Jul 242014
 July 24, 2014  Posted by at 6:39 pm Finance Tagged with: , , , ,

Arthur Rothstein Children of citrus workers, Winter Haven, Fla. Jan 1937

“The fact that the coalition has fallen apart, that laws haven’t been voted on, that soldiers can’t be paid, that there is no money to buy rifles, that there is no possibility to fill gas storages. What options do we have now?” This is, as per Bloomberg, what US handpicked handpuppet and – now former – Ukraine PM Yatsenyuk told the Kiev parliament earlier today during a speech in which he announced the resignation of his “government”. Several of his coalition partners, including right wing Svoboda, had left the government not long before.

This raises a ton of poignant questions. The first one that came to my mind was: “in whose name are the women and children of Lugansk and Donetsk going to be killed now”? It can’t be in the Kiev government’s name anymore.

But also, of course, what happens with the IMF loan tranches that were waiting to be paid out? President Poroshenko allegedly commented that “snap” elections will be held in October or thereabouts. That would suggest three months of free for all. And even then, what are the chances that the Ukrainian citizens in the eastern part of the country will – be able to – take part in that sacred exercise of democratic rights? These people don’t want Kiev to dictate their lives for them. The UN has a statute of self-determination. Seems a good fit. But instead they get shot at and bombed (why do you think they want anti-aircraft missiles?).

Still, there in no Kiev anymore now. No government. There’s a president, but the parliament used Maidan, which is still just 5 months ago, to move many of the president’s powers to itself and the government. So legally, there’s a very large grey area all of a sudden. Can a government that has already resigned, but is asked to take care of daily business, order an army to – continue to – shell civilians on its own territory? How many examples could you name?

I’m not a specialist in international law, and I’m not sure it would make much difference – who would drag Yatsenyuk before an international court? -, but these things are certainly not clear cut.

More interesting for now may be some more underlying questions. Yatsenyuk says Ukraine can’t pay its soldiers. Who’s going to pay them? He says there’s no money to buy rifles. So who’s going to arm the Ukraine army? Will the IMF make a few billion more available so the army can keep fighting their own countrymen, even if the country has no government? What does international law have to say about that? Or IMF statutes?

How about gas storages? What are the odds that Kiev will be dark and cold the coming winter?

It all comes back to Russia, and Putin, in the end, doesn’t it? Speaking of which, Holland, Australia and Malaysia are preparing a UN mandate to form a “police force” that would be tasked with securing the plan crash site. The ‘rebels’ have left it, they need to defend their families from the ongoing shelling from the now defunct Kiev government.

Holland, Australia and Malaysia, plus all other countries that think it’s a good and dignified idea to secure the site, could get what they want tomorrow morning if only they called for the shelling of east Ukraine cities to stop. But they don’t. They want that police force to come in while the attacks by a – defunct – government on its own citizens continue 20-30 miles away.

As if they had no part in those attacks, and all they want and deserve is to get their deceased people back. The problem is, they do have a part in the attacks. For the past 6 months, Yatsenyuk and his “government” has been propped up and financed by countries like Holland and Australia, through various organizations like the EU, IMF, UN, World Bank etc.

Are you, like me, beginning to grasp how absurd this whole situation is?

In order for the police force to “work”, and of course there’s a lot – certainly emotionally – to say for making it work, they will need Putin. Want to take a stab at how many times Putin has – again – been compared to Hitler recently? Remember Joe Biden saying Putin has no soul?

Here’s how they’ll play this one: if Putin doesn’t agree to push the ‘rebels’ into accepting international troops – ostensibly tasked with policing, but who knows if they smuggle in CIA or Blackwater? – on the territory they have seen thousands of their friends and family members lose their lives over protecting, Putin will be blamed for the whole thing. We live in the age of propaganda.

The same Putin faces threats of increased sanctions from the EU. Which Holland is part of. Why, I’m not entirely sure. The sanctions, that is. As far as I understand, the idea is that Putin supports the easy Ukraine rebels. Which may or may not be true, but US and EU have never provided evidence.

And why would such – purely alleged – support be so bad? Because it keeps the west, through Kiev, from conquering the entire Ukraine right up to the Russian border. A goal that can only be achieved by eradicating the east Ukraine Russian speaking population. Something multiple Kiev bigwigs, including Yulia Tymoskenko, and including newly elected president Poroshenko, have heartily supported.

So what was it again you want from Putin?

Europe, edged on by the US power politics supremacy establishment, risks painting itself into a corner it has no chance of getting out of. Brussels is loaded with career guys who dream of great powers but lack the brains to back up their ambitions. And – almost – everyone in EU national governments follows the ‘leaders’ like a bunch of, let’s give it a label, eunuch slaves. Not fit to rule.

But that same EU is now preparing major sanctions on Putin, for “offences” against ‘something’ poorly defined that they have provided no proof for – again, are you beginning to grasp how absurd this whole situation is? -, and that EU may well come to regret this whole thing.

The eurozone economy, notwithstanding the rosy rosy PMI manufacturing data today, is in a shambles. If you need proof, look at the terrible US PMI numbers, or the 20% drop in American new housing starts. The global economy is being kept alive by debt issued by central banks. Japan and China are talking over for Yellen, and Draghi gets squeezed out of the picture (which is not that bad, all the new debt is too damaging for future generations).

The battle against Putin for ‘something that he never done’ risks raising European gas prices by 100%, and world oil prices by the same percentage. Just a guess, granted, but by no means a bad one.

