Rogue Economist Rants

Prospects for retail deposits

2012-02-10T14:25:19-08:00

We're now on year 4 of ZIRP, and it looks like things are going to be like this for awhile to come. I'm not on the funding desk of a bank, I'm just wondering out loud. But how could this environment be affecting the medium and long-term plans of commercial banks with regards their deposit base?

This is an environment engineered by the Fed to discourage saving and to encourage borrowing/lending. But the people's persistence to save and delever continues unabated. So banks have been ending up with a lot of deposits, which are a cost base for them (both in terms of service and in interest) while good lending opportunities continue to be outnumbered by the amount of funds available to them. Ordinary savers continue to leave their savings in cash deposits rather than invest them in businesses or other productive endeavours (Many are still afraid of lagging demand). Meanwhile, the Fed further exacerbates the situation by swapping their treasury holdings into even more idle cash.

The yield curve has been flattening over a longer maturity period, and hence, banks have no problem securing funds whenever they need them for loan settlements. And for shorter periods, they could borrow them for zero or close to zero cost. So what the hell do they still need retail depositors for?

Retail depositors are costly to maintain. You need to have branches, costing money to rent and maintain. You need to have staff ready to serve their needs, and many of these depositors could be very needy. Rising deposits cost more to insure with the FDIC. To the extent deposits are made in physical currency, there are further costs to safeguard, keep, and transport this deposit base.

Every retail client is valuable to a bank to the extent that he churns his deposits in various transactions, where the bank earns its fees. Savers who simply leave money with the bank unused and unturned are a cost to the bank. Some banks have actually started charging fees to large deposits last year, both in an effort to make back what it costs them to take the deposits, and get this….to drive away the depositors! As some bankers in the article have said, this has never happened before.

Now as I said, retail branches can be profit centres, to the extent that they churn depositors' money, by encouraging more fee-based transactions, or encouraging savers to put them in bank-sponsored asset management vehicles. Branches that are able to do this in economical numbers can continue to justify their existence. What about those that simply have more deposits than they have transactions, and are unable to change the course of things? Many of them will probably close, pretty soon or in the coming months, if either: rates continue at ZIRP, or bank lending doesn't pick up to pay for the cost of the deposits.

If neither of those happen soon enough, is your neighbourhood bank branch at risk of closure?

Welcome back home, 'stateless' corporation

2012-02-11T12:27:31-08:00

Three years ago, I wrote, tongue-in-cheek, that we may be seeing the beginning of the end of the nation-state. Because of four decades of relentless globalization, capital was now free to go anywhere in the world, anytime it wanted, instantaneously. One day capital could be rushing towards Brazil, while the next, it's rushing out to speed on to India. The next obvious goal for the world 'surely' was the global mobility of labour, which would be the final step in dismantling all national borders, and the entire concept of the nation-state.

I wrote: Everything else in the world is mobile – capital, technology, products, entire businesses. But one crucial aspect of enterprise isn’t, and that’s people. This has resulted in a severely lopsided globalization process….people cannot mitigate the effects of a relatively-more benign policy in one region by migrating to it, or mute the harsh consequences of a neighbour country’s (competing or trading partner) actions, by piling on to that country. Countries currently compete to attract capital and technology, but not a lot also compete to attract labour.

But of course, the world is not yet ready for this step, and all its ramifications. So, the next most logical cure for the large imbalances caused by globalization is its retreat. We should see a gradual acceptance once again of capital controls and trade controls - capital controls to both keep existing capital in, and to keep new capital out. Too much fleeing capital could collapse a currency, too much flowing in could make it too expensive.

Obama's most recent state of the union speech is an indication that protectionism and trade restrictions will become more prevalent in the coming years. He's already given the first warning signs to those who continue to choose to outsource American jobs abroad. In a world where the conspicuous consumer has retreated, where everybody is trying to save, or pay down debts, and where jobs are disappearing as a result, barricading jobs and keeping them from being off-shored has become priority one.

So what do we expect of this going forward? We'll probably see much of the "stateless" corporations to become once again home-focused businesses. We'll see them retreating from countries where they have no significant consumer toehold, and bring their processes back to where their end consumers live.

We'll see globalization stop dead on its tracks, and both private and public sectors start focusing on their own domestic economies. Which is probably just as well. With less global linkages, all economies will start decoupling from each other. Everyone will start focusing their economic development efforts on their own domestic economies, and on where they're supposed to have from day one: not merely on creating jobs, regardless of where its place in the value chain was, but on building prosperous domestic business clusters of their own, ready to hire locals as much as to sell to them.

Added in comments: On a generalized view, I think companies that find they have a stronger demand for their goods and services abroad than locally will start transferring head offices abroad. Those with equally strong local and foreign demand for their offerings will probably have a local presence everywhere. Even if their operations costs will cost more in the US, if the new offshoring tax equalizes overall cost, penalizes not having local presence, they would probably choose to move back a lot of their jobs. Those that only serve locals will probably move everything back.

For example, if Apple, Dell, or JP Morgan find that their main growth would be in Asia, they'll probably move head offices there, and export to the US, or serve the US market from there. They won't be affected by the tax if they are no longer US companies. If they feel that their offerings will be equally as strong both in the US and abroad, they'll probably have local manufacturing/operations both in Asia, and in the US (to avoid any offshoring penalty and taxes). But if they only serve the US public, like your local telecom or cable company, they'll probably begin to rethink having their customer service operations abroad, and bring them all back.

