Tim Duy's Fed Watch

Push Comes to Shove

The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else.  Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program.  And we all know just how well that has worked for Greece and Ireland and Portugal.  And Spain holds real leverage.  No one is under the delusion (while, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe.  Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds.  From Bloomberg:

German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.

Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.

The idea is to let banks tap the funds directly without going through their respective national governments - thus avoiding another Troika bailout disaster.  Germany, of course, continues to resist, as this would force them to give up one of their tools to enforce austerity throughout Europe.  Perhaps, however, German Chancellor Angela Merkel is starting to break under the pressure:

Merkel put some nuance into the German position today. While promising “no taboos” in attacking the crisis, she floated a timeline of “five to 10 years” for fixing flaws in a currency shared by countries with divergent wealth and attitudes toward taxing and spending.

Of course, Europe doesn't have a 5 to 10 year horizon.  I am thinking they have something closer to a 5 to 10 week horizon to get their act together.  Something big is going to happen in Europe this summer, and I think the odds of a tail-end outcome are increasing, at both ends of the tail.  Either Europe pulls together sooner than the German timeline, or finally blows apart.  The middle-ground, muddle-through option looks less attractive each day.

Cash Exiting China

Something that I have thinking about for a few weeks - and was reminded of reading Ryan Avent this morning - is the series of pieces at FT alphaville regarding the outflow of cash from China.  See here and here and here.  The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story.  The growing exodus of cash, however, is calling that story into question.

Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself.  I am reminded of this story from the Wall Street Journal earlier this year:

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party's brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions.  So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy.  It is another signal that emerging markets will not be supporting global demand anytime soon.  I think the team at alphaville is right - this story is slipping under the radar while we all have our eyes focused on the farce in Europe.  But it could be the real game changer in the global economy.

"Fun" Is Not The Word I Would Use

Bloomberg quotes Nassim Taleb:

A breakup of the euro “is not a big deal,” Taleb said yesterday at an event in Montreal hosted by the Alternative Investment Management Association. “When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States.”

Somehow I think this over-trivializes the situation in Europe.  Just a little.  Yes, a Euro breakup would create new currencies, and I imagine they could be thought of as "fun" depending on the printing, colors, artwork, etc. But overall, I don't think economic upheaval is the path to "fun."   

Is QE3 Just Around the Corner?

From the Wall Street Journal today:

As measured by Treasury bonds, inflation expectations are falling amid heightened concerns that the discord in Europe will threaten U.S. growth. Some observers say that the lowered outlook for inflation gives the Federal Reserve more leeway to stimulate the economy, possibly through another round of quantitative easing. In "QE," the Fed pumps money into the financial system through asset purchases.

Financial market participants are anticipating Fed action.  Are monetary policymakers on the same page?  St. Louis Federal Reserve President James Bullard yesterday:

Bullard said he believes the European Central Bank is committed to backing the continent's brittle banking system, and therefore the risks to the U.S. economy are smaller than some analysts perceive.

Indeed, Bullard added he expects the U.S. economy to perform better than many forecasters anticipate and that the Fed will therefore need to raise interest rates in late 2013, not late 2014 as its policy committee is currently indicating.

Minneapolis Federal Reserve President Narayana Kocherlakota yesterday:

“I see these changes as a signal that our country’s current labor-market performance is much closer to ‘maximum employment,’ given the tools available to the [Fed], than the post-World War II U.S. data alone would suggest,” Kocherlakota said. “As I’ve argued in the past, appropriate policy should be responsive to such signals.”...

...Earlier in May, Kocherlakota said the Fed should start looking at tightening monetary policy in the next six to nine months. He said he saw inflation at around 2% this year and 2.3% in 2013, numbers that signal the need to start exiting the central bank’s current ultra-easy policy.

Arguably, neither Bullard not Kocherlakota are critical voices in the FOMC.  More interesting are today's comments from New York Federal Reserve President Wiliam Dudley.  From the Wall Street Journal:

Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said.

“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, aired Thursday.

Dudley is considered part of the inner circle; if he doesn't think the Fed needs to do something more, the baseline scenario should be that QE3 is not on the table.

At least for the moment.  Simply put, I think market participants are getting ahead of the Fed.  My suspicion is that the Fed will need to see a weaker data flow in the months ahead to justify getting back into the game.  And I don't think the TIPS-derived inflation expectations are lower enough to trigger action either.  I think we need to go down at least another 25bp if not 50bp until the Fed pulls the trigger:

That said, of course the risks to the outlook could shift by the June meeting.  The trend in new orders for nondefense, nonair durable goods suggests that some of the global weakness is catching up with the US:

That said, no clear sign that industrial demand has rolled over.  Overall, it seems unlikely that the data flow as a whole will turn fast enough to prompt the Fed into easing next month.  Only the next employment report stands out as a potential deal breaker.  In general, though, I would think you need at a minimum the Q2 GDP report to justify additional easing - which pushes us out to the July/August meeting at least.  