The US will be temporarily fine on account of shale, though for far less time than it thinks it will; I wouldn’t give shale as a viable growing industry more than 3-4 years. But the US does have that, and it’s pressing its European ‘friends’ into an energy situation it wouldn’t want to be in itself. That, along with a much stronger dollar, would give America much more say in European affairs. I don’t think Washington and Wall Street would mind that. Do you?

“Global economy starts second half on solid footing”, says a Reuters headline today. Yeah, well, I think that’s so far out there in left field it’s not funny anymore. What should we call this phase we’re in? How about ‘the age of diminishing returns’? Where empires fight not over growth, but over the scraps falling off the table.

Think about it this way: if you were someone dreaming of empire, how would you react when you find out that growth is gone, and you have to fight over what’s left, instead of look for new resources?

If growth is over, and your entire world view has always been based on more growth, then what do you do?

Apart from these larger issues, please allow me to repeat this: If countries want to secure the plane crash site, they would be allowed to do that right now if only they called for the shelling of eastern Ukraine by its own government to stop. Anything else is a waste of your time and mine.

EU To Weigh Far-Reaching Sanctions On Russia (FT)

EU diplomats will weigh sweeping Russian sanctions on Thursday that include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to a proposal seen by the Financial Times. The sanctions measure, contained in a 10-page options memo prepared by the European Commission and distributed to national capitals, also proposes barring the Russian banks from listing new issues on European exchanges, preventing them from using London or other EU stock markets to raise funds from non-Europeans.

The proposal would not initially include a similar prohibition for Russian sovereign bond auctions out of fear the Kremlin could retaliate by ordering an end to Russian purchases of EU government debt, the document states. But it would still be far more extensive than sanctions imposed by the U.S. earlier this month that only targeted two Russian banks, Gazprombank and VEB, since the EU proposal would hit all banks with more than 50% public ownership. State-controlled financial institutions account for the majority of banking assets in Russia, and the document estimates €7.5 billion of the €15.8 billion in bonds issued by Russian public financial institutions last year were in EU markets.

“[T]he measure would consist in prohibiting any EU persons from investing in debt, equity and similar financial instruments with a maturity higher than 90 days, issued by state-owned Russian financial institutions…anywhere in the world,” the document states. Although Thursday’s meeting of EU ambassadors will be the first time diplomats have formally discussed such broad-based sanctions against Russian economic sectors, the capital markets ban remains unlikely. The measure would have to be agreed unanimously by all 28 EU members, and several countries have repeatedly shown a reluctance to agree such sector-wide sanctions. The options paper, which was sent to national capitals Wednesday night, for the first time shows how extensive the preparations are in Brussels to move towards sweeping penalties that could cripple the Russian economy.

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Stalled Recovery Leaves Europe Defenceless Against Russia Economic Shock (AEP)

Europe’s economic recovery has stalled. The EMU policy elites took a fateful gamble that global growth alone would lift the eurozone off the reefs, without the need for serious monetary stimulus or a reflation package to ensure take-off velocity. Their strategy has failed. The Bundesbank says German growth may have slumped to zero in the second quarter. French industrial output has fallen for three months in a row. French business surveys point to an outright contraction of GDP, with a high risk of a triple-dip recession. Stagnation is automatically causing debt ratios to spiral upwards yet again across a large part of the currency bloc. The situation is doubly delicate since the European Central Bank is no longer able to serve as a lender-of last resort for Italy, Portugal and Spain.

Germany’s top court has ruled that the ECB’s back-stop plan (OMT) “manifestly violates” the EU treaties, and is probably Ultra Vires. The political reality is that the OMT cannot be deployed, whatever the European Court says when it issues its own judgment long hence. Any external economic shock at this stage risks exposing the fundamental incoherence of the EMU system, and therefore shattering the fragile truce in the markets. It is this fear – even more than worries about gas supply – that is contaminating the crisis strategy towards Russia.

Europeans have created a currency structure that is not only prone to chronic depression and serial crises, but has also left them incapable of responding to a geopolitical threat of the first order, even when it is on their doorstep. The eurozone relapse is slow torture for Italy, facing its 11th quarter of economic contraction, with youth unemployment at 43%. The country’s finance minister Pier Carlo Padoan called for the deployment of fiscal stabilisers, describing Germany’s shock data as an “alarm bell” for the whole currency bloc.

He has reason to worry. Eurostat revealed this week that Italy’s debt rose to 135.6% of GDP in the first quarter. This is near the point of no return for a country that borrows in what amounts to a foreign currency. What is remarkable is that the ratio has jumped 5.4 percentage points over the past year despite austerity and even though Italy is running a primary budget surplus. This is the toxic effect of near deflationary conditions on debt dynamics. Unless action is taken to boost nominal GDP, Italy must mathematically sink deeper into a compound interest trap. It is much the same story in Portugal, where the ratio rose 5.4 points to 132.9%, and where the casualties of slow debt-deflation are coming to light as the Espirito Santo family empire unravels.

Fear that the EMU debt could erupt again at any moment is why Italy has been fighting a rear-guard action to head off serious sanctions against the Kremlin, though its efforts are already being overtaken by events. Washington crossed the Rubicon a week ago by cutting off long-term finance for much of Russia’s energy sector. Every Italian bank will have to follow suit “nolens volens”. You cannot function in Western finance if you defy US regulators. It may soon escalate further. The Democrat chairmen of the US Senate’s Foreign Relations, Armed Services and Intelligence committees have called on the White House to invoke the International Emergency Economic Powers Act and consider designating the Ukrainian rebels as “terrorists”. Such a move would trigger specific clauses in US anti-terror legislation against anybody helping them. It would be tantamount to financial war against the Russian state.

