euro-zone nations at the first sign of trouble in the future because the Euro crisis found the end of the Danger Zone, but that end is labeled on the map only as “there be dragons.” Due to the entrace into this forbidden land, the unshaking and unwavering trust and faith in government deposit insurance schemes, and thus banks as a whole, well, as was so eloquently put in the brilliant “Margaritaville” episode of South Park…it’s gone.

In case you’re still confused, this London cabby will explain it for you. Just hide the children before you press play: