Walker Evans Shoeshine stand, Southeastern US 1936
“Even among China’s many questionable credit vehicles, local-government financing vehicles are a standout.”
• China Blows Its Debt Bubble Bigger (Pesek)
There are plenty of reasons one could argue China isn’t on the verge of a debt crisis: The country has $3.7 trillion in currency reserves, a closed financial system and ambitious leaders who claim to be on the case. And doesn’t the biggest rally in Chinese stocks since 2008 count for anything? But like Japan and other highly-indebted countries that have struggled to deleverage, China isn’t showing the requisite tolerance for pain. A case in point was the government’s May 15 decision to order banks to prop up the same local-government financing vehicles, or LGFVs, that it claimed to be reining in. Then the People’s Bank of China decided this week to guide the three-month Shanghai Interbank Offered Rate to its lowest level since 2008.
By manipulating “shibor” in this way, the People’s Bank of China is helping regional leaders accelerate their unsustainable borrowing. Neither of these steps will help China avoid a Japan-like crisis. Rather, they are likely to ensure a belated financial reckoning in the years ahead with the potential to shake the global economy. The encouragement of local government borrowing is especially alarming. Even among China’s many questionable credit vehicles, LGFVs are a standout. They allow provincial governments to use state-owned resources and assets, like land, to borrow from banks. LGFVs have become a potent symbol of the country’s post-2008 overindulgence in debt, with local government obligations now exceeding the entire German economy.
The Chinese government has also been urging banks to increase lending to borrowers with liquidity troubles, relaxing rules for companies to conduct off-balance-sheet borrowing and prodding the PBOC to do whatever it takes to cap local-government bond yields. Meanwhile, by allowing local government to shift their LGFV debt to fresh bonds, the Chinese government has eliminated any remaining semblance of transparency in those markets. Entrepreneurial government officials who want to raise some cash to fund dubious projects now have a license to do so without leaving a paper trail.
Meet the expert.
• Bernanke: No Risk Of Hard Landing In China (Reuters)
Former Federal Reserve Chairman Ben Bernanke said that China’s economic slowdown should not worry markets as there was no risk of a hard landing, and emphasized that a move to raise U.S. rates should be viewed as a positive sign for the world’s largest economy. Bernanke, who participated in an open interview at a private-sector forum in Seoul on Wednesday, said the expected U.S. rate hike would be “anticlimactic” when it happens and that there would only be minor negative impact on South Korea. “There may be some volatility. Countries like Korea are very well placed because it has very good policy, good institutions. It’s not weak or underdeveloped and doesn’t know how to handle capital flows.”
A Fed rate hike, expected by markets before the end of this year, would be something to cheer about, said Bernanke, who now works at the Brookings Institution, bond giant Pimco and hedge fund Citadel. “I don’t know when (the rate hike will come), but when that begins, that’s good news, not bad news because it means the U.S. economy is strong enough.” Bernanke also said the economic slowdown in China is necessary as it needs to change its growth model to be more sustainable in the long term. “China was growing 10% a year. And it was doing that through heavy capital investment, steel plants and so on. Very export oriented,” he said. “As the country gets more rich and sophisticated that kind of growth is no longer successful.”
First move in a while? Promptly denied in Athens.
• Greece May Delay IMF Payments Till The End Of June (Guardian)
Greece could secure vital weeks to negotiate a rescue deal with its creditors if Athens is able to delay repayments worth €1.6bn to the IMF, as critical deadlines approach. The proposal to combine four IMF repayments due in June and delay payment until the end of the month would win more time for vital debt talks that resumed on Tuesday. Greece must repay €300m on 5 June, the first of four instalments due next month. The IMF, its biggest creditor after the European Union, often waits a month before receiving funds from debtor countries. A senior eurozone official close to the talks with Athens told Reuters: “There is the possibility of putting together several payments that Greece would need to make to the IMF in the course of June and then just make one payment.”
The news agency said a second official close to the talks also acknowledged that a payment delay was a possibility. The first official said: “That’s basically a technical treasury exercise and they could tell the IMF that this is how they want to do it and the IMF would probably have to be OK with that.” Shut out of international markets, Athens has conceded that it will miss the 5 June payment without new loans from the EU, which is demanding reforms that will make the country’s debt sustainable. Last week, the interior minister, Nikos Voutsis, a longstanding ally of the prime minister, Alexis Tsipras, said the country needed to strike a deal with its European partners within the next couple of weeks or it would default on its IMF repayments. In remarks that heightened the possibility of a default, he said: “This money will not be given and is not there to be given.”