The decision by French leader Francois Hollande to go ahead with the sale of two Mistral helicopter carriers to Russia – one for deployment in the annexed territory of Crimea – is evidence of how disorientated he has become as his presidency is defined by permanent recession and one austerity package after another – each chasing the failure of the last as the fiscal multiplier does its worst. Mr Hollande’s poll ratings have dropped to 16%. The French employers group Medef went for the jugular this week. “The economic situation of the country is catastrophic. If France were a company, it would be going bankrupt,” said its leader, Pierre Gattaz. Hyperbole perhaps, but such is the pre-insurrectional mood of the country.

The proper answer to this critique is for Mr Hollande is to take the lead in Europe, mobilise a Latin Front and issue an ultimatum to those who have run monetary union into the ground: either accept a policy of fiscal and monetary reflation immediately, or face the consequences. Mr Hollande instead clutches at straws by refusing to give up a €1.2bn weapons deal that is of no macro-economic importance, even though he supports the principle of sanctions. It‘s not an edifying moment for the great French nation.

There are of course many reasons why one may think sanctions against the Kremlin to be unwise. The German Social Democrats (SPD) believe to this day that Willy Brandt’s Ostpolitik – not the Reagan Doctrine, or Russia’s bankruptcy – was what tamed the Soviet Union and ultimately brought down the Berlin Wall. That remains the SPD reflex, though it would be cleaner intellectually if their former Chancellor was not currently on the Gazprom payroll.

On the German Right, the AfD anti-euro party has its own variant of Ostpolitik. It has come close to suggesting that Russia has a legitimate claim on “Holy Kiev”, and it evokes the Otto Bismarck’s Reinsurance Treaty with Russia in 1887 as model for German policy today. This is of a different character, and needs watching. It taps into a historic current in German thinking that deems the Western democracies to be the real foe. Needless to say, US spies have not helped with their fatuous urge to tap Angela Merkel’s mobile phone.

But mostly, Europe’s aversion to doing anything about Vladimir Putin stems from economic fear. Their leaders have got into the latest mess because they thought – in defiance of Nobel laureates and the economics professoriate in Europe – that EMU could recover simply by feeding off Chinese, Anglo-Saxon and world demand, running an ever larger current account surplus. The International Monetary Fund’s latest “Article IV” report on the eurozone is a blistering indictment, saying the ECB may have to print money with “full conviction” to break out of the vicious circle. It said that 70% of youth unemployment is the result of the slump conditions, demolishing claims by Brussels, Frankfurt and Berlin that the jobless crisis is due to rigid labour markets or lack of skills – and therefore the fault of the victim countries themselves, not EMU policy.

“Inflation has been too low for too long. A persistent failure to meet the inflation target could undermine central bank credibility,” it said. Quite so. The ECB has failed in its common sense duty to offset the fiscal cuts with monetary stimulus as occurred in the US, UK and Japan, failed to meet its 2% inflation mandate and failed to meet its Lisbon treaty obligation to support growth. Private credit is shrinking at a rate of 2%. The broad M3 money supply has contracted over the past year if you strip out Germany. The inflation rate has fallen to 0.5%, automatically pushing up the debt trajectories of Portugal, Italy, Spain and Cyprus, among others. Yet the ECB still sits on its hands.

Paul Mortimer-Lee, from BNP Paribas, said the ECB seems to have no coherent strategy at this point and has failed to convince markets that it knows what it is doing. “Waiting to see imminent deflation before instituting QE is like putting on your lifejacket when you’ve already fallen into the sea. Inadequate policy is costing millions of jobs. The ECB needs to stop fighting ghosts and start fighting deflation,” he said. Mario Draghi’s €1 trillion blast of cheap loans – later this year – is not the same as QE. It is a swap. Banks must hand over collateral, and many are still cutting their balance sheets to meet new rules. It does not in itself ignite the money supply.

The IMF’s Reza Moghadam says QE would have “wider and larger effects” if done with gusto. It would not breach EU treaty law so long as the sovereign bonds were bought “across the board”, rather than targeting the bonds of crisis states in a quasi-fiscal rescue. This will not happen of course, or at least not soon enough or decisively enough to avert serious trouble. The eurozone stands defenceless with no safety buffer against deflation, and no shield against the near certain economic fall-out from a crisis in Russia that has only just begun. No wonder Europe’s leaders behave like frightened sheep.

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This is the IMF speaking, who want Euro QE.

Euro Economy Dead In The Water, Crisis To Carry On ‘A Long Time’ (Telegraph)

It’s taken a long time, but the International Monetary Fund finally seems to be talking some sense about the beleaguered deficit economies of the eurozone. In a new analysis of continuing imbalances within the single currency area, it pretty much concludes that the situation is hopeless without the sort of eurozone-wide macro economic policies – monetary as well as fiscal – which are specifically rejected by the high command in Berlin. OK, so it doesn’t quite say that, but even so, this will make deeply depressing reading for the struggling economies of Greece, Ireland, Italy, Portugal and Spain. Here’s a taste:

Many additional adjustments are needed to achieve the dual objectives of restoring external balance – that is, a net financial liabilities (NFL) position that is deemed sustainable by market participants – and internal balance, namely sufficiently high and sustainable growth to reduce unemployment to acceptable levels. Given the absence of nominal exchange rates, relative price adjustment needs to come via relative changes in prices and costs: internal devaluations. To the extent that these devaluations are achieved mainly by falling prices in deficit rather than rising prices in surplus economies, they can reduce domestic demand and exacerbate debt overhang problems.

