Feb 172014
 
 February 17, 2014  Posted by at 4:01 pm Finance


Harris & Ewing “Snow after blizzard, Washington, DC” January 1922

The Chinese government may have wanted to tighten lending and shrink shadow banking, but in January it’s found – as we now do – that it can’t, because its financial system has been entirely built on and with credit, and can now be diagnosed as completely and fatally addicted to it. And so in January Beijing took it up a notch, not down.

Here’s where the addiction shows: According to the BBCs Robert Peston, “China has built a new skyscraper every five days, more than 30 airports, metros in 25 cities, the three longest bridges in the world, more than 6,000 miles of high speed railway lines, 26,000 miles of motorway, and both commercial and residential property developments on a mind-boggling scale”. All in just the past five years.

While debt rose at a very rapid clip of 15% of GDP every year(!), to go from 125% to 200% of GDP in those same five years. Peston is ever so right when he says: “when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return“. Like the west, China has tried to buy growth, and borrowed to pay for it. In doing so, it went way beyond what Bernanke and Draghi would have even dared to dream of, ignored all economies of scale and ran headfirst into a giant diminishing returns sinkhole.

Analyst Charlene Chu: “In 2008, the Chinese banking sector was roughly $10 trillion in size. Right now it’s in the order of $24 to $25 trillion. That incremental increase of $14 to $15 trillion is the equivalent of the entire size of the US commercial banking sector, which took more than a century to build.

China will have replicated the entire US system in the span of half a decade.

Total Chinese loan creation in January was CNY 1.32 trillion, or $218 billion. While January traditionally sees a pick up in loan creation (and demand), the 174% increase in bank loans from December [..] was the largest monthly bank loan injection since January 2010. The last time China scrambled to inject massive amounts of bank loans was in late 2008 and early 2009 when the world was ending, and it was China’s money that stabilized the global financial system far more so than the Fed’s whose QE 1 did not begin in earnest until March 2009. China’s banks created some 50% more in bank loans in January than all of the QE credit money created by both the Fed and the BOJ combined.

The cruel irony for Communist Party is that it may well be trying to shrink the shadow banks, but at this stage that only means that the PBoC and the official banks will need to fill the gaps left by any actions taken to execute such shrinkage. Because the economy is not going to continue apace with less credit, it can’t, it’s all it has in the way of fuel. Hence, not only do official banks need to make up for what’s lost in shadow credit, there’s a second “unfortunate” and probably unintended consequence.

As the FT quotes Mizuho analyst Shen Jianguang: “ The move by the central bank to tighten shadow lending is effectively forcing banks to bring loans back onto their balance sheets …” and makes it harder for banks “to funnel cash into off-balance-sheet products”. But those same banks still expended bank loan creation by 174% in January from the month before… That makes it hard not to wonder when, not if, the bubble will pop and burst and implode and shake us all over.

The shadow banking system is equal to 69% of GDP, so shrinking it by just 10% means having to replace 6.9% of GDP. On top of the huge expansion that’s been happening in the past 5 years. There’s no doubt that the PBoC and the government have scores of economists and other experts trying to figure out how to deal with this without having it blow up in everyone’s face, but how do you cure an addict that needs more, not less, all the time? There’s only so much methadone that will have an effect on a heroin junkie.

Across the pond from China another giant bubble, the one blown by the second incarnation of Shinzo Abe, is also threatening to destroy a whole economy, as Japan doesn’t come anywhere near Abenomics’ lofty goals of solving a multi decade deflation in 3 easy steps. The reports about Abe’s desire to wash away the nation’s shame of post WWII decrees don’t make looking at Japan any easier.

It’s not that the Fed or the ECB have been smart in dealing with the ongoing crisis, but there are others who’ve been even a lot crazier.

How China Fooled The World (Robert Peston-BBC)

[..] … the economic slowdown evident in China, coupled with recent manifestations of tension in its financial markets, can be seen as the third wave of the global financial crisis which began in 2007-08 (the first wave was the Wall Street and City debacle of 2007-08; the second was the eurozone crisis).

[..] … in the autumn of 2008, after the collapse of Lehman, there was a sudden and dramatic shrinkage of world trade. And that was catastrophic for China, whose growth was largely generated by exporting to the rich West all that stuff we craved. When our economies went bust, we stopped buying – and almost overnight, factories turned off the power, all over China.

I visited China at the time and witnessed mobs of poor migrant workers packing all their possessions, including infants, on their backs and heading back to their villages. It was alarming for the government, and threatened to smash the implicit contract between the ruling Communist Party and Chinese people – namely, that they give up their democratic rights in order to become richer.

So with encouragement from the US government (we interviewed the then US Treasury Secretary, Hank Paulson), the Chinese government unleashed a stimulus programme of mammoth scale: £400bn of direct government spending, and an instruction to the state-owned banks to “open their wallets” and lend as if there were no tomorrow.

