Mar 182014
 March 18, 2014  Posted by at 5:20 pm Finance

Theodor Horydczak Snow Globe 1935

Alright, alright, let’s do a little timeline again first. It’s common knowledge by now that Khrushchev gave the Crimea to Ukraine in 1954. But nobody really cared that much, they just figured it happened because Khrushchev was himself Ukrainian and drunk at the time he did it. It never seemed to matter one way or the other because Ukraine was part of the Soviet Union anyway. As can be seen in this great little video of how European borders have shifted through the past 1000 years.

It wasn’t until 1991 that Crimea became part of a de facto foreign nation (something Khrushchev would never have allowed), as the just as drunk western stooge Boris Yeltsin let Ukraine split from what was then called the CIS, and take Crimea with it. In case you’re old enough to remember the footage of the heroic Yeltsin standing on top of a tank in front of the parliament building, bravely liberating his people, you’re going to have to re-assess that memory.

Today, the western objective of separating Russia from its Black Sea port for good is gone for good. And it’s fittingly ironic that Michael Gorbachev, the man stooge Yeltsin needed to oust, now calls the Crimean desire to join Russia a correction of a Soviet-era mistake.

So do you think western politicians have yelled and screamed themselves into such a stupidly tight corner that they’re going to go all-out on Putin now? Joe Biden calls it land grabbing. The headlines say “Putin annexes Crimea”. Well, guys, not from the point of view of the Crimeans who voted over the weekend to join Russia. That’s not how you usually define either land grabbing or annexation. You tried to install a stooge in Kiev, and you fumbled well before the endzone.

And we get it: you don’t want to lose face. But what are you willing to sacrifice for that? And what does it matter anyway? European stocks are up and Wall Street opens higher, and isn’t that what you guys are all about in the end? Or is the catch perhaps exactly there? In the fact that markets don’t care what you say or what sanctions you come with? Or are you even simply just busy overshouting your own domestic problems? Like this maybe:

Bloomberg’s Evan Soltas addresses the issue of lost US productivity growth in Is This the Best the Economy Can Do? , and concludes that it’s lost forever, because any excess capacity has simply vanished. Bad news for America if he’s only half way right.

Also on Bloomberg, Megan McArdle writes in The Coming Real Estate Bubble :

I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?

What are we to think indeed? Well, that we are blowing bubbles like we never have before, that’s what.

The entire western world, plus Japan plus China, is participating in unparalleled bubble blowing, but perhaps no country as much as the UK. The Cameron government never tires of pointing out how great the economy is doing, spurred along by “neutral” OECD numbers saying the UK grows faster than any other nation, but when you get to look at details, the picture changes.

The Guardian says UK Living Standards Have Fallen Across The Board Since 2010 . That should be clear enough: there is no recovery in Britain, at best there’s one “just around the corner”. But don’t bet on that either. The most galling possible action of a government that claims large scale recovery is to throw even more taxpayer money at a housing market that’s already been thrown into overdrive with taxpayer money. While even the Bank of England has issued the warning that UK housing is in a bubble, Cameron et al announce an extension of Help to Buy until 2020, with a potential cost of $10 billion or more.

The net effect is even less affordable homes, homebuilders’ shares up 81% in a year, and people being forced to plunge ever deeper into debt just to be able to live somewhere. And while in general I’m all for rewarding stupidity in kind, for a government to lure its citizens into the poorhouse is immoral. Cameron is much more concerned with Londongrad Russian billions from luxury home sales and City IPO deals being lost to sanctions than he is with the welfare of his own people, and the British people will pay dearly for this lack of a conscience. There won’t be many places in the world where the future looks bright, but Britain is going to scrape the gutter.

Meanwhile, even the BoE admits that Britain’s Banks Will Carry On Being ‘Too Big To Fail’ (Telegraph) . Maybe we should look forward to having one of them fail, and being bailed out with taxpayer funds. Maybe that’s the only way people will see the deep dark forest for the crippled trees.

One thing the BoE – inadvertently – does right is provide the fodder for our good friend and economics professor Steve Keen to take down Paul Krugman by another foot or so (yeah, that makes him awfully small by now). Even if it’s a theoretical more than a practical thing, The BoE’s Sharp Shock To Monetary Illusions is quite funny, certainly if you know how deep Krugman’s foot is already in his mouth. I’ll leave you with Steve:

Economic textbooks teach students that money creation is a two-stage process. At the start, banks can’t lend because of a rule called the “Required Reserve Ratio” that specifies a ratio between their deposits and their reserves. If they’re required to hold 10 cents in reserves to back every dollar in deposits, then if deposits are $10 trillion and reserves are $1 trillion, the banking sector can’t lend any money to anyone.

Stage one in the textbook money creation model is that the Fed (or the Bank of England) gives the banks additional reserves — say $100 billion worth. Then in stage two, the banks lend this to their customers, who then deposit it right back into banks, who hang on to 10 per cent of it ($10 billion) and lend the remaining $90 billion out again. This process iterates until an additional $1 trillion of deposits are created, so that the reserve ratio is restored ($1.1 trillion in reserves, $11 trillion in deposits).

That model goes by the name of “Fractional Reserve Banking” (aka the “Money Multiplier”), and depending on your political persuasion it’s either outright fraud (If you’re of an Austrian persuasion like my mate Mish Shedlock) or just the way things are if you’re a mainstream economist like Paul Krugman. In the latter case, it lets conventional economists build models of the economy that completely ignore the existence of banks, and private debt, and in which the money supply is completely controlled by the Fed.

In this new paper, the Bank of England states emphatically that “Fractional Reserve Banking” is neither fraud, nor the way things are, but a myth — and it rightly blames economic textbooks for perpetuating it. The paper doesn’t beat about the bush when it comes to the divergence between reality and what economic textbooks spout. In fact, as the paper explains it:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. (p. 1)

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits… (p. 1)

•Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks… (p. 2)

•While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality… (p. 2)

•As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. (p. 2)

Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.