In any case, “under current projections, it will take a long time” for imbalances to correct and these economies to get onto a sustainable footing, a conclusion which gives the lie to repeated claims among some eurozone policymakers that the crisis is now largely over. The reality is that relative price adjustments have been proceeding at glacial speed, and to the extent that there has been real exchange rate adjustment via reduced unit labour costs, it has tended to through reduced employment rather than wages per se. The same goes for the once burgeoning current account deficits of these countries, which have largely closed but only via the mechanism of a collapse in internal demand.

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The euro will sink a lot, that’s for sure. But so much, they won’t like that either.

The Stubborn Euro May Have Finally Cracked (CNBC)

The euro’s resolve could be starting to crack, as it cleared “psychologically significant” barriers on Tuesday, according to strategists, who now predict a slow grind lower for the currency. The single currency fell to an 8-month low against the dollar on Wednesday, and hit a 2-year trough against sterling. By close of London trading Wednesday, the euro was trading at $1.346 and 0.79 against the pound, with the latter giving back some gains after a data release from the Bank of England. The euro’s break below the $1.35 mark means it has now broken out of the “recent suffocating range”, Kit Juckes, global head of foreign exchange strategy at Societe Generale, said in a research note on Wednesday morning.

“Technically and psychologically this is significant, and ‘should’ herald a move towards $1.32, though this risks being pretty slow going,” he said. The euro has performed surprisingly well in recent months, much to the dislike of euro zone exporters and European Central Bank (ECB) President Mario Draghi. A number of traders were also wrong-footed after the ECB unveil a host of stimulus measures in June, and alluded to a quantitative easing program further down the line. The euro was expected to fall against the dollar in anticipation of additional money in the economy, but this failed to materialize, and dovish words from central bankers in the U.S. also helped the dollar from moving higher.

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Well, either that or France is simply too weak. Take your pick.

French PM Says Euro Too Strong, EU Must Do More (Reuters)

France’s prime minister on Thursday called for the European Union to do more to help those member states carrying out reforms and reiterated France’s views that the euro is overvalued. “You know I consider that the euro today is too expensive, too strong. To implement the stability pact we need more flexibility … Europe must do more to accompany the policies carried out by governments,” Manuel Valls told RTL radio. Valls referred in particular to the European Commission’s President-elect Jean-Claude Juncker’s pledge to present within the first three months of his mandate “a Jobs, Growth and Investment Package” to generate an extra €300 billion ($403 billion) in investment over the next three years.

Francois Hollande’s government has repeatedly complained this year about the strength of the euro, calling on both the ECB and governments to take action on the currency front to boost growth. Hollande himself said on Monday it could be hard for France to reach EU fiscal targets next year because of disappointing growth, saying France would use available margins of maneuver if necessary. In any case, France will not go beyond its 50 billion-euro public spending cut plan for 2015-2017, he said. European Union leaders signaled at a summit last month they were ready to be flexible by giving member states extra time to consolidate their budgets as long as they pressed ahead with reforms.

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Because it has seen more debt.

Why China Hasn’t Seen More Defaults (CNBC)

Despite starting the year with dire predictions that China faced a slew of defaults, few mainland borrowers have welshed on their debts, thanks to various stripes of government intervention. “The central government earlier this year issued a decree saying [local governments] need to focus on preventing financial or regional systemic risk,” Donna Kwok, senior China economist at UBS, told CNBC. “Local governments have taken this to heart,” stepping up intervention either by directly or indirectly bailing companies out or actively mediating between corporates and banks, Kwok said. China’s debt levels – which soared to 250% of GDP according to some estimates – have been a major concern for investors for years, spurring fears that the surge in borrowing is fueling a dangerous property bubble and overcapacity in many industries, including steel, mining and solar energy, any of which could face collapse as the economy slows and Beijing tries to choke off overinvestment.

Concerns spiked anew after little known Huatong Road & Bridge Group Co. warned last week it wouldn’t be able to pay down its debt, likely marking the first time a Chinese company is set to openly default on both principal and interest for a bond. Reuters reported late Wednesday that sources directly involved said Huatong Road’s aggressive fund raising, combined with funds contributed by local government bodies in Shanxi province may have enabled the company to avoid a default. In addition to managing the bond market, the government is also looking to keep the shadow banking sector, which accounts for around a quarter to a third of total credit, on an even keel, Kwok noted. “They’ve been trying for the last few months to re-intermediate some of the credit away from the shadow banking system back to formal bank loans, which arguably is in a much more solid and firmer state,” she said.

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America’s economy is in religious hands. Not a good combination.

Great Crash of 2016, Third $10 Trillion Loss This Century (Farrell)

Sometime after the Great Crash of 2016, Fed Chairwoman Janet Yellen will be testifying before Congress, just like Alan Greenspan was forced to do in 2008. She will be explaining why America has already had three megacrashes in the 21st Century, each draining roughly $10 trillion, each a direct result of Federal Reserve policy failures. She will be forced to explain why the Great Crash of 2016 was a clone of the bank credit crash of 2008 and the 2000 excesses. But we already know exactly what Yellen will be forced to admit: That she is a clone of Alan Greenspan, who was a perfect clone of capitalism’s patron saints, Milton Friedman and Ayn Rand, going back decades. To fully understand this self-destructive lineage, simply focus your laser on the one admission Greenspan made to Congress in 2008, eight words that explain why Greenspan’s bizarre capitalism failed and why it will happen again and again under Yellen … “I really didn’t get it until very late.”