Which, in one sense, worked. While the economies of much of the rich West and Japan stagnated, boom times returned to China – growth accelerated back to the remarkable 10% annual rate that the country had enjoyed for 30 years. But the sources of growth changed in an important way, and would always have a limited life.

There are two ways of seeing this. First, even before the great stimulus, China was investing at a faster rate than almost any big country in history. Before the crash, investment was the equivalent of about 40% of GDP, around three times the rate in most developed countries and significantly greater even than what Japan invested during its development phase – which preceded its bust of the early 1990s. After the crash, thanks to the stimulus and the unleashing of all that construction, investment surged to an unprecedented 50% of GDP, where it has more-or-less stayed.

Here is the thing: when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return, that the investment is way beyond what rational decision-making would have produced. That is why in China, there are vast residential developments and even a whole city where the lights are never on and why there are gleaming motorways barely tickled by traffic.

But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China’s debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.[..]

Anyone living in the rich West does not need a lecture on the perils of a financial system that creates too much credit too quickly. And in China’s case, as was dangerously true in ours, a good deal of the debt is hidden, in specially created, opaque and largely financial institutions which we’ve come to call “shadow” banks. There are no exceptions to the lessons of financial history: lending at that rate leads to debtors unable to meet their obligations, and to large losses for creditors; the question is not whether this will happen but when, and on what scale.

Which is why we’ve seen a couple of episodes of stress and tension in China’s banking markets over the past nine months, as a possible augury of worse to come. More broadly, for the economy as a whole, when growth is generated over a longish period by debt-fuelled investment or spending, there can be one of two outcomes. If the boom is deflated early enough and in a controlled way, and measures are taken to reconstruct the economy so that growth can be generated in a sustainable way, the consequence would be an economic slowdown, but disaster would be averted. But if lending continues at breakneck pace, then a crash becomes inevitable.

(How China Fooled the World, Tuesday Feb 18, BBC2, 9pm)

Spot The Real Liquidity Bubble (Zero Hedge)

Overnight the PBOC released the latest Chinese bank loan and liquidity data for the month of January. Those who have been following our recent series on Chinese liquidity measures will know that when it comes to the real marginal source of global liquidity, it is China that is the true unprecedented juggernaut, putting both the Fed and the BOJ’s “puny” QE programs to shame. And January’s data was simply the final exclamation mark in a decade-long series in which China’s prosperity has been simply the result of an exponentially increasing amount of loan and liquidity creation by the Chinese semi-national and government backstopped financial system.

Here are the numbers:

Total Chinese loan creation in January was CNY 1.32 trillion, or $218 billion. While January traditionally sees a pick up in loan creation (and demand), the 174% increase in bank loans from December was an unprecedented number, was above the CNY 1.1 trillion, and CNY 250 billion more than a year ago. More notably, this was the largest monthly bank loan injection since January 2010. The last time China scrambled to inject massive amounts of bank loans was in late 2008 and early 2009 when the world was ending, and it was China’s money that stabilized the global financial system far more so than the Fed’s whose QE 1 did not begin in earnest until March 2009.

The far broader monetary aggregate, Total Social Financing, which is the most encompassing calculation of credit and liquidity created in China in any one month, rose to CNY 2.58 trillion. This was more than double December’s CNY 1.23 trillion, and beat last January’s CNY 2.545 trillion. In fact, this month’s broad liquidity creation was the largest monthly amount in China’s history!

Here is what Reuters had to say about the overnight data:

January’s lending surge aside, China’s central bank has consistently signaled in recent months that it wants to temper credit growth to slow a rapid rise in debt levels across the economy. It has focused in particular on keeping short-term interest rates elevated to force banks to stop lending to speculators or high-risk borrowers.

Here’s the problem: one can’t put the January lending surge aside, as it came at a time when for the second time in six months the PBOC tried to taper, only to be forced to not only bail out its money markets, but is on the verge of a bankruptcy tsunami involving its shadow banking products, the first of which it also bailed out despite repeated warnings this time it means business and would let it die. In this context, the January number is precisely what it appears: the bank’s logical response to a liquidity crunch as the Chinese regime finds itself in the same spot that the Fed has been in for the past 5 years – it must keep the monetary spice flowing, or else the party is over. And just like the Fed, and now the BOJ, so too does China not want to deal with the fall out if all it takes to create yet another quarter of increasingly subpar economic growth is another record of funny money conceived out of thin air.

The only problem is that it is becoming increasingly difficult to hide all the pieces of funny money, most of which result in bad and otherwise impaired loans, under the rug. And just to show the problem in its context, here is how China’s banks created some 50% more in bank loans in January than the QE credit money created by both the Fed and the BOJ combined.