Is This the Best the American Economy Can Do? (Bloomberg)

The belief that U.S. economic output is less than it could be — an idea that’s driven post-recession policy at the Federal Reserve — is increasingly challenged by the data, as I described in my last post. That suggests a drop in the country’s productive capacity, which leads to an even more vexing question: What’s behind that drop? And how should the Fed respond?

It’s not hard to see why economists’ instinct is to view our current low growth as an anomaly. The U.S. economy has long been a predictable growth machine. For decades, you could count on it growing about 3% a year after accounting for inflation.

Federal Reserve Bank of St. Louis

And then the recession happened. The U.S. has grown an average of just 1.6% a year over the last decade. Whether the U.S. can recapture the growth it has lost depends on what slowed growth in the first place.

If slow growth has left the U.S. economy with lots of excess capacity — slack, in other words — we could still hope to make up for that lost growth. But there’s another possibility: that slack might not exist. Maybe we’re running near full speed but don’t know it.

What would explain the slowdown in growth, if the culprit isn’t some version of unused capacity? It’s not as if the entire U.S. woke up one morning in 2008 and decided, “I’m going to be less productive today and every day going forward.”

The best explanation might come from thinking closely about the U.S. housing market. Amid the bubble in home prices, homebuilders glutted the nation with new homes, which sat vacant when the bubble popped.

That slack capacity was expected to hold down home prices, but when the recovery arrived, little slack turned out to exist. With few homes built in the recession, there were few to sell when the recession ended. Extraordinarily slow construction had drained the slack away.

If slack doesn’t exist in the rest of the U.S. economy, it could be for a similar reason. Investments to expand capacity don’t happen when the capacity that already exists isn’t being used. And it’s not as if one can clap those investments instantly into existence once the slack goes away — the time required to invest has already been forfeited. This lack of investment during the recession probably reduced the country’s economic potential and, with it, the amount of slack it has left.

What’s the evidence that U.S. capacity hasn’t grown much since 2007? To start with, productivity growth is crawlingly slow — averaging just 1% over the last few years. That’s a far cry from the late 1990s, when it ran at 3%. That underperformance was enough to garner attention in Ben Bernanke’s farewell speech as chairman of the Federal Reserve:

The reasons for weak productivity growth are not entirely clear. It may be a result of the severity of the financial crisis, for example, if tight credit conditions have inhibited innovation, productivity-improving investments, and the formation of new firms; or it may simply reflect slow growth in sales, which have led firms to use capital and labor less intensively, or even mismeasurement.

Estimates of industrial capacity from the Fed’s Board of Governors show just as little progress during the recession. The result: Factories are reporting they are near full capacity even though production has just recovered to prerecession levels.

Economic theorists wouldn’t be surprised by the possibility that the recession sapped the American economy’s potential. In fact, many warned us about it. A much-discussed paper from J. Bradford DeLong and Lawrence Summers, for instance, argued that an economy’s potential output falls when that potential goes unused for an extended period of time. Their estimates of how quickly that process happens would imply that half the slack that appeared during the recession has since decayed.

If this is really what has happened, the policy prescription is clear: less monetary easing. Trying to repair lost potential is something monetary policy simply can’t do.

Yet the central challenge of the Fed’s exit strategy is that these are risks, not certainties.

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The Coming American Real Estate Bubble (Bloomberg)

Three and a half years ago, my newly married household acquired an actual house, a 1,750-square-foot slice of paradise in Washington’s Eckington neighborhood. In real estate euphemism, the house is what’s known as “lightly renovated,” the neighborhood “transitional.” “Lightly renovated” meant that some stuff had been done, most of it badly, but the HVAC dated from the Paleozoic, and the yard . . . um, better not to speak of the yard, unless you’re a Hollywood location scout looking for somewhere for your heroin-addict protagonist to bottom out.

“Transitional” meant . . . oh, you can figure it out. We had gone north of H Street and east of North Capitol to the unfashionable precincts of the city’s Northeast quadrant. The most common response, when we told people where we lived, was “Where the hell is Eckington?” The second-most-common response was, “Wow [rapid eye-blinking]. I could never live there. It’s too far from everything.”

Now some of the same people who politely suggested we were crazy for buying so far east are lamenting that they can’t afford to buy in our neighborhood. Lest you think this is schadenfreude, let me point out that some of these people are friends I very much want to live near me; I would even give up a little of my real estate price appreciation to make that happen.

The point is, something insane has happened to Washington real estate prices in those intervening years. There’s a feeding frenzy over single-family homes in neighborhoods that are barely within walking distance of a metro. This cri-de-coeur was recently posted on a local real estate blog:

My husband and I are in the process of purchasing our first home. Our realtor has put a focus on the Edgewood and Brookland neighborhoods since it previously looked like you can still get a house for a reasonable price. However we have been baffled by these two recent purchases.

Are we really looking at spending nearly $600,000 for an up and coming neighborhood? Have we missed some big announcement for something coming to the area? Are we ever going to find something in our price range of under $500,000 if we want to stay in the District? We are becoming discouraged.

Brookland and Edgewood are two neighborhoods even deeper into Northeast than ours.

These seekers are not alone; I’ve heard this from a lot of people who want to buy a house. The bidding wars, which were common enough when we were looking, are now frantic: People are waiving inspections and practically any other contingency the bank will let them get away with, and also paying 20% to 50% above the asking price. I feel like I’ve seen this somewhere before . . .

Of course, I can name reasons that prices should have zoomed up in 2012 and 2013. Washington’s job market is far more insulated from economic vicissitudes than the rest of the nation — indeed, the extra government spending creates jobs here (though not as many as you might think). So it’s not necessarily surprising that more affluent professionals are trying to get their hands on the one thing Washington isn’t making any more of: single-family homes.

But that doesn’t really explain why the same buying frenzy is happening in San Francisco.