No, you don’t have to be a neuroscientist, psychologist or behavioral-finance genius to understand what Greenspan was saying, in this confession to Congress, to American investors, the whole world: Greenspan says capitalism was working just fine … in his head … for decades … then suddenly, capitalism stopped working … capitalism exploded in his face … capitalism is a bubble machine … very predictable bear-bull cycles … and a bad habit of exploding … just when you hope to get just a little richer … but instead, capitalism’s bubble explodes … triggering trillions in losses … did it in 2000, again in 2008, certain to repeat around 2016 … He was on the job 18 years, Not enough. Unfortunately the esteemed head of our monetary system never “really got it until very late.” Capitalists never do “get it.” Never will get it. Neither does Yellen, she’s just a clone of robotic Greenspan. It’s the curse of capitalist leaders.

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Can we have a large across the board review please? If not, don’t bother.

S&P Faces Fraud Charges Over Mortgage Ratings (FT)

Standard & Poor’s may face securities fraud charges for ratings given to six commercial mortgage-backed securities issued in 2011, the credit rating company said. The potential civil lawsuit is the latest legal issue for the credit rating company, which along with its competitors have faced intense regulatory scrutiny following the financial crisis. S&P, a unit of McGraw Hill, disclosed on Wednesday that it had received a Wells notice from the Securities and Exchange Commission indicating its enforcement division staff intended to recommend that the five member commission authorize civil charges against the company. “S&P has been co-operating with the commission in this matter and intends to continue to doso,” it said in a statement. S&P said the Wells notice related to the six securities “and public disclosure made by S&P regarding those ratings thereafter”.

A Wells notice is no guarantee that the SEC will bring charges. In 2011 the SEC sent a Wells notice to S&P over its ratings of a collateralize debt obligation called Delphinus. No charges were brought against S&P, however Mizuho Securities and three former employees were charged for misleading investors in the CDO. Mizuho paid $127 million and the former employees also settled without admitting or denying wrongdoing. The new Wells notice relates to CMBS sold in 2011. S&P withdrew ratings on a $1.5 billion CMBS after discovering inconsistencies in how its rating methodology was applied. That withdrawal prompted an internal review, which highlighted methodology inconsistencies for six other CMBS it rated in 2011.

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“Unexpectedly” because the Bloomberg News survey of 29 economists didn’t see this coming. Want to make some easy money? Bet on the opposite of what these guys say will happen. Can’t miss.

Japan Trade Deficit Expands After Exports Unexpectedly Drop (Bloomberg)

Japan’s exports unexpectedly fell in June to swell the trade deficit more than forecast, dragging on an economy squeezed by a sales-tax increase in April. Exports shrank 2% from a year earlier, the finance ministry said in Tokyo today, compared with a median forecast of a 1% rise in a Bloomberg News survey of 29 economists. Imports rose 8.4% to leave a shortfall of 822.2 billion yen ($8.1 billion), surpassing a 643 billion yen projection. Exports fell 1.7% by volume, showing the yen’s 16% drop against the dollar since Prime Minister Shinzo Abe came to power in December 2012 has failed to boost outward shipments. They remain 23% lower by value than a peak in March 2008, in contrast to the U.S. where they grew 25% over the same period.

“Export recovery will be sluggish mainly due to structural reasons” as Japanese companies are producing products abroad for foreign demand, Kiichi Murashima, chief economist at Citigroup Inc. in Tokyo, said after the data. “The trade deficit will remain at the current level through the end of this year with both exports and imports growing slightly.” Imports in the first six months of 2014 were the most in any half-year in comparable data back to 1979. With fossil-fuel imports swelling the trade deficit to the most in any such period, a pickup in exports is needed to sustain growth in the world’s third-largest economy. Bank of Japan Deputy Governor Hiroshi Nakaso said yesterday that the sluggishness in exports is due to slow growth in overseas economies. Exports to the U.S. fell 2.2% from a year earlier, with automobiles shipments dropping 6.8%. Exports to Asia were down 3.8%.

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Holding out for more free yen?

Japan’s Bond-Hugging Banks Are Pinning Abe Down (Reuters)

Japanese lenders’ outsized government bond holdings have Prime Minister Shinzo Abe in a chokehold. Unless banks shed the load now, they might try to dump the debt when the Bank of Japan stops printing money and causes bond prices to fall. A stampede could rattle the financial system and dent Abe’s anti-deflation campaign. Deposit-taking institutions have trimmed their portfolio of Japanese government bonds (JGBs) by 9% over the past year, helped by the BOJ’s aggressive bond-buying programme. But they still carry 288 trillion yen ($2.8 trillion) of JGBs, equivalent to 60% of GDP. There is a worrying amount of government debt still to come. The stock of JGBs would zoom to just over 925 trillion yen by 2017, from an estimated 860 trillion yen at the end of 2014, assuming 2.5% annual growth in the debt pile.