So if we take the US data off the table, then we are looking for financial disruption, which is obviously a possibility given the current unpleasantness in Europe.  Indeed, we should not be surprised if the Fed needs to further improve dollar liquidity abroad (an action that is sure to be taken as a sign that QE3 is imminent; expect Fed speakers to deny a policy shift is afoot).  And note that the next FOMC meeting is just 2 days after the June 17 Greek vote - and that could be the vote heard round the financial world that prompts the Fed to act.   

Bottom Line:  The data flow is soft, but Dudley indicates it is not soft enough to ease.  And while some are pointing to falling TIPS-derived inflation as  given the Fed room to move, they have traditionally delayed until conditions are more dire (they are not exactly prone to overshooting in the first place).  The Fed doesn't think they will ease further; they think their next move will be to tighten.  Which means that financial conditions will need to deteriorate dramatically to prompt action in June.  So if you are looking for the Fed to ease in just four weeks, you are looking for financial markets to turn very, very ugly.  Lehman ugly.  And I wish that I could say that it won't happen, but European policymakers are hell-bent to push their economies to the wall while worshipping at the alter of moral hazard.  

Rumors and Threats

From the Wall Street Journal's MarketBeat blog this morning:

“We’re now in a very sentiment-driven, rumor-driven, nonsense-driven market that’s prepared to grasp onto anything,” Dow Jones’s Katie Martin said this morning on the Markets Hub.

One of the only things holding the euro up, she said, is the so-called “announcement risk,” the fear that the eurocrats will actually pull together some kind of solution. But it’s just a hope, she said

From Bloomberg this afternoon:

U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for a fourth day, after Italian Prime Minister Mario Monti said a majority of leaders at a European Union summit backed joint European bonds.

Timing is important on this one.  From the Financial Times:

But summit leaders agreed such measures were months – and, in the case of eurozone bonds, years – away, and some officials have in recent days begun to express concern that the EU has not properly prepared itself for the whirlwind that could strike if a new Greek government defaults on its bailout loans and is forced out of the euro.

Most of Europe might support Eurobonds, but it isn't going to happen in the near-term.  Interestingly, Monti also laid down his own gauntlet to Germany.  From Bloomberg:

Italian Prime Minister Mario Monti said Germany has an interest in ensuring that no country leaves the euro.

Monti said that, in a hypothetical case, Germany would be harmed should Italy “one day leave the euro.” A weak “new lira” would put German exports at a disadvantage, though an exit from the currency region would also harm Italy, Monti said in an interview today on Italian television La7.

While “anything can happen in Greece,” the nation is likely to remain in the 17-nation currency, Monti said.

A clear escalation of the doctrine of mutually assured financial destruction - now Italy has its hand on the button.  The more hands on the button, the greater the chance that someone pushes it.  Meanwhile, while European politicians fiddle, Europe burns.  From Reuters:

The euro zone's private sector has sunk further into the doldrums this month as new orders shrivel, forcing firms to run down backlogs and slash workforces, key business surveys showed on Thursday.

And worryingly for policymakers, a downturn that started in smaller periphery members is taking root in the core countries of Germany and France, whose tepid growth had been keeping the troubled bloc afloat.

For his part ECB President Mario Draghi is throwing down his own gaunlet:

We are living at a critical juncture in the history of the Union. The sovereign debt crisis has exposed serious weaknesses in the institutional framework; in this context, the difficulties in finding common solutions are having a negative impact on market valuations. The extraordinary measures taken by the ECB have gained us time; they have preserved the functioning of monetary policy.

But we have now reached a point where European integration, in order to survive, needs a bold leap of political imagination. It is in this sense that I have referred to the need for a “growth compact” alongside the well-known “fiscal compact”.

That sounds to me like he is saying their is not much more that the ECB can or will do.  Policymakers need to get their act together.  I'll see your moral hazard, and double it.  See who blinks first.

Moreover, it is increasingly clear it's not just Europe anymore.  Ed Harrison reiterates that this is turning into a global slowdown:

Me, I am more concerned about the global growth slowdown in emerging markets than the crisis in Europe. This is a big, big story but no one is talking about it because Europe is sucking up all of the air. It’s not only Europe here. The reality is we are seeing a global economic backdrop with nearly every major developed and developing country slowing – all with less policy space across the board. That is not bullish.