OK, tech billionaires. But what about New York, where you also hear the same stories about Brooklyn neighborhoods? Finance may not have suffered as much as you wanted, but the Masters of the Universe have not become richer, or more numerous, since 2008.

Of course, there’s a nationwide housing recovery. But what you see, when you look at the S&P/Case-Shiller index, is that that recovery is uneven, even in urban areas:

For urban residents, S&P/Case-Shiller dramatically understates things, because it covers the whole metro area. If you look at Trulia’s estimates of price per square foot, you see things much more clearly: San Francisco, New York, Washington and Boston now have prices above their 2008 levels. San Diego, Seattle, Los Angeles and Chicago don’t. Which is why occupants of the former cities are spending so much time complaining about the crazy cost of real estate.

Now, I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?

I can tell a story about these cities in which they’re somehow special and the money will just keep rolling in. But I can also tell a story in which people are paying more than they should for houses in my neighborhood on the assumption that today’s $750,000 house will be tomorrow’s $1.5 million retirement fund, even though incomes in DC can’t really support an entire city’s worth of seven-figure homes. I might even tell a story where today’s ultra-low interest rates give several cities full of smart upper-middle-class professionals a badly contagious case of money illusion.

Which of these stories is correct? I’m not sure I know, and indeed, the answer may be different for different cities. But there are two things I do know: I’m very glad we bought our house in 2010. And I’m not going to count on any of our newfound equity until I see what happens when the Federal Reserve really begins to tighten up the money supply.

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UK Living Standards Have Fallen Across The Board Since 2010 (Guardian)

Households at every income level have seen their living standards fall since the last election, according to independent figures that put pressure on George Osborne to translate economic growth into higher incomes. According to data from the Institute for Fiscal Studies, households at the top and bottom of the income scale are worst affected, but middle-income earners who pay the 40p tax rate suffer most when their wages increase. As the chancellor puts the finishing touches to his Budget, the findings will add to the clamour from Tory backbenchers for a rise in the 40p threshold to exclude more middle-income families who are dragged into the higher rate tax band as their salaries rise.

New figures from the IFS’s “green budget”, a scene-setter for the chancellor’s statement, reveal that stagnant wages, rising shop prices and austerity measures have hit the real incomes of all workers across the pay spectrum, supporting Labour’s claims that all workers are worse off since 2010. The detailed analysis contrasts with a study by Treasury officials, published on Tuesday, that found a majority of workers saw a boost to their real incomes in all but one of the last seven years.

The Treasury said full-time workers in steady employment had enjoyed rising wages after taking inflation into account since 2006, with the exception of 2011. A spokesman said it wanted to dispel concerns that the slow growth in average weekly earnings was “evidence that people aren’t benefiting from improvements in the labour market”. He said: “Relatively strong performance in employment naturally has implications for movements in average wages.

Strong employment growth can result in a compositional change in the labour market, in part reflected through new entrants to employment. This will have an effect on average wage growth. “To examine this we need to look at wage growth after removing the influence of the changes in composition of the labour market.”

However, the study excluded almost half the workforce, many of them in key groups that have suffered wage cuts. More than 10 million people who moved jobs or entered the jobs market were not counted alongside the 3.7 million self-employed people. The estimated one million people on zero hour contracts were also excluded, along with any tax and benefit changes. Labour said the Treasury was “desperately trying to tell people facing a cost-of-living crisis they’ve never had it so good”.

It added: “In fact the latest figures show that under David Cameron real wages have fallen by over £1,600 a year. And IFS figures show families are on average £891 worse off this year due to tax and benefit changes since 2010. This analysis is totally out of touch with the real world. It ignores the one-third of full-time workers who have not stayed in continuous employment and the 27% who work parttime.”

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UK Help To Buy Scheme Extended to 2020, Housebuilders’ Shares Up 81% In One Year (Guardian)

An extension in taxpayer support for the property sector through the Help to Buy scheme prompted big jumps in the shares of Britain’s biggest housebuilding firms – which in some cases have doubled since the start of last year. The four biggest listed companies have increased in market value by 81%, or £7.2bn, over the period, during which the government introduced the Help to Buy scheme.

Monday’s fresh rises came after a weekend announcement by the chancellor, George Osborne, that the equity loan part of the initiative – which had been due to end in 2016 – would be extended until the end of the decade. It will mean another £6bn invested to help an estimated 120,000 more households purchase a newly built home.

Shares in the FTSE 100-listed builder Persimmon climbed nearly 4% as traders digested the implications of Osborne’s announcement. Persimmon’s value has already surged by about £2bn, or more than 75%, to £4.3bn, since the start of 2013. Barratt, listed on the FTSE 250 Index, rose 3%. Its market capitalisation has doubled since the start of last year, to nearly £4.2bn. Taylor Wimpey climbed 2%. Its value has risen by more than 80%, or £1.8bn, over the same period, to £3.9bn. Bovis Homes were up at 895p, from 667p a year ago, a 67% increase, taking its market value to £1.2bn.

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Londongrad Dealmakers Threatened by Sanctions (Bloomberg)

Russian companies have made $180 billion in deals globally in the past two years, providing steady profits to London bankers, lawyers, and image crafters as the city has become a hub for such transactions. Sanctions planned by the U.S. and European Union threaten that business. The potential fallout highlights the web of connections linking Russia to the global financial system. Since many large Russian companies are controlled by the state or by billionaires with close ties to President Vladimir Putin, even narrowly targeted sanctions could hurt their global operations.

A reminder of the stakes emerged on March 16, when L1 Energy, a London-based investment vehicle backed by Russian billionaire Mikhail Fridman, agreed to buy Dea, the oil and gas unit of Germany’s RWE AG (RWE), for $7.1 billion — the biggest Russia-related deal this year. “There’s a huge amount of business, both industrial and financial, in both directions between the West and Russia,” said Dominic Sanders, a partner in Moscow at law firm Linklaters. “The further the sanctions and retaliation go, the greater the pain.”