And finally, here is China’s nearly half a trillion in total liquidity added to the system in just one month (some deleveraging, right?) looks compared to the Fed and the BOJ’s much maligned and unprecedented unconventional monetary policy.

China bank lending surge adds to credit addiction concern (FT)

Chinese banks burst out of the 2014 starting blocks with a four-year high in monthly new lending that appeared to fly in the face of government efforts to rein in credit growth. It is customary for banks in China to lend most heavily at the start of the year, but the numbers this January were unusually strong even when accounting for seasonal patterns. New local-currency loans reached Rmb1.32tn ($218bn) last month – nearly triple December’s total, Rmb200bn more than market expectations and the highest monthly total since January 2010.

China’s broadest measure of new credit issuance, which includes lending by non-bank financial institutions, also referred to as “shadow banking”, also surged. This measure, known as total social financing, hit Rmb2.58tn, about 25% higher than forecast. The boom in lending augurs well for the Chinese economy in the coming months, allaying fears that higher market interest rates will starve companies of financing and weigh on growth. But it also adds to concerns that China has become increasingly reliant on debt and that the government is struggling to wean banks and companies off that dependence.

“What I take away is, oh my goodness, both [bank lending and total social financing] are very strong again,” said Wang Tao, a UBS economist. “We can see that authorities never intended to tighten as aggressively as some people feared.” The Chinese central bank has steadily guided market interest rates higher over the past year, leading to a “cash crunch” last June and a smaller echo in December when the rates at which banks lend to each other spiked toward double-digit levels.

Many investors and analysts believed this was a sign that China’s new leadership was willing to accept the short-term pain of slower growth in exchange for the long-term gain of a healthier economy with less leverage. Overall debt levels in China have soared from 130% of gross domestic product in 2008 to about 210% last year, an increase that has prompted the International Monetary Fund to warn about the country’s financial stability.

Yet the strength of lending in January calls that view into question. “Now you know the People’s Bank of China is not really tightening,” Lu Ting, an analyst with Bank of America-Merrill Lynch, wrote in a note. “The PBoC’s policy stance remains neutral.”

Whenever money market rates have soared, the central bank has been quick to deliver emergency infusions of crash to the banking system to prevent financial trouble from spreading. That has helped to stabilise market interest rates, albeit at a higher level than in the past. A closer look at the January credit numbers revealed a potential shift away from shadow bank lending to more on-balance-sheet lending by banks. Though higher than expected, total social financing last month was about the same as the Rmb2.54tn in new credit issued in January of 2013.

Analysts said this shift, if sustained, would mean Beijing is trying to bring its burgeoning shadow financing sector under control without inflicting excessive damage on the wider economy. Lending by trust companies – the most important of China’s non-bank financial institutions and ones that have been at the centre of a recent spate of default scares – fell to Rmb104bn, half as much as a year earlier.

“The move by the central bank to tighten shadow lending is effectively forcing banks to bring loans back onto their balance sheets,” said Shen Jianguang, an analyst with Mizuho Securities. The central bank has taken a series of steps in recent months to limit shadow lending, making it harder for banks to funnel cash into off-balance-sheet products.

Japan Growth Trails Forecasts as Sales-Tax Increase Looms (Bloomberg)

Japan’s economy grew at less than half the forecast pace in the fourth quarter, underscoring risks to the nation’s recovery as a sales-tax increase looms in April. Gross domestic product expanded an annualized 1% from the previous quarter, the Cabinet Office said today in Tokyo, less than the median projection of 2.8% in a Bloomberg News survey of 37 economists where the lowest estimate was 1.1%.

While capital spending rose by the most in two years and consumption picked up, trade deficits from surging imports and limited gains in exports dragged on the expansion. Weaker-than-forecast growth may fuel speculation that the Bank of Japan will expand stimulus in coming months and add pressure on Prime Minister Shinzo Abe to flesh out his policies to make the nation more competitive. “This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, told Bloomberg Television. “Prime Minister Abe really needs to be quick in showing to the market that he can deliver reform.”

Business investment rose 1.3% from the previous quarter and consumer spending gained 0.5%. Exports rose 0.4%, while imports surged 3.5%. Investors are waiting for Abe to flesh out the so-called “Third Arrow” of Abenomics, in addition to fiscal and monetary stimulus, as he seeks to drive a sustained recovery from a 15-year deflationary malaise.

Recent declines in consumer confidence and limited gains in exports have highlighted the risk that Japan’s recovery under Abenomics could fade after the levy increase. “It’s unavoidable that the economy will slump in the April-June period due to a backlash from the front-loaded demand,” said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute.

Turkey is surprisingly honest about preparing for inevitable predatory attacks: “We are not going to fight the markets because we know we can’t win.” Short-term foreign debt has jumped five-fold since 2007, and external financing requirements are over 25% of GDP per year, while the local lira is falling fast, making debt repayment harder as it does. And political stability is vanishing on the horizon.