 The world looks riskier with each passing day.  

The Fed and the Fiscal Cliff

Ryan Avent has an ambitious post, in which he claims the Federal Reserve will resist proclaiming it has the tools to offset the fiscal cliff, should it even occur:

The Fed could therefore proclaim to the world that will maintain aggregate demand growth (in the form of, say, nominal income growth) at all costs, and that it would by no means allow the fiscal cliff to knock the economy off its preferred path.  It could explain in great detail what specific steps it would be willing to take to achieve this goal, so as to boost its credibility. And if demand expectations as reflected in equity or bond prices showed signs of weakening ahead of the cliff, the Fed could preemptively swing into the action to establish the credibility of its purpose.

The Fed will almost certainly not do this.

Why? Because the Fed is thinking about moral hazard, specifically, that if it promises to protect the economy against reckless fiscal policy Congress will have no incentive to avoid reckless fiscal policy... 

I understand where Avent is going with this.  The Fed should be concerned that Congress will never get its act together if the Fed is always there to bail them out.  But reading the comments by Minneapolis Federal Reserve President Narayana Kocherlakota today makes me think his concerns are at least for the moment misplaced.  From the Chicago Tribune:

The U.S. Federal Reserve, which has kept short-term rates near zero since December 2008, may need to ease monetary policy further if U.S. unemployment rises or inflation falls, a top Fed official said on Wednesday.

Those are possible outcomes if U.S. lawmakers allow a raft of tax breaks to expire on schedule at the end of the year, pushing the nation over a "fiscal cliff" in 2013, Minneapolis Fed President Narayana Kocherlakota said in answer to an audience question after a talk at the Black Hills Knowledge Network.

But, he added, "I don't see that that is a policy choice that the Congress and President wind up making," he said.

That sounds to me like a pretty explicit promise to step up if Congress falls down on the job.  Likewise, St. Louis Federal Reserve President James Bullard, via Reuters:

"If there was a sharp slowdown in the U.S. I do think we'd have further scope to take action, we'd be taking on more risk, but we could do it if the situation called for it," he said.

I take this to implicitly include a fiscal cliff slowdown.  So it seems to me that at least some monetary policymakers are already promising, explicitly or implicitly, to offset the fiscal cliff.  

My guess is that in a low-inflation environment, monetary policymakers would have little reason to engage in moral hazard games, in that any hesitation on their parts would not be credible.  It seems pretty likely they would step on the monetary gas, even if doing so allowed Congress another year of reckless behavior.  Not doing so would be a clear violation of the dual-mandate. As such, are they really able to play coy?

Whether they accurately gauge the impact of the fiscal cliff and engage in the appropriate degree of easing, however, is another matter entirely.

Total Failure

With the crisis once again nipping at their heels, European policymakers accomplished exactly what was expected of them.  Absolutely nothing.  From the FT:

European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector.

Instead, the heads of the EU’s main institutions were given the task of drawing up proposals for closer fiscal co-ordination in time for another summit next month, including plans that could include a path towards a Europe-wide deposit guarantee scheme and, in the longer term, commonly-backed eurozone bonds.

The trouble is that Europe doesn't have a month to wait for another summit.  I am not confident they even have a week.  But not to fear - the ECB is expected to step into the breech once again.  At least that is the hope.  But notice the irony.  Germany doesn't want Eurobonds because of the moral hazard risk.  They don't want to get stuck paying for Southern Europe's profligacy.  At the same time, the ECB does want to act as lender of last resort for fear that will only encourage policymakers to put off hard decisions on fiscal union.  Moral hazard to the right, moral hard to the left.  The only path left is gridlock - and failure.

In the meantime, the Wall Street Journal reports on accelerating plans for a Greek exit.

 European officials are stepping up contingency planning for a possible Greek exit from the euro zone, even as Europe's leaders struggled to overcome differences on how to resolve the currency bloc's crisis at a summit meeting here.

And, for good measure, St. Louis Federal Reserve President James Bullard let's us know that he sleeps easy at night.  Via Reuters:

"I'm one that thinks that Greece could exit, and it could be handled in an appropriate way without causing too much damage, either in Europe or in the U.S.," St. Louis Federal Reserve Bank President James Bullard told Reuters.

 I wish I could be so confident.

Cutting Off Your Nose...

...to spite your face.  This should be the new, official slogan of German policymakers.  It is pretty clear that financial conditions in Europe are unravelling, now putting the Euro into free-fall.  European policymakers simply became far too complacent over the winter, thinking that the ECB's two LTROs had fixed the problem.  And, in a sense they did - for the moment.  But as it became increasingly evident that the ECB was back out of the game, everything went sour.   The economic realities came back into play.  Moreover, there has been precious little action taken to resolve those problems - essentially, the lack of an federal fiscal institutional structure - that would make a common currency workable.