While wealthy Russians have fanned out across Europe, with businesses incorporated in Luxembourg and Cyprus and homes in Switzerland and the south of France, their impact has been most keenly felt in the British capital. Advisory professionals in the city, dubbed “Londongrad” in a 2010 book by journalists Mark Hollingsworth and Stuart Lansley, have been instrumental in Russian deals.

Merger and acquisition activity involving Russian companies has totaled about $181 billion in the last two years, according to data compiled by Bloomberg. The largest transactions have been in energy, led by the $55 billion reorganization of oil venture TNK-BP in 2012, followed by this week’s Dea sale. RWE accelerated the sale to Fridman because of concerns about pending sanctions, according to a person familiar with the matter. The German utility spoke to the government in Berlin before reaching a deal to ensure that the sale would not be blocked, the person said.

Initial public offerings by Russian companies such as mobile operator OAO MegaFon and fertilizer producer OAO Phosagro have accounted for about 13% of the $63 billion raised in London in the last five years. The instability spawned by the Ukraine crisis is beginning to dent that. Billionaire Vladimir Evtushenkov’s children-goods retailer Detsky Mir Group is postponing a planned London share sale because of tensions over Crimea, according to people familiar with the matter.

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Britain’s Banks Will Carry On Being ‘Too Big To Fail’ (Telegraph)

If the financial crisis had a catchphrase, it was “too big to fail” (TBTF). The four words summed up everything that had gone wrong in global finance and set out the challenge to regulators as they looked to construct a safer system. This September will mark the sixth anniversary of the collapse of Lehman Brothers, the original TBTF event that highlighted to the world exactly what the failure of a major financial institution would entail.

Since Lehman’s bankruptcy, reforms have been enacted aimed at making big banks safer and yet, for all the considerable work expended, officials remain worried that the failure of one of these global behemoths could still jeopardise the entire financial system.

Sir Jon Cunliffe, deputy governor of the Bank of England and the man responsible for ensuring the financial stability of Britain, admitted on Monday he had no confidence a “global giant” could fail safely and described TBTF as “perhaps the most important regulatory priority”. His comments reflect the privately-held fears of Bank of England officials who remain concerned that no major financial institution has yet been able to produce a resolution plan for their failure that meets their standards.

This is not surprising, discomfiting as it may be. The immediate aftermath of the Lehman Brothers failure provided a rare moment of international consensus on the need to agree common standards on everything from capital buffers to oversight that might help solve TBTF. For all the optimism of the early talks, of which Sir Jon was a participant in his then role as a senior Treasury official, the end of TBTF looks as far away today as it did then.

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My main man Stevie in fine form, taking down Krugman once again, and this time supported by the Bank of England. Please read the entire piece at the link.

The BoE’s Sharp Shock To Monetary Illusions (Steve Keen)


Leading economists can’t just ignore this paper, or blithely dismiss it as the foot-soldiers of the profession will do. But I seriously doubt that they will let it challenge their current position.

I will in particular be curious to see whether Paul Krugman notes this paper, and how he reacts to it. Krugman has been the most visible and aggressive defender of the proposition that banks don’t matter, with this including throwing a haymaker at me for making the case that the Bank of England is now making.

“In particular, he [Keen] asserts that putting banks in the story is essential,” Krugman wrote in 2012. “Now, I'm all for including the banking sector in stories where it's relevant; but why is it so crucial to a story about debt and leverage?

“Keen says that it's because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can't increase unless the money supply rises, but that's only true if the velocity of money is fixed; so have we suddenly become strict monetarists while I wasn't looking? In the kind of model Gauti and I use, lending very much can and does increase aggregate demand, so what is the problem?”

Since then Krugman has continued to press the belief that banks are “mere intermediaries” in lending, that they can be ignored in macroeconomics.

“Yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there,” he said in the article Commercial Banks As Creators of “Money”.

And in the same piece he wrote: “Banks are just another kind of financial intermediary, and the size of the banking sector — and hence the quantity of outside money — is determined by the same kinds of considerations that determine the size of, say, the mutual fund industry.”

Now that he has been directly contradicted on these points, not by some Antipodean heterodox economist, but by Threadneedle Street itself, I expect Krugman’s riposte will be the KISS principle: that while the “loans create deposits” argument is technically true, it doesn’t make any real difference to macroeconomics.

After all, Krugman certainly can’t just dismiss the Bank of England as being staffed by “Banking Mystics”, as he has brushed off the contrary views of others.

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It’s like f**king Dante’s Promised Land.

Britain’s 5 Richest Families Worth More Than Poorest 20% Of Population (Guardian)

The scale of Britain’s growing inequality is revealed today by a report from a leading charity showing that the country’s five richest families now own more wealth than the poorest 20% of the population. Oxfam urged the chancellor George Osborne to use Wednesday’s budget to make a fresh assault on tax avoidance and introduce a living wage in a report highlighting how a handful of the super-rich, headed by the Duke of Westminster, have more money and financial assets than 12.6 million Britons put together.

The development charity, which has opened UK programmes to tackle poverty, said the government should explore the possibility of a wealth tax after revealing how income gains and the benefits of rising asset prices had disproportionately helped those at the top. Although Labour is seeking to make living standards central to the political debate in the run-up to next year’s general election, Osborne is determined not to abandon the deficit-reduction strategy that has been in place since 2010. But he is likely to announce a fresh crackdown on tax avoidance and measures aimed at overseas owners of high-value London property in order to pay for modest tax cuts for working families.

The early stages of the UK’s most severe post-war recession saw a fall in inequality as the least well-off were shielded by tax credits and benefits. But the trend has been reversed in recent years as a result of falling real wages, the rising cost of food and fuel, and by the exclusion of most poor families from home and share ownership.