If the Government Pension Investment Fund starts chasing riskier assets like equities to bolster returns, another 10-15 trillion yen of JGBs may need to find alternative buyers by 2017. That brings the oversupply to 80 trillion yen. On past trends, other non-bank investors and foreigners can pick up 35 trillion yen of the slack, leaving 45 trillion yen of JGBs looking for a home. The BOJ can’t keep buying 50 trillion yen of JGBs a year, and may turn seller once inflation picks up. All this is a problem because excessive buying could turn into panic selling, if bond yields start to rise from their low levels. That could bring financial instability and fiscal ruin. About 44% of Japanese corporate executives recently surveyed by Reuters expect a southern European-style debt crisis within the next 10 years. Abe’s team is aware of the challenge. A finance ministry official attending the BOJ’s June 12-13 monetary policy meeting characterized the fiscal situation as “severe.”

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If you finance 90% of $1.2 trillion in debt, and defaults rise like a flood surge, what do you do?

Record Student-Loan Debt Prompts Treasury Push to Stem Defaults (Bloomberg)

The U.S. Treasury, which finances more than 90% of new student loans, is exploring ways to make repayment more affordable as defaults by almost 7 million Americans and other strapped borrowers restrain economic growth. Leading the effort is Deputy Secretary Sarah Bloom Raskin, who became the department’s No. 2 official in March after more than three years as a Federal Reserve governor. As higher-education debt swells to a record $1.2 trillion, Raskin, 53, is alert to parallels to the mortgage crisis. Back then, “we would see signs on telephones polls with 1-800 numbers urging homeowners to call to stop foreclosures. People generally got into more trouble when they used those services,” she said in an interview. Driving past the same telephone poles recently, she saw signs “urging people to call a 1-800 number for helping paying student loans.”

Raskin has reason to worry: Most of those loans are backed by the federal government. In addition to trying to facilitate stronger growth, she’s focusing on the impact such debt has on government’s financing needs and ways to improve servicing and collection. Among the options under consideration is boosting participation in underused Education Department programs that reduce monthly payments by tying them to a%age of income for those who struggle, while extending the term of the loan. The Treasury and Education departments are working with tax preparers Intuit and H&R Block to reach borrowers during the tax-filing process and provide information about student loan repayment options.

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Time for BRICS to Act to Counter US Destabilization Efforts (Tanosborn)

It had to happen! The blame game on that horrendous airline incident, Malaysian Flight MH17, has reached the expected loud monotone of pointing fault, lock, stock and barrel at Russia… and, more specifically, to that villain ex-KGB Slav, Vladimir Putin. US media barrage of grotesque and obscene propaganda against America’s former foe and competitor, whether filtering down from the top or randomly finding placement in the emotions of a brainwashed citizenry, has found a leader of this warring marching band in Barack Obama. The neocon ruling forces in the US State Department together with the bellicosarians running the Pentagon have found a perfect mouthpiece in the president of the US, an unlikely candidate just a few years ago, to do their bidding in Leo Strauss’ messianic vision to rule the World.

America’s few leadership voices of dissent and reasonableness against such ill-conceived propaganda, those of Libertarian Ron Paul and Professor Stephen Cohen (NY University) uniquely standing out, are drowned in a sea of US-poisoned waters where an armada of sanctions is unjustly landing on a nation, Russia, which dares stand for a right to secure its own historic geopolitical status… doing so without expressed or implied ambitions to extend its power and influence over others in the world… as the US does.

If blame is to be directed at any nation for the downing of this aircraft, the investigation needs to be pointed at what has transpired during this past year in Ukraine. It was not Russia, or separatists in Eastern Ukraine, that created Ukraine’s political chaos. It was the United States using its money and influence over a subservient European Union that brought down the democratically elected government in Kiev and stirred the ultimate separatist unrest. So, if anyone is deserving of the ultimate, root-cause blame for this sordid loss of life, it should be the United States Machiavellian players now running Washington. However, we might honor the memory of these innocent victims of flight MH17 by reaching a modus operandi consensus so that incidents such as this do not occur again. But how is the world to counter the power of any nation, or block of nations, running amok to establish some form of supremacy over the rest?

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Yeah, get a machine!

Traders Are Walking Zombies On Wall Street (MarketWatch)

The signs are everywhere on Wall Street. Trading floors that once buzzed with noise and energy are now as silent as cathedrals. Big firms that reaped huge profits from trading stocks, bonds, commodities and currencies are turning to staid money management to boost earnings. What once was the main event is now just a sideshow. There are many fewer traders now, and they’re making much less money. And there are going to be even fewer very, very soon. With one big exception I’ll discuss later, trading is dying. And it’s not just stock trading, where volumes are slightly more than half of what they were five years ago. Fixed income, currencies and commodities trading (FICC), Wall Street’s huge profit driver of the 2000s, is in deep, deep trouble.

Bitter traders watching the gravy train leave the station blame regulators for tying Wall Street’s hands or the Federal Reserve’s unconventional monetary policy, which suppresses interest rate spreads and volatility that are traders’ bread and butter. That’s what’s really behind former pit trader and CNBC commentator Rick Santelli’s increasingly strident, desperate rants over the past few months. And the so-called “debate” in the financial media about whether this decline is cyclical or permanent is completely phony. It’s not coming back, guys, so maybe you should learn a useful trade like being a plumber or electrician. I’m serious. Problem is, tighter regulation stemming from the 2009 Dodd-Frank Act, the Fed’s zero interest rates and extraordinary bond-buying, and the end of a three-decade-long bull market in bonds have changed the landscape forever.

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Isn’t this a lovely riddle from TAE buddy Euan in Aberdeen!