Moreover, Germany continues to block movement in that direction.  From the FT:

Germany refused to share the debt burden of stressed eurozone peers on Tuesday, ignoring two of the most influential international economic bodies which offered support for proposals championed by Paris, Rome and Brussels ahead of a summit.

Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms. The calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development came on the eve of Wednesday’s EU summit.

Merkel sees a large stick as the only way to end the crisis.  She is unwilling to recognize that she needs to match that stick with a large carrot.  At the end of the day, rather than concede on the necessity of internal fiscal transfers to make this work, she would rather doom the entire project to failure.

And speaking of the path to failure, notice another warning sign.  Germany is now selling zero coupon bonds.  Again from the FT:

Germany sold €4.5bn of two-year government bonds at a record low yield of 0.07 per cent, underscoring the strong demand for safer assets amid fears that Greece could be forced out of the eurozone.

The German Bundesbank said the two-year “Schatz”, which was sold with a zero-coupon for the first time, received bids for €7.7bn, compared to a maximum sales target of €5bn.

Germany is rushing headlong on the Japanese (and arguably) US path, dragging the rest of Europe along for the ride. Of course, German policymakers see it exactly the other way, and worry about the moral hazard implications of changing course.  But Europe is beyond moral hazard, which at this point is just something to talk about over a few pints at the pub.  Germany needs put moral hazard concerns in the back seat and find a cooperative path, and needs to find it soon.

Calm Before the Storm?

A relatively calm start to the week.  Can it last?  Almost certainly not.  It will get worse before it gets better.

A few themes popped since last Friday that are worth considering.  First is that some calmer voices have come to the forefront, arguing that a Greek exit is not really all that likely.  See Brad Plummer at Ezra Klein's blog or Kate MacKenzie at FT Alphaville.  The general point:  Breaking up is hard to do.  No argument here - a Greek exit would be ugly for Greece, and the rest of Europe as well.  And, by all accounts, the Greek people don't want that outcome.  The problem, however, is that the alternative, unending austerity to induce a substantial internal devaluation, is not really a solution either.  

Indeed, it seems to me that on the current path, the cost of austerity will soon outweigh the cost of exit.  And we are running out of time to change that trajectory.  As I noted in my last post, it looks like the Greece fiscal situation is quickly deteriorating.  And it looks like a collapsing tourism industry will only worsen the economy, thereby putting additional pressure on deficit to GDP targets.  From FT Alphaville:

 Greece received a boost last year as the unrest in the Middle East made countries such as Egypt unattractive destinations. But it looks like German tourists won’t be propping up the Greek economy so much this summer...

...When you think of the tax revenue that might be lost from this drop in activity, it’s possibly another sign that the bailout programme may be so far off course since the elections that it could have to be renegotiated anyway.

The last bailout is quickly being overtaken taken overtaken by events.  What will be the demands of any new bailout?  If history is any guide, more austerity - and with it a higher probability of exit.

This seems to be exactly the story that Syriza party leader Alexis Tsipras is trying to sell in Germany.  To be sure, this is politically motivated, as he seeks to convince Greeks that voting for his party does not ensure an exit.  Indeed, he is pushing the opposite story - that only by tearing up the bailout agreement can Greece stay in the Euro.  From Bloomberg:

“Until when should German taxpayers pay into a bottomless pit?” Tsipras said to reporters in Berlin today after he held talks with leaders of Germany’s anti-capitalist Left Party. “It apparently flows to the Greek economy, but in reality only the banks and bankers are being financed.”...

...For Greeks, voting for Syriza “doesn’t mean that we’ll be kicked out of the euro,” he said. “It will mean a great opportunity for us to save the euro.”

A victory for Syriza would mean stability for Greece, whereas insisting on a continuation of the “catastrophic” austerity measures means a return to the drachma, Tsipras said.

I think he is right - except that to the Germans, tearing up the bailout is the same thing as exiting the Euro.  Both sides have their hands on the buttons that ensure mutually assured financial destruction, and each austerity package forces Greece closer to pushing that button.