In a report, a Tale of Two Britains, Oxfam said the poorest 20% in the UK had wealth totalling £28.1bn – an average of £2,230 each. The latest rich list from Forbes magazine showed that the five top UK entries – the family of the Duke of Westminster, David and Simon Reuben, the Hinduja brothers, the Cadogan family, and Sports Direct retail boss Mike Ashley – between them had property, savings and other assets worth £28.2bn.

The most affluent family in Britain, headed by Major General Gerald Grosvenor, owns 77 hectares (190 acres) of prime real estate in Belgravia, London, and has been a beneficiary of the foreign money flooding in to the capital’s soaring property market in recent years. Oxfam said Grosvenor and his family had more wealth (£7.9bn) than the poorest 10% of the UK population (£7.8bn).

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1,000 Years of European Border Shifts (LiveLeak)

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Central bank says Russia will not impose capital controls (Reuters)

Russia will not impose capital controls, the central bank said on Tuesday, easing concerns that restrictions could be introduced to stem capital flight that has accelerated since the Ukrainian region of Crimea was seized by Russian forces. President Vladimir Putin’s assertions of Russia’s rights to intervene in Ukraine and make Crimea part of Russia are expected to cause net capital outflows in the first quarter to $50-$70 billion, compared with $63 billion in the whole of last year.

Limiting money flows, once considered a damaging constraint on open markets, has been more accepted in the aftermath of the 2008-2009 financial crisis as a tool sometimes needed to manage financial stability. But the Russian central bank said its current monetary policy is strong enough to provide financial stability and the issue of capital controls is not on the table. “The Bank of Russia is not considering at this time the possibility of introducing measures that would restrict the movement of the capital,” the bank told Reuters in an emailed statement.

“Actions taken by the Bank of Russia in the framework of exchange rate policy help contain excessive exchange rate fluctuations, and as such prevent the emergence of risks to financial stability.” The central bank, which has been gradually allowing the ruble to float more freely, had to halt the process earlier this month and start defending the currency, which has lost more than a tenth of its value this year.Introducing restrictions on money flows would reduce Russians’ demand for foreign currency, but it would also raise borrowing costs for the state and corporations alike.

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Gorbachev: Crimea Referendum Corrected Soviet-Era Mistake (RT)

The people of Crimea fixed a Soviet-era mistake with the Sunday’s referendum and the will of the people should not be punished by sanctions, said former Soviet leader Mikhail Gorbachev. “Earlier Crimea was merged with Ukraine under Soviet laws, to be more exact by the [Communist] party’s laws, without asking the people, and now the people have decided to correct that mistake. This should be welcomed instead of declaring sanctions,” he told Interfax on Monday.

Gorbachev praised the referendum, stating that it “reflects the aspirations of Crimea’s residents.” He criticized the use of sanctions against Russia in retaliation to the referendum. “To declare sanctions you need very serious reasons. And they must be upheld by the UN,” Gorbachev added. “The will of the people of the Crimea and the Crimea’s possible unification with Russia as a constituent region do not constitute such a reason.”

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Made me smile.

Russia: US Sanctions A ‘Pathological’ Refusal To Admit Reality (ITAR-TASS)

The US sanctions against Russia reflect Washington’s pathological refusal to acknowledge reality, Russian Deputy Foreign Minister Sergei Ryabkov said.

On Monday, the USA has published the list of people subject to sanctions, which includes several Russian and Ukrainian officials. As the White House reported March 17, the list includes presidential aide Vladislav Surkov, presidential adviser Sergei Glazyev, Head of State Duma Committee for CIS Affairs Leonid Slutsky, Head of Federation Council’s Committee for constitutional legislation Andrei Klishas, Federation Council Speaker Valentina Matviyenko, Deputy Prime Minister Dmitry Rogozin, Chair of the Duma committee for family, women and children affairs Yelena Mizulina, Crimean Prime Minister Sergey Aksyonov, Crimean State Council Speaker Vladimir Konstantinov, leader of the Ukrainian Choice public movement Viktor Medvedchuk and Ukrainian president Viktor Yanukovych.

Their assets in the US will be frozen, and Americans will be banned from getting into business contacts with the officials on the list. Apart from that, a new executive order of the US president has been adopted. This order forms the basis of sanctions against the aforementioned persons. In addition, the document allows introducing punitive measures against persons and organizations serving the interests of Russia’s military industry, as well as providing material support to people included in the black list. Furthermore, US President Barack Obama threatened with additional sanctions in case if Russia continues interfering with Ukraine’s affairs.

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Russia Sounds Alarm on Economic Crisis as West Imposes Sanctions (Bloomberg)

Russia’s economy is showing signs of a crisis, the government in Moscow said as the U.S. and the European Union announced sanctions over the country’s support for the Crimea region breaking away from Ukraine. “The situation in the economy bears clear signs of a crisis,” Deputy Economy Minister Sergei Belyakov said in Moscow yesterday. The cabinet needs to refrain from raising the fiscal burden on companies, which would be the “wrong approach,” he said. “Taking money from companies and asking them afterward to modernize production is illogical and strange.”

Even before the worst standoff against the West since the Cold War, Russia’s economy was facing the weakest growth since a 2009 recession as consumer demand failed to make up for sagging investment. EU foreign ministers yesterday agreed to freeze assets and impose visa travel bans on 21 Russian, Crimean and former Ukrainian officials, while U.S. President Barack Obama imposed sanctions on seven Russians.

The Ukrainian crisis is putting a strain on Russia’s $2 trillion economy, which grew 1.3% in 2013 after expanding 3.4% previous year. Last year’s growth was “insufficient” and the current outlook and government forecasts “can’t satisfy us,” President Vladimir Putin said March 12. The Economy Ministry projects growth will average 2.5% a year through 2030.

Russia will probably dip into a recession in the second and third quarters of this year as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions,” Vladimir Kolychev and Daria Isakova, economists at Moscow-based VTB Capital, said in a research note yesterday. They cut their 2014 growth estimate to zero growth from 1.3%.

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Crimea: 2 million people. Veneto: 5 million people. Where are the calls about violation of international law?