“It’s about time the institutions, in particular the IMF, get their act together..”
• Greece’s Creditors Must ‘Get Their Act Together’, Says Varoufakis (AFP)
Greece’s creditors must “get their act together” and help produce a new loan deal for the cash-strapped country, Finance Minister Yanis Varoufakis said Tuesday. “It’s about time the institutions, in particular the IMF, get their act together, and come to an agreement with us,” the outspoken Varoufakis told CNN. Greece’s radical left government in recent days has sent conflicting messages on its finances as the state is gradually running out of money. The cash crunch has been caused by the government’s inability to agree with its international creditors on reforms that would unlock some €7.2 billion in promised bailout cash.
Over the weekend, a cabinet minister said Greece had “no money” to make a series of repayments to the IMF from June 5. “The instalments for the IMF in June are (overall) €1.6 billion. This money will not be given. There isn’t any to be given. This is a known fact,” Interior Minister Nikos Voutsis said on Sunday. A day later, a government spokesman insisted the country would keep up with its payments for as long as it could. “To the extent that we are able to pay, we will keep on repaying these obligations,” government spokesman Gabriel Sakellaridis told reporters. Varoufakis on Tuesday denied that Greece is about to run out of money. “Our state, as a result of huge sacrifices by the Greek people, has managed to live within its means,” he said.
“We will make the payment because I have no doubt that we will have an agreement,” he added. Talks in Brussels over the Greek reform list are to resume on Tuesday. According to Athens, the two sides are still apart on tax issues, social insurance, labour rights and the size of Greece’s budget surplus. The government hopes to secure an agreement by early June at the latest.
“Mainly his frustration, the fact that the one thing that he can’t discuss with the finance ministers of Europe is economics..”
• Steve Keen: Varoufakis Battles ‘Divorce Lawyer’ Style Austerity Talks (CNBC)
Greece’s controversial finance minister, Yanis Varoufakis, has blamed the euro zone’s insistence on greater austerity measures as the real reason why talks with lenders are stalling, and not any lack of willingness on Greece’s part to implement reforms. In a blog post published Monday, Varoufakis said the Greek government’s negotiations with its creditors have been entirely misrepresented as “unwilling” by the world’s media when Athens is actually very keen to put economic reforms in place. “The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs,” Varoufakis said in a Project Syndicate blog post, published on Monday.
“Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease,” he added. At the same time, former colleague, fellow economist and close friend of Varoufakis, Steve Keen said the finance minister was frustrated with the progress of Greece’s talks with the euro zone, adding Varoufakis had compared the talks to dealing with “divorce lawyers”. Keen, chief economist of the Institute of Dynamic Economic Analysis (IDEA) who is credited with forecasting the economic crisis from as early as 2005, said the finance ministers of Europe refused to discuss certain euro policies, according to Varoufakis.
Keen, who also heads up the school of economics, history and politics at Kingston University in London, first met Varoufakis when they both worked as lecturers at Sydney University in the late 1980s. When asked what they mainly discuss at the moment, Keen said, “Mainly his frustration, the fact that the one thing that he can’t discuss with the finance ministers of Europe is economics,” he told CNBC. “He goes inside, he is expected to be discussing what the economic impact of the policies of the euro are and how to get a better set of policies, living within the confines of the euro and the entire European Union system, and he said they simply won’t discuss it. He said it is like walking into a bunch of divorce lawyers, it is not anything like what you think finance ministers should be talking about,” Keen said, adding that he thought current austerity reforms being suggested by the euro zone were a “fantasy”.
Way beyond his mandate. Still wondering how that became so accepted in Europe.
• Juncker Questions Varoufakis, Tsipras (Kathimerini)
As Greece’s negotiations with its creditors enter the most critical phase, the country’s finance minister created fresh confusion on Tuesday with statements regarding possible tax reforms which were almost immediately revoked. Meanwhile, fuelling speculation about how much longer Varoufakis can stay in the crucial post of finance minister, European Commission President Jean-Claude Juncker declared that he was “not helping the process.” “Mr Varoufakis is the finance minister of a country that has to confront huge problems and he doesn’t give the feeling that he knows that,” Juncker told the MNI news agency. Asked by the MNI reporter whether he trusted Prime Minister Alexis Tsipras, Juncker took 14 seconds to answer “yes” but said Tsipras was becoming “increasingly responsible.”