Turkey in eye of emerging market storm as everything goes wrong at once (AEP)

Turkey’s finance minister knows his country is in the cross-hairs as the US and China tighten the liquidity spigot, viewed by many as the most vulnerable of the big emerging market states, and potentially the detonator of a broader global crisis. Mehmet Simsek is a poacher turned game-keeper. He used to work for Merrill Lynch and is a well-known face in London. Indeed, he is a British citizen.

“We are aware it’s going to be tough,” he said, admitting that the government woke up to a “changed world” last year as US Federal Reserve turned hawkish. “We are not going to fight the markets because we know we can’t win. We’ll let the adjustment take place, as it already has with the currency,” he said.

Everything has gone wrong at once. Hedge funds are closing in on those countries with the worst current account profiles, and Turkey is looking naked with a deficit of 7.6% of GDP. Foreign reserves have fallen to two months import cover. The International Monetary Fund issued a blistering report in December, warning that Turkey is on an “unsustainable” path, with gross external financing requirements above 25% of GDP per year. It said monetary and fiscal policy were both too loose.

There has been a chronic erosion of Turkey’s net foreign asset position since 2008 to minus 53% of GDP. Investment in factories and plant (FDI) has dried up, replaced by hot money. The IMF said Turkey risks a “sudden stop” in capital flows that could trigger recession. The country has been skating on thin ice ever since mass protests last June, put down by police with live ammunition. This took a turn for the worse with the eruption of a bitter power-struggle within the Islamist movement of premier Tayyip Recep Erdogan, the “events of December 17”.

It was triggered by corruption probes against party elites, including three children of cabinet ministers. Mr Erdogan responded with a purge of the judiciary and police, claiming that a “parallel state” was orchestrating a judicial coup. “This has gone beyond tinkering and become really serious: Erdogan can’t just roll up democratic institutions,” said one diplomat. “Fund managers who thought Turkey was stable tell us they now have to worry about political risk, or even whether contracts will be enforced.”

Turkey has little safety margin. A report by UBS said Turkey is almost as vulnerable as Thailand before it set off the Asian crisis in 1997, and worse in key respects. Its savings rate is 12.6% compared to 33% in Thailand then. Short-term foreign debt has jumped five-fold to $90bn since 2007, according to S&P. This has to be rolled over continuously. Much of the dollar debt is “unhedged” and has fuelled a construction boom. Borrowers face a triple squeeze from rising rates, a 22% fall in the lira over the last year, and a slump in growth. The IMF says the era of Chinese-style growth rates of 9% will never return.

Russia and its former “republics” are sinking together, but it’s the smaller brothers who get hit hardest; they don’t have anywhere near the same quality and quantity of resources. A region so replete with festering discontent is always a dangerous thing to let sink.

Kazakhstan currency devalued 19%, Russia ruble slides, Ukraine, Belarus to follow (RT)

The National Bank of Kazakhstan has devalued the tenge by 18.9%, as the Russian ruble keeps on hitting new lows against the dollar. Weakness in emerging markets is increasing, with experts warning more devaluations across the region could follow. Instead of taking a gradual approach like Russia’s central bank, Kazakhstan decided to devalue its currency in one go,.

“The decision was apparently triggered by the weakening of Russia’s ruble, which has put local industries under competitive pressure from Russia. Kazakhstan devalued its tenge not to lose the Russian market, which the country is very exposed to,” Vladimir Osakovsky, Chief Economist for Russia and the CIS at Bank of America Merrill Lynch, told RT. The analyst said that about 36% of Kazakhstan imports are coming from Russia.

UBS Global Research sees Kazakhstan’s move as a signal for Ukraine to devalue the hryvnia. “We think that such weakness of the otherwise well-supported tenge exposes the Ukrainian hryvnia as the next likely candidate for devaluation,” Osakovsky said. The hryvnia has been under rising pressure, as protests in the streets of Kiev are damaging the economy and increasing political risks.

The fact that about a third of Ukraine’s imports come from Russia, where the domestic currency is losing value, is also weighing on the hryvnia. “Unlike Kazakhstan, Ukraine has a large current account deficit, high external debt as well as already low international reserves at the National Bank,” the Merrill Lynch expert added.

As for Belarus, an ally of Russia and Kazakhstan in the Customs Union, “the National Bank will not react in the next week or two,” the Moscow Times quotes Dmitry Kruk, an economist at the Belarusian Economic Research and Outreach Center in Minsk. “But if the devaluation of the Russian currency is more prolonged, then it will have to take account of this fact, and let the Belarusian ruble fall,” Kruk added.

Another recent miracle growth story is starting to stutter. Are there any left?