Unlike Crimea, Independence Referendum In Venice Goes Almost Unnoticed (RT)

While the Crimean referendum tops world media headlines, an attempt at secession is going on in Veneto, Italy, with its major city Venice. But as it is being virtually ignored by media, people in Europe are hardly aware of what’s happening next door. “Do you mean the independence of Crimea?” says a Berlin resident when RT’s Irina Galushko asks him of what he thinks of the current referendum in Veneto, Italy, where people are voting on whether to break away from Rome. “No, I haven’t heard of it” was the most common answer Galushko received.

The online referendum in the northern Italian province was launched on Sunday, the same day the majority of people in Crimea voted yes to seceding from Ukraine and joining Russia. But unlike the Crimean referendum, the Veneto one has not quite found itself in the media spotlight. Nevertheless, about 3.8 million eligible Veneto resident voters will now be able, until Friday, to say if they would like to see the region an independent, sovereign and federative Republic of Veneto.

Veneto is one of the biggest and wealthiest provinces in Italy with a population of more than 5 million people. One of the main reasons for the vote is that the region is tired of the backbreaking burden of taxes imposed by Rome. “We would like to continue the economic ties with Italy,” Lodovico Pizzati, the spokesman for the independence movement, told RT. “But from a fiscal standpoint there’s a huge gap between what we pay in taxes and what we receive as public service. We are talking about a difference of 20 billion euro.”

The latest polls, suggesting that about 65% of the population is in favor of becoming independent, have encouraged the independence movement leaders finally to have the region’s fate decided. “We have to fight for it [independence],” Giovanni Dalla Valle, head of the Veneto independence movement, told RT. “We will do it in a peaceful, diplomatic way. We do strongly believe that when the majority wants to be independent there is nothing they [the Italian government] can do.” Veneto independence activists say they have been inspired by secession movements in Scotland and Catalonia.

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China keeps receding.

China Developer With $567 Million Debt Said to Collapse (Bloomberg)

A closely held Chinese real estate developer with 3.5 billion yuan ($566.6 million) of debt has collapsed and its largest shareholder was detained, government officials familiar with the matter said yesterday. Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.

The collapse of the company, based in the eastern town of Fenghua, adds to concern of strains in the nation’s real estate sector and comes less than two weeks after the first bond default by a Chinese company. Shanghai Chaori Solar Energy Science & Technology Co.’s inability to repay its debt may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, Bank of America Corp. said March 5.

“Chinese developers are extremely exposed to the easy credit that is used to finance purchases and investment,” said Patrick Chovanec, the New York-based chief strategist at Silvercrest Asset Management Group LLC, which oversees $14.1 billion in asset, by phone. “When credit is reined in even slightly, it undercuts demand. This is potentially an inflection point.” Stocks and bonds issued by Chinese real estate companies slumped after reports of Zhejiang Xingrun’s collapse added to concern that defaults are starting to mount as the nation’s economy slows and the government reins in lending.

Prices on the dollar bonds sold by Evergrande Real Estate Group Ltd., the nation’s fourth-largest developer by market value, fell 0.5 cent on the dollar yesterday, sending yields to the highest since August. Prices on Kaisa Group Holdings Ltd.’s bonds maturing in 2018 dropped to a seven-month low. American depositary receipts of E-House China Holdings Ltd., the online real estate services provider, slid 2.6% while SouFun Holdings Ltd. retreated for a seventh day.

Zhejiang Xingrun’s collapse was reported earlier yesterday by the Chinese-language National Business Daily, which cited an unidentified government official for the news. The report blamed the failure on mismanagement and high costs of private lending, according to the newspaper.

The city of Ningbo has jurisdiction over the town of Fenghua, which is the birthplace of former Chinese nationalist leader Chiang Kai-Shek. Fenghua is in discussions with the banks and Ningbo on how to repay the debt, the people said. They said Zhejiang Xingrun has assets worth 3 billion yuan. “We think the default of the developer will alert the banks on escalating risk from developers amid the liquidity tightening,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. “We maintain our view that banks may revisit loan policy on property and may take a stricter stance on property development loans, particularly for small developers.”

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Looming property default in China raises fears of broader crisis (AEP)

China faces the biggest property default on record as credit curbs threaten to break the housing boom, leaving a string of “ghost towns” across the country. The Chinese newspaper Economic Daily News said Xingrun Properties, in the coastal city of Ningbo, is on the brink of collapse with debts of $570m, mostly owed to banks. The local government has set up a working group to contain the crisis.

“As far as we know, this is the largest property developer in recent years at risk of bankruptcy,” said Zhiwei Zhang, from Nomura. “We believe that a sharp property market correction could lead to a systemic crisis in China, and is the biggest risk China faces in 2014. The risk is particularly high in third and fourth-tier cities, which accounted for 67% of housing under construction in 2013,” he said.

Nomura said the number of ghost towns has spread beyond the well-known disaster stories of Ordos and Wenzhou to at least eight other sites. Three developers have abandoned half-built projects in the 2.5m-strong city of Yingkou, on the Liaodong peninsular. They have fled the area, a pattern replicated in Jizhou and Tongchuan. Yu Xuejun, the Jiangsu banking regulator, said developers are running out of cash. This risks undermining land sales needed to fund local government entities. “Credit defaults will definitely happen. It’s just a matter of timing, scale and how big the impact is,” he said.

Land sales and property taxes provided 39% of the Chinese government’s total tax revenue last year, higher than in Ireland when such “fair-weather” taxes during the boom masked the rot in public finances. Li Kashing, Hong Kong’s top developer and Asia’s richest man, has been selling his property holdings in China, including the Duhui Palace in Guangzhou and the Oriental Financial Centre in Shanghai. Nomura said residential construction has jumped fivefold from 497m square metres in new floor space to 2.596bn last year. Floor space per capita has reached 30 square metres, surpassing the level in Japan in 1988 just before the Tokyo market collapsed.