In the interview Juncker also presented his opinions on what concessions should be made from each side in the tough negotiations while saying it was imperative to achieve a deal that includes the International Monetary Fund, which is awaiting a €300 million repayment from Greece next week. Referring to proposed changes to the Greek value-added tax system that are under discussion, Juncker said these reforms must yield €1.8 billion, or 1% of gross domestic product, in order to narrow a fiscal gap. He said pension reform was also crucial, pointing to the large proportion of early retirements in Greece in particular, while suggesting that labor reforms – another sticking point – could be postponed until the fall.
The Brussels Group negotiations resume on Wednesday with a Euro Working Group teleconference expected to take place on Thursday. In Athens, government sources said they expected a deal by the weekend so an emergency Eurogroup can be held next Tuesday. But confusion about the details such a deal would entail was deepened by Varoufakis. The minister told a press conference the government was considering introducing a “small” levy on ATM withdrawals. Two hours after the statement, his ministry said that the idea of taxing bank transactions had been proposed during negotiations but was withdrawn following “objections by the Finance Ministry.”
“..one can see a preference emerging for an austerity which sweeps everything away wherever it passes.”
• Greek Default, European Bankruptcy (Jacques Sapir)
The negotiations with Greece have been lead against any good sense or, more exactly, against any democratic good sense (which we are forced to agree is not quite the same thing). There have been attempts to discredit, to threaten, even to corrupt the Greek negotiators. These negotiations are actually being held in the greatest of obscurity. We do not have at disposal the minutes of the declarations of the participants, and one leaves it over to the press the produce “leaks“ the content of which is uncontrollable, precisely because of the lack of minutes. Yannis Varoufakis has expressed this quite well on his blog, admitting that he taped the negotiations so that one day we will know what to make out of the behavior of all parties involved.
“And maybe that we should question the European institutions, where decisions of fundamental importance are being taken, in the name of the European citizens, but minutes of which are neither taken down nor published. Secrecy and a credulous press are not good harbingers for European democracy.” Considering that Varoufakis is in reality a defender of the European project, one must understand, and measure the amplitude and the reach of his criticism. In effect, it is European democracy, not so much as a principle (already badly harmed since the 2005 refusal to take into account the referendums in France and in the Netherlands) but as a system of operational rules, with the purpose of ensuring the responsibility of actors for their acts, which is absent today. We know quite well that without responsibility there is democracy no longer.
What Varoufakis is saying, is that the European Union is no longer, in its day to day functioning, a democratic system. But the failure also concerns the aims of the European Union. In the case of Greece, one pretends officially wanting to keep the country in the Eurozone. But, in fact, and for various reasons, one can see a preference emerging for an austerity which sweeps everything away wherever it passes. Greece’s position has received the support of many economists and even the IMF has considered that on a number of points, the Greek government was right. But, nothing doing. It is all happening as if the German government, it must be said with the help of the French government which is behaving – alas – in this instance as the most eager of vassal, as the lowest of lackeys, were seeking to impose at any price upon ALL the countries of the Eurozone the death-bringing austerity which is its policy.
And one can understand that concessions to Greece would immediately entail demands emanating from Spain. In this latter country, Podemos, the party coming out of the movement of the indignés has carried away on this Sunday, May 24, a few beautiful victories which are rendering the position of the Spanish Prime Minister, Rajoy, ever more fragile. But this is true also of Portugal and Italy. Concessions to Greece would signal the beginning of a wholesale putting into question of austerity, something the German government doesn’t want to happen under any pretext. For ideological reasons, but also for some very material ones.
What is profiling itself on the horizon is not a Greek default, or more exactly, not only a Greek default. We are witnessing the bankruptcy of the Europeist ideology, and of the European Union as well. Through the Greek default, we will be witnessing a defaulting of the politics of the European Union, taken hostage by Germany. So that this default will be a European default, as it will signal the end of a certain idea of the European Union and will open a deep and durable crisis within Europe. European institutions will be affected in their legitimacy. This default will be the basis of the coming revolution.
A useful overview that includes Cochrane, Parenteau and Varoufakis’ ideas.