India Finance Minister Poised To Tighten Spending Despite Looming Polls (ETimes)

The Finance minister is expected to tighten spending in an interim budget Monday and resist the temptation to announce a populist spending spree in a bid to stave off defeat at looming elections. Finance Minister P. Chidambaram, of the embattled ruling Congress party, is expected to focus on fiscal consolidation in his budget speech to the Indian parliament, his final one before a national vote due by May. “There is no room for populism. He will have to stay focused on the current account deficit, fiscal deficit and inflation,” said Vivek Rajpal, an interest rates strategist at Nomura Singapore Limited.

The government aims to limit the size of its fiscal deficit to 4.8% of gross domestic product for the current financial year, at a time when economic growth is at decade lows. It hopes to make good on its aim thanks to higher-than-expected non-tax revenues such as those from the recent auction of mobile phone spectrum licences, for which companies bid around $10 billion.

Arun Singh, senior economist with research firm Dun & Bradstreet, said international credit agencies would be looking closely at the state of India’s public finances. “When they have already warned of an adverse impact on India’s rating if this (deficit) figure worsens, the government really has no choice but to keep walking on a fiscal consolidation path,” Singh said.

My bet is Yellen and Draghi secretly enjoy the spectacle of emerging market troubles. They will come to regret that.

Deflation Threat Worries G-20 Roiled by Emerging Markets (Bloomberg)

Janet Yellen and Mario Draghi have a new reason to consider what International Monetary Fund chief Christine Lagarde calls the “ogre” of deflation: eroding confidence in emerging markets. Weaker growth from Brazil to South Africa risks unleashing a “disinflationary impulse through the global economy,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. Cheaper commodities, slower trade and sliding exchange rates in developing markets all could soften price pressures internationally.

That in turn could force Federal Reserve Chair Yellen and European Central Bank President Draghi to keep monetary policy loose for longer, increasing the attractiveness of their financial assets even at the threat of creating asset bubbles. “Emerging market volatility is likely to continue,” said Roberto Perli, a former Fed economist and now a partner at Cornerstone Macro LP in Washington. That “over time could lead to easier monetary policies than large central banks would have otherwise preferred, mainly through potential disinflationary effects.”

The dynamics of the world economy will be debated this week when central bankers and finance ministers from the Group of 20 gather in Sydney. For the first time since the G-20 became the premier forum for economic policy discussion in September 2009, it is officials from developing nations who are on the defensive as growth fades and markets tumble.

Managing Director Lagarde said rich nations can’t be complacent. “We see rising risks of deflation, which could prove disastrous for the recovery,” she said in a speech in Washington on Jan. 15. “Deflation is the ogre that must be fought decisively.” Central bankers so far don’t sound concerned. Yellen told lawmakers on Feb. 11 that some of the recent softness in prices “reflects factors that seem likely to prove transitory” and the trading volatility sparked by emerging markets doesn’t pose a “substantial risk to the U.S. economic outlook.”

Farrell does Wall Street!

10 weapons Wall Street uses to manipulate you (Paul B. Farrell)

Remember, Wall Street has only one goal, make insiders superrich, and shareholders rich. The public interest and the rest of the world are never part of their competitive algorithms. Never. They achieve their goal with the basic ideas of behavioral-finance geniuses like Richard Thaler, by keeping investors in the dark, dependent, irrational and uninformed. Very simple. Here are 10 of Wall Street’s high-tech/low-tech weapons used by their psychological/neuroscientific/behavioral finance cyberwarriors to control their casinos:

  1. Hire psychologists, neuroscientists to manipulate the media

    Use consulting contracts, grants and retainers and lock up the best talent to work to keep America’s 95 million individual investors “irrational and uninformed” as Thaler says.

  2. Free experts constantly deliver Wall Street’s message to media

    Network, cable, bloggers must fill their channels every day. Talking heads are free advertising for Wall Street to manipulate investors using so-called news content.

  3. Invest megabucks on lobbyists to control politicians, government

    Lobbying is one of Wall Street’s best investments. Lobbyists control Washington: control politicians, fight reforms, push favorable laws, regs, spin the truth to mislead investors.

  4. Fuel anxiety by pushing the investor’s buy/sell/ trade button

    Wall Street’s a casino, makes money on “the action,” skimming a percentage off the top. They fuel investor anxieties, fears, optimism, volatility, maximize action on exchanges.

  5. Kill our savings button, undercut self-confidence, long-term planning

    Wall Street uses neuroscience technology to sow doubts about retirement security, do-it-yourself investing, how indexing beats trading, then overloads us with misleading ads.

  6. High-frequency trading, misleading Wall Street and Main Street

    Short-term online trading makes Wall Street billions annually. Hyperactive traders have a competitive edge using high-tech neuroscientific strategies, plus keep markets churning.