Some suggestions to improve MMT and the JG proposal

2012-02-01T15:26:17-08:00

Cullen Roche, along with TC and Beowulf, have a new initiative, to flesh out a quasi-MMT economic paradigm, and will likely start website dedicated to it. This paradigm seeks to incorporate all, if not most, MMT insights on monetary and banking operations into its thinking while doing away with the controversial JG component of MMT. They call this new MMT offshoot Monetary Realism, or MR. This sounds like a promising initiative, one that could only be good for both those who want to preserve market-based adjustments in the functioning of the macroeconomy, while seeking to spread the insights of sectoral balances approach in both private and public decision-making and policy-making; and for the main proponents of MMT. After all, If MMT proponents are correct, that better understanding and functioning according to the real world monetary reality will eventually lead us to accept the JG, then this is also helpful to MMT.

Cullen starts off some of their basic principles, at least as to how it would distinguish itself with mainstream MMT:

1. We side with Godley on the current account issue.
2. We view the state theory and the “taxes drive money” idea as incomplete.
3. We will focus more on productivity as a compliment to consumption as opposed to mainly looking at ways to increase aggregate demand.
4. We reject the JG as a central component of understanding the modern monetary system.

MR will focus on monetary and banking realities and operations, and focus less on the macroeconomy, to be clean in its analysis. For the mainstream MMT, meanwhile, I suggest it approach economic analysis with a clearer view of how specific policy proposals would affect grassroots-based businesses. It needs to start looking at the economy as comprised not just of large private sector institutions, but also of many small mom-and-pop size businesses. Consideration for small businesses and their concerns is something that is currently still weak in the current evolution of MMT(as I see it). For example how does government tweak its tax policy and deficit spending in a way that does not kill off a significant part of what makes a dynamic economy. To wit:

1. If inflation starts heating up, mainstream MMT with a 100% JG proposes to manage it by increasing taxes and decreasing spending. The goal would be to decrease private employment and bring a segment of workers back to the public JG. What types of taxes would be increased? Taxes of whom? For doing what activities? Will the higher tax burden be rolled out the same across the board, or segmented and differentiated, depending on size of business? I ask because, while increased taxes could affect large businesses the way MMT economists intend - by decreasing their employee rolls, it will entirely kill off the smallest businesses whose profits are now below the higher income threshold caused by higher taxes, and whose sales may now fall below break-even with the decreased government spending.

2. Will this tax be rolled out by sector, by geographic location, by nature of business activity? Would it take into consideration a business' place in the value chain? Or how many JG-skill level employees it has?

3. How would this economy-wide aggregate demand management account for small business who occasionally need to borrow funds? This type of system will likely discourage banks from extending any medium or long term loans to the smallest businesses who could easily be killed by a ramping up of JG and increase of taxes. Does MMT propose to take the banks' place, or do these smallest businesses become casualties in the name of greater employment and price stability?

4. Also, those businesses most highly affected by those occasions when government increases the JG sector would likely lose all their revolving credit lines precisely when government announces a ramping up of the JG. Is this a natural aim of the JG program, or is there a proposed mechanism whereby those businesses with existing obligations towards employees, suppliers, and customers will be provided a bridge loan by the government, at least to enable them to attend to their open client accounts until they can cleanly liquidate their business and everybody can go back to join the JG?

5. How does JG address greater than normal inventory and capital equipment liquidation every time a ramping of JG and private sector taxes kills off the businesses now below the marginal profitability? Will the government buy these excess, or will it let the market clean up the mess?

6. How does the JG account for the current long and interconnected supply chain processes among businesses? Ex. if the smallest car components makers are to close to accommodate the JG ramp up, does the government intend to turn those business operations into JG positions owned by the government so as to keep the supply lines from disrupting the entire auto industry? How about with large food conglomerates that source a lot of their raw inputs from small growers, who in turn source their own inputs from further small businesses? Do these processes become government-owned JG businesses during times of inflation? And paying the lower JG wage level?

7. How does this JG-led system account for JG people who wish to save up capital, so they can leave the JG to start their own business? So let's say a prospective entrepreneur saves up enough for startup capital, but when he tries to hire people, he can't hire them unless he promises to pay them more than he himself used to earn from the JG? Would the JG have incentive programs to encourage entrepreneurship, to make up for the higher startup costs effected by a permanent JG? Further, if a JG can give workers employable skills, what makes these same workers to still willingly leave that skill-enhancing JG job for a job in the private sector at all? Does the JG coerce these workers to leave the JG?

8. How will MMT address the possibility that JG entrenches big companies even more? If small businesses were to start up, the guaranteed JG wage could be used as a negotiating ploy by workers, and could lead to escalating wages, and the more people a startup needs, the higher its labour clearing price. Less startups would probably result. The Walmarts of the world, in the meantime, would probably start trying to justify that they are a JG supporting company that creates a lot of jobs for the JG, so the government better start paying their line workers.

9. The JG as proposed likely will encourage the mass expectation among workers that though they might work for JG now, tomorrow they'll work for private business, but maybe next month, economic changes will cause the government make them go back to the JG. How does the JG still encourage long-term planning among both workers and small business owners?

For as long as the program as proposed goes against people’s EXISTING risk-return mindset, and discourages free initiative, it's not ready to be at the forefront for reform.

discussions below and at MNE, where my position and Tom Hickey's eventually converge.