• A Parallel Currency For Greece: Part I (VoxEU)
Absent a deal with creditors, very soon, short of cash, the Greek government might default on its debt. To prevent this from happening, and to avoid taking new extra doses of useless and painful austerity, Athens could be bound to resort to the introduction of some kind of new domestic currency – in parallel to the euro – for the government to be able to make payments to public employees and pensioners while freeing up the euros needed to pay out its creditors. The ECB has not denied this possibility. Recently, ECB sources have unofficially discussed the issue with the media in some detail (albeit anonymously), and executive board member Yves Mersch has referred to a parallel currency for Greece as one of “the exceptional tools that any government can consider if it has no other options,” noting that all these tools bear high costs.
Is this really so? Is it really the case that a parallel currency would be worse than the current medicine Greece is taking (and is set to be taking for an indefinite future)? A parallel currency per se would neither prevent the risk of Greece’s disorderly default nor automatically help it out of depression. But not all parallel currencies are born equal, and there are various ways to design a parallel currency, each bearing significantly different implications. Below we compare the proposals currently on the table and discuss how a parallel (quasi) currency could be designed to promote Greece’s economic recovery. The issue is relevant for all countries suffering a weak economic activity, with no autonomous monetary policy, and limited fiscal space.
John Cochrane (2015) considers the possibility that the Greek government issues small cuts, zero-coupon bonds as promises to repay the bearer an equivalent amount of euros at some future date (IOUs). These IOUs could take the form of paper securities or electronic book entries in bank accounts, and the government could roll them over every year, just as for any type of debt obligation. The IOUs could be used to pay public salaries, pensions, and social transfers as well as to recapitalise or lend to banks. The IOUs would trade at a discount, but if the government accepted them at face value for tax payments, the discount might not be large. Mostly, the discount would reflect the risk that Greece either reneges on its commitment to accept its own debt for tax payments or suspends the roll over, thereby defaulting on the new debt. As Cochrane notices, introducing the IOUs would amount to creating a separate or dual currency that would allow Greece not to leave the Eurozone.
The other half doesn’t have any…
• Half Of Greeks Cover Their Needs From Their Deposits (Kathimerini)
Greek salaried workers cannot buy what they want but, rather, have to limit themselves to what they can afford on their reduced disposable income, a survey by the Labor Institute of the General Confederation of Greek Labor (GSEE) and the Association of Working Consumers of Greece (EEKE) showed on Tuesday. Crucially, 47% of consumers surveyed said they have relied on their savings to cover their needs in the past few months, while 16% were forced to borrow to spend, as the reduction of incomes continued in 2015 for more than half of Greece’s wage-earners (53%), the survey conducted in mid-February revealed – though this is markedly better than the 70% rate recorded last September.
In terms of expectations for the current quarter, consumers (who responded just three or four weeks after the change in government) said that things could not get much worse: Three in four (75%) said incomes would remain stable (from 57% in September), 16% expected a decline (from 40% five months earlier) and 9% even expected to see their incomes rise.
To be filed under ‘irony’?!
• EU Funds At Risk Due To Project Payment Freeze By Athens (Kathimerini)
Greece runs the immediate risk of missing out on €1 billion worth of EU subsidies this year from the previous support framework, which expires on December 31, as a payment freeze by the state has blocked the proper implementation of projects that will have to finish by the end of the year. Although the subsidy absorption rate had improved considerably in recent years, reaching a level of 85%, failure to stick to that rate this year – the last of the extended 2007-2013 program – would hamper Greece’s capacity to utilize the EU funds. At greater risk are not only the highway and environmental projects but also investment plans that are being implemented by the private sector. Economic uncertainty has suspended any resolve for investing, resulting in an extensive inability to absorb the funds Brussels has set aside for Greece.
Hit man.
• Target Of Greek Scorn Shapes Nation’s Fate As IMF’s Storm Chaser (Bloomberg)
When the IMF’s point man on Greece, Poul Thomsen, rebuffed the nation’s proposal in December to unlock more bailout funding, he wound up making his job even tougher. The Greek government’s failure then to secure an agreement with its creditors helped pave the way for its defeat in January by the anti-austerity Syriza party. Instead of negotiating with Greece’s establishment, Thomsen finds himself facing a novice group whose leaders have likened the lenders’ conditions to “fiscal waterboarding.” Now the 60-year-old Danish economist is holding his ground against Syriza economic plans that fail to meet IMF criteria for putting Greece’s debt on a sustainable path.