  7. Brokers trained on aggressive selling and closing techniques

    Securities are sold not bought: Broker’s advice is self-serving, often misleading, anything to get a commission. They’re trained to use high-powered psychological techniques.

  8. ‘Investor education’ programs are self-serving sales gimmicks

    Most Wall Street-sponsored “investor education” programs are loaded with new business, sales and promotional gimmicks. But they help Wall Street present a “we care” persona.

  9. New ‘designer’ funds based on latest fads to replace losers

    Fund companies constantly design new funds based on the latest fads, for anxious investors chasing higher returns, driven like teenagers who need the latest video games.

  10. Retirement gatekeepers: kept in the dark and manipulated

    Two-thirds of all funds are controlled by corporate pension and retirement managers. So Wall Street focuses sales pitches on easy to manipulate naïve plan managers.

John Mauldin has a nice analogy, which goes a long way. Wonder if he picked up on Hawking’s recent statement that black holes don’t exist.

The Economic Singularity (Mauldin)

We think the analogy of an Economic Singularity is a good one. The Black Hole of Debt simply overwhelms the ability of current economic theories to craft solutions based on past performance. Each country will have to find its own unique way to achieve escape velocity from its own particular black hole. That can be through a combination of reducing the debt (the size of the black hole) and growth.

Even countries that do not have such a problem will have to deal with the black holes in their vicinity. As an example, Finland is part of the eurozone and finds itself gravitationally affected by the black holes of debt created by its fellow eurozone members. And China has recently seen its exports to Europe drop by almost 12%. I would imagine that has been more or less the experience of most countries that export to Europe.

In science fiction novels, a spaceship’s straying too close to a black hole typically results in no spaceship. There are also hundreds of examples of what happens to nations that drift too close to the Black Hole of Debt. None of the instances are pretty; they all end in tears. For countries that have been trapped in the gravity well of debt, there is only the pain that comes with restructuring. It is all too sad.

The usual response by central banks when confronted with a debt crisis is to provide liquidity and create more money. But as we’ll discover in the next section, not all money is created equal; and central banks don’t really control the broad money supply at all.

EU leaders trying to score cheap points at home. They all want the same: to gather as much info as they possibly can on as many people as they can. It’s and essential part of the modern power game, and presidents and chancellors can’t afford not to play that game.

Merkel, Hollande to discuss European communication network avoiding U.S. (Reuters)

German Chancellor Angela Merkel said on Saturday she would talk to French President Francois Hollande about building up a European communication network to avoid emails and other data passing through the United States. Merkel, who visits France on Wednesday, has been pushing for greater data protection in Europe following reports last year about mass surveillance in Germany and elsewhere by the U.S. National Security Agency. Even Merkel’s cell phone was reportedly monitored by American spies.

Merkel said in her weekly podcast that she disapproved of companies such as Google and Facebook basing their operations in countries with low levels of data protection while being active in countries such as Germany with high data protection. “We’ll talk with France about how we can maintain a high level of data protection,” Merkel said. “Above all, we’ll talk about European providers that offer security for our citizens, so that one shouldn’t have to send emails and other information across the Atlantic. Rather, one could build up a communication network inside Europe.”

Obama restates what we’ve know for a long time: there will bo no serious attempts to stop or slow climate change. Too expensive. It’s how the sh*t that floats to the top of our societies think. A symbolic hand-out for the first victims, and that’ll be it.

Obama: U.S. must rethink water as climate changes (AP)

Warning that weather-related disasters will only get worse, President Obama said Friday that the United States must rethink the way it uses water as he announced new federal aid to help drought-stricken California.

Obama drew a clear connection between California’s troubles and climate change as he toured part of a farm that will go unsown this year as the state faces its worst drought in more than 100 years. Even if the U.S. takes action now to curb pollution, the planet will keep getting warmer “for a long time to come” thanks to greenhouse gases that have already built up, Obama said. “We’re going to have to stop looking at these disasters as something to wait for. We’re going to have to start looking at these disasters as something to prepare for,” Obama said.

After arriving in California on Friday afternoon, Obama met with community leaders at a rural water facility before announcing more than $160 million in federal financial aid, including $100 million in the farm bill he signed into law this month for programs that cover the loss of livestock. The overall package includes smaller amounts to aid in the most extreme drought areas and to help food banks that serve families affected by the water shortage. Obama also called on federal facilities in California to limit water consumption immediately.

“These actions will help, but they’re just the first step,” he said. “We have to be clear. A changing climate means that weather-related disasters like droughts, wildfires, storms, floods, are potentially going to be costlier and they’re going to be harsher.”

But the effects of climate change won’t stop coming at us with increasing regularity. It’s just that what Obama effectively says is we’re on our own.