The High Cost Of A Scottish Renewable Energy Surplus (Euan Mearns)

“The Scottish Government’s targets are for renewable sources to generate the equivalent of 100 per cent of Scotland’s gross annual electricity consumption by 2020.” What will the consequences be for the Scottish People? This post models Scottish electricity production and consumption in 2020 and compares this with 2012. It is assumed that Scotland’s two nuclear power stations remain operational in 2020. The reader is asked to always recall that the numbers are based on models and the conclusions therefore carry uncertainty. The consequences of this energy policy may be:

• A large electricity surplus of about 15 TWh may be produced in 2020, worth about £2.5 billion at 17p / KWh.

• There are currently many ideas but no certainty about where this surplus might go. It seems possible that a large part may simply be wasted.

• Assuming that marine renewables remain negligible and hydro output remains unchanged in 2020 then the bulk of the expansion in renewables to meet the target will most likely be met by wind that will require a 5 fold increase relative to 2012.

• In an independent Scotland the subsidy payments currently made to renewables companies by 63 million UK citizens would fall pro rata on the shoulders of 5.3 million Scottish citizens. This, combined with the 5 fold increase in wind capacity may mean a 25 fold increase in the level of renewable subsidy born by Scottish electricity consumers. Electricity bills may double.

In summary, the Scottish Government energy plan may result in a large electricity surplus that at present has nowhere to go, the number of wind turbines may increase 5 fold and electricity bills may double.

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Jeez …

Environmental Cost Of Beef 10 Times More Than Other Livestock (BBC)

A new study suggests that the production of beef is around 10 times more damaging to the environment than any other form of livestock. Scientists measured the environment inputs required to produce the main US sources of protein. Beef cattle need 28 times more land and 11 times more irrigation water than pork, poultry, eggs or dairy. The research has been published in the Proceedings of the National Academy of Sciences. While it has long been known that beef has a greater environmental impact than other meats, the authors of this paper say theirs is is the first to quantify the scale in a comparative way. The researchers developed a uniform methodology that they were able to apply to all five livestock categories and to four measures of environmental performance.

“We have a sharp view of the comparative impact that beef, pork, poultry, dairy and eggs have in terms of land and water use, reactive nitrogen discharge, and greenhouse gas emissions,” lead author Prof Gidon Eshel, from Bard College in New York, told BBC News. “The uniformity and expansive scope is novel, unique, and important,” he said. The scientists used data from from 2000-2010 from the US department of agriculture to calculate the amount of resources required for all the feed consumed by edible livestock. They then worked out the amount of hay, silage and concentrates such as soybeans required by the different species to put on a kilo of weight. They also include greenhouse gas emissions not just from the production of feed for animals but from their digestion and manure. As ruminants, cattle can survive on a wide variety of plants but they have a very low energy conversion efficiency from what they eat. As a result, beef comes out clearly as the food animal with the biggest environmental impact.

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Jeez squared …

Eating Beef Raises Carbon Footprint More Than Driving A Car (Guardian)

Beef’s environmental impact dwarfs that of other meat including chicken and pork, new research reveals, with one expert saying that eating less red meat would be a better way for people to cut carbon emissions than giving up their cars. The heavy impact on the environment of meat production was known but the research shows a new scale and scope of damage, particularly for beef. The popular red meat requires 28 times more land to produce than pork or chicken, 11 times more water and results in five times more climate-warming emissions. When compared to staples like potatoes, wheat, and rice, the impact of beef per calorie is even more extreme, requiring 160 times more land and producing 11 times more greenhouse gases. Agriculture is a significant driver of global warming and causes 15% of all emissions, half of which are from livestock.

Furthermore, the huge amounts of grain and water needed to raise cattle is a concern to experts worried about feeding an extra 2 billion people by 2050. But previous calls for people to eat less meat in order to help the environment, or preserve grain stocks, have been highly controversial. “The big story is just how dramatically impactful beef is compared to all the others,” said Prof Gidon Eshel, at Bard College in New York state and who led the research on beef’s impact. He said cutting subsidies for meat production would be the least controversial way to reduce its consumption. “I would strongly hope that governments stay out of people’s diet, but at the same time there are many government policies that favour of the current diet in which animals feature too prominently,” he said. “Remove the artificial support given to the livestock industry and rising prices will do the rest. In that way you are having less government intervention in people’s diet and not more.”

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” … go cap in hand to the self-seeking flea and beg it for what became £27 billion”

Putting A Price On Nature Is The Road To Ruin (Monbiot)

Ladies and gentlemen, we are witnessing the death of both the theory and the practice of neoliberal capitalism. This is the doctrine which holds that the market can resolve almost all social, economic and political problems. It holds that people are best served, and their prosperity is best advanced, by the minimum of intervention and spending by the state. It contends that we can maximise the general social interest through the pursuit of self-interest. To illustrate the spectacular crashing and burning of that doctrine, let me tell you the sad tale of a man called Matt Ridley. He was a columnist on the Daily Telegraph until he became – and I think this tells us something about the meritocratic pretensions of neoliberalism – the hereditary chair of Northern Rock: a building society that became a bank. His father had been chair of Northern Rock before him, which appears to have been his sole qualification. While he was a columnist on the Telegraph he wrote the following, in 1996:

“[the government] is a self-seeking flea on the backs of the more productive people of this world. … governments do not run countries, they parasitize them.”