And this time, the nation’s membership in the euro and the IMF’s credibility hang in the balance as Greece runs low on cash and European leaders look to the fund’s blessing before disbursing more bailout money. The situation has Thomsen, whose thesis adviser was an architect of the euro, in the role of helping decide the currency’s fate. Thomsen has been closely involved with the Greek bailout since its inception in 2010, and often represents the fund at meetings of euro-area finance ministers, where officials from the European Commission and ECB also typically attend. Those two institutions and the IMF form the so-called troika of Greek creditors.
“That deal in December was a hugely missed opportunity,” said Martin Edwards, an international-relations professor at Seton Hall University in South Orange, New Jersey, who has researched IMF lending programs. “They moved from having a moderately cooperative government to one that wasn’t going to be in their corner. This is a problem of their own devising.”
“A fraction of this amount would go a long way towards fixing our housing shortage, and giving millions of priced-out families and young people the chance of a stable home.”
• Landlords Enjoy £14 Billion Tax Breaks In UK Buy-To-Let Expansion (Guardian)
Landlords enjoyed a record £14bn in tax breaks in 2013, according to figures revealing the expansion of the UK’s buy-to-let market in the aftermath of the financial crisis. Some £6.3bn was declared against the cost of mortgage interest alone in the 2012-13 financial year, according to information obtained by the Guardian from HMRC through a freedom of information request. The figures also reveal that the number of landlords has increased by more than one-third over the past six years. In the 2012-13 financial year, 2.1 million taxpayers declared income from property, up from 1.5 million in 2007-08.
The anti-homelessness charity Shelter has called for the government to conduct an urgent review of the tax treatment of landlords, who can also deduct the cost of insurance, maintenance and repairs, utility bills, legal fees and other expenses from their income. Owner-occupiers are not entitled to the same privileges. In response to the figures, Campbell Robb, Shelter’s chief executive, said: “In the context of looming welfare cuts and a dramatic shortage of homes, all those struggling to keep up with sky-high housing costs will be shocked to hear that a massive £14bn has been given in tax breaks for landlords in just a year.
“A fraction of this amount would go a long way towards fixing our housing shortage, and giving millions of priced-out families and young people the chance of a stable home. “In the Queen’s speech the new government must start to set out a comprehensive plan that will finally build the homes this country desperately needs, and an urgent review of these huge tax breaks must be part of this.”
Masters of corruption.
• Corruptionomics in Italy (Alessio Terzi)
In line with its National Reform Programme for the period 2015-16, Matteo Renzi’s government obtained parliament’s approval on a new anti-corruption law on May 21. We document the sheer size of corruption in Italy and argue that tackling it is not only a matter of fairness, but also crucial to boost the country’s potential output after three years of recession and almost two decades of stagnation. Experience from past success cases suggests that only forceful and comprehensive actions will succeed in bringing corruption under control.
The problem of corruption in Italy is real and large. Transparency International’s Corruption Perception Index, the most widely used indicator of corruption, shows how Italy occupies the last place in Europe and 69th in the world, on par with Romania, Bulgaria, and Greece. This picture is confirmed by other organisations. The World Bank’s indicator for Control of Corruption ranks Italy 95th out of 215 countries, again neck and neck with Greece, Romania, and Bulgaria. The WEF ranks Italy 102nd out of 144 countries on indicators related to ethics and corruption.
The economic consequences of corruption can be dissected in two classes: static and dynamic. Statically, corruption leads to the creation of deadweight losses, as it drives prices above their marginal cost of production. This implies a loss for both the public (e.g. in the form of investment projects being more expensive) and the private sector (e.g. in a bureaucratic procedure costing more to execute). The Italian Court of Auditors estimates these direct costs of corruption to be in the order of magnitude of €60bn per year, equivalent to roughly 4% of the country’s GDP.
A timely reminder: “..when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.”
• Robert Mundell, Evil Genius Of The Euro (Greg Palast, 2012)
The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency. Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:
“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?” As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement. But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.) “It’s very hard to fire workers in Europe,” he complained. His answer: the euro. The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.
“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.” He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing. [..] The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher. Mundell explained to me that, in fact, the euro is of a piece with Reaganomics: “Monetary discipline forces fiscal discipline on the politicians as well.” And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.