Drought Threatens to Cripple California Agriculture Industry

A withering drought that has turned California rivers and reservoirs to dust now threatens to devastate the agriculture business in the country’s top farming state. President Barack Obama on Friday pledged millions of dollars in federal assistance to the state during a visit to Fresno, the biggest city in the state’s once-lush San Joaquin Valley.

“The truth of the matter is that this is going to be a very challenging situation this year, and frankly, the trend lines are such where it’s going to be a challenging situation for some time to come,” Obama said Friday during a meeting with local leaders in Firebaugh, Calif., a rural enclave not far from Fresno. Obama promised to make $100 million in livestock-disaster aid available within 60 days to help the state rebound from what the White House’s top science and technology adviser has called the worst dry spell in 500 years.

The historic drought — which Gov. Jerry Brown has called an “unprecedented” emergency — has imperiled the region’s $44.7 billion agriculture business. It could cost the state $2.8 billion in job income and $11 billion in annual state revenue, according to data from the California Farm Water Coalition, an industry advocacy group.

In the state’s Central Valley — where nearly 40 percent of all jobs are tied to agriculture production and related processing — the pain has already trickled down. Businesses across a wide swath of the region have shuttered, casting countless workers adrift in a downturn that calls to mind the Dust Bowl of the 1930s.

A drowning country needs to worry about water shortages. What a perfect example of what our “Money first, talk later” attitude leads to.

Water shortages could disrupt Britain’s electricity supply (Guardian)

Parts of Britain may be under water after the worst floods in half a century, but a team of top academics from Newcastle and Oxford University is warning that the country is at risk of water shortages that could shut down power stations and paralyse electricity supplies. “It is difficult to fathom we should start to think about water shortages in the middle of these storms but only two years ago areas of Britain were suffering from severe droughts,” said Ed Byers, a researcher at Newcastle University’s engineering and geosciences department.

“The high dependency on water in electricity generation means there is a real possibility that in just a few decades some power stations may be forced to decrease production or shut down if there are water shortages, which may be expected with changes in climate and a growing population.”

Byers, with another Newcastle colleague and Professor Jim Hall, director of the Environmental Change Institute at Oxford University, has been studying the impact on water of the government’s proposed different energy “pathways” taken from the 2011 Carbon Plan. Their new academic paper makes clear that one Department of Energy and Climate Change option – of using gas or other fossil fuels with high levels of carbon capture and storage (CCS) – could increase fresh water consumption by almost 70%.

Another option – using high levels of nuclear power – could lead to increases in the use of tidal and coastal water by almost 400%. Although sea water is clearly in much greater supply than fresh water from rivers, the increase in use could bring with it much more impact on the environment because of potentially harmful emissions.

Using wind power, in contrast, could save water. The academics conclude that a high level of wind or other renewable power technology, with a consequent reduction of other more water-intensive power systems, could result in fresh water consumption falling in the electricity sector by about 60%. The academics have not looked at the impact of fracking – which uses huge amounts of water – but they say it would only increase pressure on water supplies even more.

Lots of discussion about the effect of this winter cold spells on the US economy, and they’re not all that large when you get a better look, but yeah, cold can be expensive. If you want to keep warm.

Winter’s Not Just Cold and Snowy. It’s Expensive. (NY Times)

It is not yet clear how much of the poor showing in recent data is the result of bad weather, and how much the bad weather may simply be masking softer demand. On the one hand, said Ian Shepherdson of Pantheon Economics, weather “affects pretty much everyone all the way up the supply chain.” On the other hand, he said, “It’s completely impossible to disentangle weather effects from everything else.”

The effects can be tricky to nail down. In one analysis, economists at Capital Economics, a research firm, noted that through a series of complex chain reactions, a heavy blanket of snow might drive gold prices up and wheat prices down.

Speaking to Congress earlier this week, Janet L. Yellen, chairwoman of the Federal Reserve, said that weather might have been a factor in the weak jobs reports in December and January, but warned the public not to jump to conclusions. In a report this week, retail sales made a poor showing as well, decreasing 0.4 percent last month from December, and spending in December was revised downward to make the 2013 holiday shopping season the weakest since 2009. Manufacturing also declined in January, despite a large jump in output from utilities because of the cold, with many economists concluding that the weather was not causing the retreat but making it look worse.

Mr. Shepherdson ticked off indications that some of the growth in the latter half of last year would not be sustainable: Manufacturing output was fed by a buildup in inventory, not demand, and increased spending by consumers was fed by a decline in the savings rate. The construction industry, which is particularly sensitive to weather, added jobs in January, which some economists said was evidence that the weather was not the problem. Jed Kolko, the chief economist for Trulia, agreed. “There are plenty of other factors that have held back sales in recent months,” including low inventory and pullback by investors, he said.

How can we not admire the crazy ants? They don’t worry about debt or heat, they just work and conquer.