A new study by the International Monetary Fund said the ratio of residential investment to GDP reached 9.5% in 2012, higher than the peaks in Japan and Korea, and much higher than in the US during the subprime bubble. It also warned that China is running a budget deficit of 10% of GDP, once the land sales are stripped out, and has “considerably less” fiscal leeway than assumed.

There have long been warnings of a property bust in China. These reached fever-pitch in mid-2012 when a bout of monetary tightening caused house prices to fall briefly. Prices have since roared back in the tier 1 cites such as Shanghai and Beijing but while these places capture the headlines, they account for just 5% of total building in China. Prices are falling in 43% of the tier 3 and 4 cities.

Optimists hope that the country’s urbanisation drive will stoke demand for years to come, but this too is in doubt. China’s workforce contracted by 3.45 million in 2012 and another 2.27 million in 2013 as the demographic crisis began to bite. The number of fresh rural migrants to the cities each year has already halved from 12.5 million to 6.3 million since 2010. Nomura said there could be net outflows by 2016.

The mounting stress in the property sector is a test of President Xi Jinping’s vow to impose market discipline, however painful. Beijing allowed the solar group Chaori to default earlier this month, the first failure on China’s domestic bond market.
The authorities are trying to wean the economy off excess credit after a $16 trillion spike in loans since 2009 – equal in size to the entire US banking system – but lending curbs are beginning to expose the sheer scale of bad debt in the system.

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Developers’ Bonds Decline Amid China Housing Bankruptcy (Bloomberg)

Stocks and bonds issued by some Chinese real estate companies extended a slump after the collapse of a developer stoked concern defaults are starting to mount as the economy slows and the government reins in lending. [..]

Government officials familiar with the matter said yesterday that closely-held Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The housing market in the world’s second-biggest economy is cooling with the value of home sales falling 5% in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5% economic expansion targeted by China this year would be the slowest since 1990.

“Chinese developers are extremely exposed to the easy credit that’s used to finance purchases and investment,” said Patrick Chovanec, the New York-based chief strategist at Silvercrest Asset Management Group LLC, which oversees $14.1 billion in assets. “When credit is reined in even slightly, it undercuts demand. This is potentially an inflection point.”

The collapse comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds. Multiple calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered today.

China will face more credit risks in its $4.2 trillion onshore bond market following Chaori Solar, according to China International Capital Corp. The investment bank flagged 12 companies with outstanding onshore bonds in “great need” of more scrutiny after changes in the debt profiles of the issuers, it said in a March 14 report. “Looking at the second quarter, we think the worst of credit risk is far from over,” CICC bond analysts Ji Jiangfan, Zhang Li, Xu Yan and Wang Zhifei said. “Lower-rated bonds’ credit premiums may stay at high levels or rise to new highs.”

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China Home-Price Growth Slows in Big Cities on Tight Credit

Chinese new-home price growth slowed last month, led by the four cities the government defines as first tier, amid tighter credit to rein in excessive borrowing and individual city measures to curb property prices.

Prices in Beijing and the southern business hub of Shenzhen each rose 0.2% in February from a month earlier, the National Bureau of Statistics said today. That was the slowest pace since October 2012. They added 0.4% in Shanghai, the smallest increase since November 2012, and gained 0.5% in Guangzhou. Prices climbed in 57 of the 70 cities tracked by the government. That compares with 62 in January. “Overall, we see the property sector as becoming increasingly a major and more real risk to growth and financial stability this year,” said Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, in an e-mailed reply to questions on the data.

The government will curb demand for housing among investors and regulate the home market “differently in different cities,” Premier Li Keqiang said last week. It has also been reining in lending that lend to excessive borrowing and now is sparking defaults. A closely held Chinese real estate developer with 3.5 billion yuan ($566 million) of debt has collapsed and its largest shareholder was detained, government officials familiar with the matter said yesterday.

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GM pays $1 million per casualty. As for the countless injuries, they’re probably just counted as boosts to GDP.

GM To Take $300 Million Charge Over Recalls (BBC)

US car manufacturer General Motors (GM) expects to spend nearly $300m (£180m) in the first quarter to repair vehicles affected by its recent recalls. The firm set aside the amount on Monday as it announced three separate recalls affecting nearly 1.5 million vehicles. That follows the 1.6 million vehicles it called back last month over faulty ignition switches.

GM is facing an investigation over its handling of the recall over the faulty switches which can disable airbags. “I asked our team to redouble our efforts on our pending product reviews, bring them forward and resolve them quickly,” said Mary Barra, chief executive of the firm, in a statement.

The recall announced on Monday affects the following models:

• 1.18 million vehicles, including 2008 – 2013 Buick Enclave and GMC Acadia, 2009 – 2013 Chevrolet Traverse and 2008 – 2010 Saturn Outlook, over problems with deployment of side airbags.
• 303,000 Chevrolet Express and GMC Savana from the 2009 – 2014 model years with gross vehicle weights of 10,000 pounds or less as they do not comply with a head impact requirement for unrestrained occupants.
• 63,900 Cadillac XTS full-size sedan from the 2013 and 2014 model years to fix a problem that could lead to overheating, melting of plastic components and a possible engine compartment fire.

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Algeria shaken by drop in gas output (Guardian)

At 8.30pm on 22 February a magnitude 4.1 quake shook Algiers. Some local wits suggested it was linked to the announcement the same day that ailing President Abdelaziz Bouteflika would be running for a fourth term of office in the April election.

Earlier that day Algerian hydrocarbon experts met at the Hilton hotel to discuss the imminent economic problems heralded by falling oil and gas production. In a country heavily dependent on hydrocarbons (97% of its total exports) this is a serious shock. Gas exports only amounted to 45bn cubic metres in 2013, says Nordine Aït Laoussine, former CEO of Sonatrach, the state-owned hydrocarbons company. Admittedly the terrorist attack on the Tigantourine gas facility near Amenas reduced export capacity by 8bn cubic metres, but output had started a downward trend well before then. Gas production peaked at 65bn cubic metres in 2005, far short of forecasts of about 85bn cubic metres in 2012.