Another theme is one I find particularly intriguing - the idea that Greece will establish an internal currency that trades side-by-side with the Euro.  FT Alphaville explains a version of this plan by Deutsche Bank’s Thomas Mayer.  The basic idea is that the government will need to turn to issuing some kind of IUO's in the weeks ahead due to its deteriorating fiscal situation.  The new currency would trade internally and need to be exchanged for Euros to pay for imports. The exchange rate would not be one to one, of course, and internal prices would be devalued against the Euro.  To prevent the banking system from collapsing, it would need to be pulled into European supervision that guarantees Euro denominated accounts - thereby alleviating the fear of depositors that their Euro accounts would be replaced with a New Drachma, thus preventing a massive bank run.  This is only a half exit, and the goal would be to stabilize the budget to the point where the government could cease printing the New Drachmas and eventually return to the Euro.

I am not confident this would work - and particularly not confident that the Greek government could wisely use its new-found power of the printing press.  But it is a possible third way out, and this is a situation that desperately needs a third way.

Finally, Eurobonds are back on the table.  Sort of.  From the Wall Street Journal:

But next month's elections in Greece could dramatically change the euro zone's political calculus, analysts say. A victory by parties opposed to the bailout negotiated with the euro zone and the International Monetary Fund would sharply raise the risk of Greece leaving the currency area, and possibly prompt policy makers to adopt more far-reaching measures to contain the turmoil arising from such a threat.

These bolder policies include the creation of "euro bonds," or debt jointly guaranteed by the euro zone that would allow weaker countries such as Spain to borrow at interest rates partly subsidized by Germany. Berlin remains staunchly opposed, though new French President François Hollande is expected to raise the topic during informal discussions at the summit.

Edward Harrison argues that Germany is not entirely opposed to the idea and see a path - an austerity-laden path - to Eurobonds. (Other views on the role of Eurobonds can be found at the NYT's Room for Debate). The challenge, however, is that Europe doesn't have time to wait.  Nor does it have time to wait for the other institutional plumbing, such a mechanism for Eurozone bank recapitalization under a full banking union.  

Lacking a path to a real fiscal and economic union, the outcome of tomorrow's EU meeting is likely to disappoint.  Back to the Wall Street Journal:

Without agreement on these major steps, the leaders will in the meantime back three relatively minor policy initiatives. The first is a proposal to increase the capital of the European Investment Bank, the bloc's long-term lending arm, by €10 billion. The second proposal would ease requirements for troubled governments to use funds due to them from the EU budget.

The third is a plan to borrow money against the EU budget that would be dedicated to infrastructure-investment projects. The plan would create a pilot project using €230 million in EU budget money that could leverage funds of up to €4.6 billion. After two years, the program will be reviewed and possibly increased.

Analysts say none of these ideas is enough to have a significant, near-term macroeconomic effect in the bloc's troubled economies.

"These ideas don't materially improve trend growth prospects in the euro zone," said Mujtaba Rahman, an analyst at the Eurasia Group, a political risk consulting firm. "It's a lot of rhetoric and not a lot substance."

Enough to look like policymakers are doing something, but a far cry from the steps needed to bring the crisis under control.  In other words, more of the same.

Closer to Colliding

Each passing day brings the runaways trains closer to collision.  

The European strategy to scare the Greek people into voting for pro-austerity parties was always risky.  My tendency is to think it will drive voters in the other direction, this is especially the case if voters come to believe they hold the real leverage.  And that is exactly the strategy that is emerging.  From the Wall Street Journal:

The head of Greece's radical left party says there is little chance Europe will cut off funding to the country and if it does, Greece will repudiate its debts, throwing down a gauntlet that could increase tensions between Greece's recalcitrant politicians and frustrated European creditors...

..."Our first choice is to convince our European partners that, in their own interest, financing must not be stopped," Mr. Tsipras said in an interview with The Wall Street Journal. "If we can't convince them—because we don't have the intention to take unilateral action—but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."

Europe and the Greece are locked in a battle of mutually assured financial destruction.  Nor can European leaders afford to take Tsipras' threats lightly:

According to recent opinion polls, Mr. Tsipras' party is poised to win the most votes in repeat elections next month, bettering its surprise second-place finish in an inconclusive May 6 vote that left no party or coalition with enough seats in Parliament to form a government. With Mr. Tsipras poised to win pole position in the coming vote, it raises the risk that Greece will soon face a showdown with its European creditors over the contentious austerity program that Athens must implement in order to receive fresh aid.

If Europe caves and gives in to Greek demands, however, a new set of challenges to the austerity agenda will arise.  How long would it be before the people of Spain or Italy or Portugal or Ireland realize that they too have much more leverage than they ever imagined.  Can the Troika cave to Greece while remaining credible with other troubled economies?   I doubt it - which I think increases the risk that the core of Europe will believe it necessary to create a moral hazard example out of Greece.  

Of course, this worked so well with Lehman Brothers. We will just foget about that little detail for the moment.