The Rise of the Crazy Ants (Hoops Daily)

The English had the longbow. The Spanish had steel. Tawny crazy ants have their own formidable weapon—a protective acid sheath—that protects them against fire ant enemies. The revelation comes from a new study published this week.

Named for their butterscotch color and erratic movements, tawny crazy ants are the newest insect invaders sprawling throughout Texas and the Gulf states, unseating the reigning imported fire ants that have infested the region. Teeming out of electrical outlets and short-circuiting electronics, the tiny reddish-brown crazy ants have been making headlines as their numbers climb in the southeastern U.S. In some locales they can be so tightly packed together they are initially mistaken for dirt. Then they move.

As their population swells, the ants, formally known as Nylanderia fulva (but also sometimes called Rasberry crazy ants in honor of the Texas exterminator that discovered them), are harming the environment—not to mention people’s homes and electronics. Now we have a new clue as to why they are able to prevail over the previously dominant fire ants: Crazy ants produce chemicals they then rub on themselves as an antidote to fire ant venom. And the acidic substance exuded from where a stinger would be located on other ant species also doubles as a chemical weapon they spray at foes, allowing the crazy ants to defeat competitors that would otherwise help keep them in check.

The discovery stemmed from some initial observations of odd, and sometimes disturbing, ant behavior. Since these ants, native to northern Argentina and southern Brazil, first started showing up in Texas in 2002 it has been unclear why they were able to flourish. But it is undeniable that they do. When fire ants and crazy ants show up in roughly equal numbers and go for the same tasty cricket treat, new work reveals that the crazy ants typically win some 93 percent of the time. Moreover, many crazy ant colonies have been spotted inside fire ant mounds that still are home to some of their previous tenants, raising the alarm among bug experts that crazy ants can apparently snatch active nests from their cousins with ease.

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

Home Forums Debt Rattle Feb 17 2014: A Racing Certainty

This topic contains 3 replies, has 4 voices, and was last updated by  Andrewp111 5 years, 6 months ago.

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  • #11378

    Harris & Ewing “Snow after blizzard, Washington, DC” January 1922 The Chinese government may have wanted to tighten lending and shrink shadow banking,
    [See the full post at: Debt Rattle Feb 17 2014: A Racing Certainty]

    #11380

    Raleigh
    Participant

    Very interesting, Ilargi. Here’s a good article entitled “The Ocean’s Death March”.

    “The use of fossil fuel, in large measure, is the primary pathway behind this impending extinction event. Excessive quantities of CO2, of which the ocean absorbs 30% of CO2 emitted into the atmosphere, are changing the ocean’s chemistry, called acidification, which eventually has the potential to kill most, but not all, ocean life forms. […]

    Most, if not all, of the five global mass extinctions in Earth’s history carry the fingerprints of the main symptoms of… global warming, ocean acidification and anoxia or lack of oxygen. It is these three factors — the ‘deadly trio’ — which are present in the ocean today.”

    The Ocean’s Death March

    #11382

    rapier
    Participant

    Why do the Chinese loans have to be repaid? Why do any loans have to be repaid? I’m serious. Why?

    So the banks won’t be bankrupt? Well if the books don’t balance but nobody cares then they aren’t bankrupt are they?

    There is an entire monetary ‘school’ now called Modern Monetary Theory which totally and completely ignores that loans are assets. Well that’s my reading anyway. Just lend, borrow and spend, and there will be growth, end of story. When Mark to Market accounting was suspended by the congress for the banks so they did not have to deflate the assets on their balance sheets the principal was put into action. A perfect fait accompli. Well ordinary citizens still have to pay off their loans but beyond that the powers that be can pick and choose what has to be repaid and who has to repay and what and who doesn’t.

    The Chinese, the ones not worrying about the bubble anyway, must be laughing their heads off at the US and its drive to lower the deficit and thus shrink credit growth. I’d figure 75% of that 15%/yr credit growth there is government borrowing. Mostly via local consuls building whole cities and all the rest. If the banks books don’t balance here and it makes little difference that should go triple for China. I mean really, whose to say what the numbers are?

    Again, this is all only half tongue in cheek. I am at a loss to think how it could end if nobody says it has to end. That the loans have to be written down. The banks bankrupted. Maybe Mother Nature will be the only brake.

    #11543

    Andrewp111
    Participant

    Response to rapier. You are right about the effect of Mark To Market repeal. Do loans have to be repaid if no one cares? Of course not, but there are 2 natural constraints. A bank is insolvent when it can’t make a payment on debt it owes, and is forced to default. This is what happened to Lehman. If a bank is backed by the Government, it never has to default. Then the ultimate constraint is resources – especially energy. I expect the China bubble to end when oil prices shoot the moon again. It could be a long time before that happens.

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