He argued that taxes, bail-outs, regulations, subsidies, interventions of any kind are an unwarranted restraint on market freedom. When he became chairman of Northern Rock, Ridley was able to put some of these ideas into practice. You can see the results today on your bank statements. In 2007 Ridley had to go cap in hand to the self-seeking flea and beg it for what became £27 billion. This was rapidly followed by the first run on a British bank since 1878. The government had to guarantee all the deposits of the investors in the bank. Eventually it had to nationalise the bank, being the kind of parasitic self-seeking flea that it is, in order to prevent more or less the complete collapse of the banking system.

By comparison to Ridley, the likes of Paul Flowers, our poor old crystal Methodist, were pretty half-hearted. In fact about the only things which distinguish Flowers from the rest of the banking fraternity were that a) he allegedly bought his own cocaine and b) he singularly failed to bring the entire banking system to its knees. Where’s Ridley now? Oh, we don’t call him Mr Ridley any more. He sits in the House of Lords as a Conservative peer. That, ladies and gentlemen, is how our system works.

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Better get out. There’s no solution to this.

California Water Prices Soar for Farmers as Drought Grows (Bloomberg)

Farmers in California’s Central Valley, the world’s most productive agricultural region, are paying as much as 10 times more for water than they did before the state’s record drought cut supply. Costs have soared to $1,100 per acre-foot from about $140 a year ago in the Fresno-based Westlands Water District, which represents 700 farms, said Gayle Holman, a spokeswoman. North of Sacramento, the Western Canal Water District is selling it for double the usual price: $500 per acre-foot, about 326,000 gallons (1.2 million liters). “This year the demand was great, the competition was high,” said Ted Trimble, general manager of Western Canal, which represents rice farmers. “You have huge demand in the southern end of the state.” The drought gripping the state that supplies half the fruits, vegetables and nuts consumed in the U.S. has led federal and state providers to curtail the water they distribute to California’s farmers.

That’s prompted districts representing growers to buy and sell for escalated prices from other parts of the state as thousands of acres go unplanted. The drought threatens to boost produce costs that are already elevated following a December frost, according to the U.S. Agriculture Department. The price of fresh fruit is forecast to rise as much as 6% this year, the department said last month. Dairy products, of which California is the biggest producer, may rise as much as 4%. Agriculture consumes about 80% of all delivered water in the most-populous U.S. state. California’s 80,500 farms and ranches supply everything from milk, beef and flowers to some of the nation’s largest fruit and vegetable crops, including almonds, avocados and strawberries. After three years of record-low rainfall, 82% of the state is experiencing extreme drought, according to the U.S. Drought Monitor, a federal website.

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Home Forums Debt Rattle Jul 24 2014: Ukraine: What To Do When Growth Is Gone

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    Arthur Rothstein Children of citrus workers, Winter Haven, Fla. Jan 1937 “The fact that the coalition has fallen apart, that laws haven’t been voted o
    [See the full post at: Debt Rattle Jul 24 2014: Ukraine: What To Do When Growth Is Gone]


    Everything US Foreign Policy touches turns to shit. It’s just a given now.

    Everything US Economic Policy touches becomes ever more dependent on more debt folly.

    Everything US Entitlement/Social Policy touches creates more poverty and reliance upon systems that can’t be sustained.

    So, the only real “Growth” taking place is in all of the above. Any bets on how this ends?


    It’s 10PM EST and neither the NY Times or Washington Post online front pages mention the resignation of PM Yatsenyuk. Not that I can find anyway. I suppose his statement is just too difficult to spin. As much as the separatists in the east have a pretend country the same can be said about the east, the Kaganate of the Nulands. (An inside joke coined by a Pepe Escobar commentator)

    Here I figured with the billions flowing in they could pay the army and keep some semblance of a country, at least until winter. How wrong I was. The real story on the ground there is increasingly tragic but the story about the story, or should I say the lack of it,is entertaining in a sick way.

    The incompetence of the administration is astounding. The worst part being I don’t even think they think they are failing since success for them seems to be who is winning the PR war. If ever there was a time where fate delivered some massive blow to the deluded this would be a prime time for it as the whole thing seems like peak stupidity.


    Is it just me or does the whole world seem surreal these days? Or am I just spending too much time at TAE? I take nothing at face value anymore. I have always known that the media is nothing but propaganda, but the recent anti-Putin propaganda was so over the top that it woke me from my slumber. The Marie Harf video was really hard to watch. Is it too much to ask that the mouthpiece of the government be a little more articulate, composed, and competent? At least then I might be taken in by the propaganda and stay in the Matrix. This is all bad quality B-move propaganda that even lacks residual entertainment value.

    Maybe it’s not just the propaganda. A light came on when I read Rapier’s comment yesterday that “One inch past our borders and the government is only criticized for being too weak, too timid.” So true. In fact, Michael Snyder hast a list up today of issues where Americans are politically divided:

    America The Divided: Everyone Knows We Have Problems But There Is Very Little Agreement On Solutions

    Note that virtually all of the issues are domestic — I don’t think that’s an accident. And though all of the issues are important, some are obviously more important than others. Yet there is no sense of priorities in the U.S., no grasp of the big picture.

    That realization, and perhaps the realization that others are realizing the same thing, makes the whole world seem all the more dreamlike and unreal.

    V. Arnold

    Navigating Wonderland, even Alice needed drugs. Lacking that, one does best by stepping back, away from the fray and not letting the bastards get you. Especially mentally.
    Knowing the truth may not allow one to change anything, except ones personal decisions.
    Great read and information…

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