Oil production is also dropping, with only relatively small deposits being discovered. Another former head of Sonatrach, Abdelmadjid Attar, reckons that without a major drive to boost exploration and increase energy efficiency, Algeria may find itself unable to honour its export commitments between now and 2030. Nazim Zouioueche, yet another former head of the national company, does not believe shale gas will make much difference. At best, it could “cushion the decline in output of conventional gas in the near future”.

The other bad news is that energy consumption is soaring, encouraged by low prices. To contain social unrest the government has postponed electricity and fuel-price increases. Algeria has some of the lowest energy prices of any country, according to the United Nations Development Programme. Total energy subsidies amounted to $11bn in 2010. The difference in price compared with neighbouring countries – Tunisia and Morocco – encourages large-scale smuggling on the eastern and western borders.

On 23 February energy minister Youcef Yousfi repeated that he was confident about the future of Algeria’s oil and gas industry. He highlighted the “big potential of non-conventional hydrocarbons”. But even the governor of the Bank of Algeria, Mohamed Laksaci, well known for his caution, is worried. The 2013 report on economic trends confirms that the policy of redistributing hydrocarbon rent, launched in 2011 to prevent contamination by the Arab spring, is increasingly “unsustainable”.

The trade surplus, which stood at $20bn in 2011, has been wiped out. By late 2013 the balance of payments had more or less reached equilibrium, after hydrocarbon revenue plunged from $70bn in 2012 to $63bn last year. Imports continue their steady growth (7%), with imported goods and services exceeding $65bn.

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No comment.

Global Arms Trade Increases 14% in 2013 (Prensa Latina)

Global arms trade increased last year by 14%, reports the Stockholm International Peace Research Institute (SIPRI). With a 7% share, Germany is in third place among the nations that export arms, according to the source. The list is headed by the United States, with 29%, and Russia with 27%. China increased its exports in the period 2009-2013 and is fourth with 6%, while France is number five at 5%. The five main exporters controlled 74% of the global arm traffic. USA and Russia account for a total of 56%, according to SIPRI.

India keeps first place as importer. In Europe, the United Kingdom is the major importer with a 12%, while Greece, despite its economic and financial crisis, has 11% of imports. Nevertheless, SIPRI said the purchase of arms decreased in European countries by 25% in the last five years.

In Germany, groups from the Movement for Peace criticized the high level of arms exports. Arms sales increase the threat of military conflicts and the arms race, said the Federal Council for Peace, an alliance of organizations and groups. Activists reminded the German Federal Government of the 2000 official guidelines on arms exports, meant to restrict arms business.

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Yeah, sure, this Nobel and Oscar material. But wait a minute, it’s still simply a confirmation of what Einstein wrote 100 years ago. Where’s the progress?

Primordial gravitational wave discovery heralds ‘whole new era’ in physics (Guardian)

Scientists have heralded a “whole new era” in physics with the detection of “primordial gravitational waves” – the first tremors of the big bang. The minuscule ripples in space-time are the last prediction of Albert Einstein’s 1916 general theory of relativity to be verified. Until now, there has only been circumstantial evidence of their existence. The discovery also provides a deep connection between general relativity and quantum mechanics, another central pillar of physics.

“This is a genuine breakthrough,” says Andrew Pontzen, a cosmologist from University College London who was not involved in the work. “It represents a whole new era in cosmology and physics as well.” If the discovery is confirmed, it will almost certainly lead to a Nobel Prize. The detection, which has yet to be published in a peer-reviewed scientific journal, was announced on Monday at the Harvard-Smithsonian Center for Astrophysics in Cambridge, Massachusetts, and comes from the Background Imaging of Cosmic Extragalactic Polarization 2 (Bicep2) experiment – a telescope at the South Pole.

The detection also provides the first direct evidence for a long-held hypothesis called inflation. This states that a fraction of a second after the big bang, the universe was driven to expand hugely. Without this sudden growth spurt, the gravitational waves would not have been amplified enough to be visible. “Detecting this signal is one of the most important goals in cosmology today. A lot of work by a lot of people has led up to this point,” said John Kovac of the Harvard-Smithsonian Center for Astrophysics, who leads the BICEP2 collaboration.

The primordial gravitational waves were visible because they created a twisting pattern called polarisation in light from the big bang. Polarisation is the direction in which a light wave oscillates. It is invisible to human eyes, which only register brightness and colour. Sunglasses made from polaroid sheets work by blocking out all light waves except those with a specific polarisation. Light from the big bang has been turned into microwaves by its passage across space. These microwaves were discovered in 1964 and are known as the cosmic microwave background radiation. Bicep2 was designed to measure their polarisation.

Rumours began on Friday that the detection of primordial gravitational waves would be announced. It had been thought that a gravitational wave signal would have to be surprisingly strong to be detected by the current technology used in ground-based detectors. The Bicep2 team have spent three years analysing the signal in order to be certain. “This has been like looking for a needle in a haystack, but instead we found a crowbar,” said co-leader Clem Pryke of the University of Minnesota.

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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 Mar 18 2014: The Deep Dark Forest And The Crippled Trees

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    Theodor Horydczak Snow Globe 1935 Alright, alright, let’s do a little timeline again first. It’s common knowledge by now that Khrushchev gave the Crim
    [See the full post at: Debt Rattle Mar 18 2014: The Deep Dark Forest And The Crippled Trees]

    Ken Barrows

    The Bloomberg article mentions the USA reliably growing at 3% per annum. It doesn’t seem to mention that total credit market debt went up more robustly.

    I think if you are a mainstream economist your assumption is that debt growth can exceed output growth forever. It’s unstated, however.


    Yeah, exactly, Ken, this graph from a while back depicts that quite well:

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