Which is why the EU has no future.
• In EU, Reform Means Different Things To Member Countries (Guardian)
The most over-used word in Brussels is “reform”. There is not a leader in the EU who does not urge reform of the union. The trouble is they all mean different things when they declaim the r-word. A German leader urges reform and means belt-tightening, structural change, balanced budgets in the push for global competitiveness. If you’re a French or Italian leader, reform means less austerity, more public spending, policies geared to growth not contraction, to jobs and not more unemployment. And David Cameron, who couches his referendum campaign in the need to reform the EU, of course, means a new deal for Britain.
Reform means concessions to UK exceptionalism in the EU, with 27 countries recognising and adjusting to Britain’s uniqueness in Europe. In the arguments about the looming renegotiation of Britain’s position in the EU, the emphasis until now has been on form rather than substance, the shape that a deal might take rather than what it might bring. This has focused on the calls for reopening the EU treaties, changing the terms of British EU membership, conferring a new legal order on that status. It is still not clear what might happen because Cameron has been deliberately vague about what he wants, exploring what the others – by the other 27 leaders, Cameron usually means Angela Merkel – might be prepared to give.
Cameron’s argument is that treaty change is necessary because of the impact of the euro crisis, that the eurozone needs a radical shift towards greater political and fiscal integration to shore up the single currency. Of course, Cameron speaks with a forked tongue because his argument is aimed at exploiting that renegotiation to rewrite the terms of British membership. Treaty change in any major way will not happen. It is too difficult. It will take too long. And eurozone leaders are also intensely irritated by the lecturing from Cameron and George Osborne, the chancellor, about how to put their house in order.
Ain’t we smart?
• Big Oil Bosses’ Bonuses Linked To $1 Trillion Spending on Drilling (Guardian)
Bosses at the world’s big five oil companies have been showered with bonus payouts linked to a $1tn crescendo of spending on fossil fuel exploration and extraction over nine years, according to Guardian analysis of company reports. The unprecedented push to bring untapped reserves into production, and to exploit new and undiscovered fields, involves some of the most complex feats of engineering ever attempted. It also reflects how confident Exxon Mobil, Shell, Chevron, Total and BP are that demand will remain high for decades to come.
The big oil groups are pressing ahead with investments despite the International Energy Agency (IEA) estimating that two-thirds of proven fossil fuel reserves will need to remain in the ground to prevent the earth from warming 2C above pre-industrial levels – a proposed temperature limit beyond which scientists warn of spiralling and irreversible climate change. Multi-billion-dollar capital projects amount to huge, long-term bets by the big five that exorbitant costs associated with unlocking hydrocarbon reserves in some of the most inaccessible locations on the planet can eventually be recouped and converted into profits. Bonuses for chief executives at all five firms are tied to the achievement of delivery milestones in the construction and deployment of such projects.
Shell’s Ben van Beurden, for example, last year received a pay deal worth $32.2m, including bonuses linked to delivering “a high proportion of flagship projects on time and on budget”. These are thought to include four platforms floating 1,000 metres or more above deepwater wells in the Gulf of Mexico, Gulf of Guinea and South China Sea. Similarly, BP’s Bob Dudley was awarded a pay deal worth $15.3m, with bonuses linked to seven “major projects”, thought to include Sunrise, a tar sands joint venture in Canada, as well as projects in Angola, Azerbaijan, the Gulf of Mexico and the North Sea.
“The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements..”
• Why Finance Is Too Much Of A Good Thing (Martin Wolf)
An organised society offers two ways of becoming rich. The normal way has been to exercise monopoly power. Historically, monopoly control over land, usually seized by force, has been the main route to wealth. A competitive market economy offers a socially more desirable alternative: invention and production of goods and services. Alas, it is also possible to extract rents in markets. The financial sector with its complexity and implicit subsidies is in an excellent position to do so. But such practices do not only shift money from a large number of poorer people to a smaller number of richer ones. It may also gravely damage the economy.
This is the argument of Luigi Zingales of Chicago Booth School, a strong believer in free markets, in his presidential address to the American Finance Association. The harm takes two forms. The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements, due to crises, pervasive “duping”, or both. Prof Zingales emphasises the indirect costs. He argues that a vicious circle may emerge between public outrage, rent extraction and back to yet more outrage. When outrage is high, it is difficult to maintain prompt and unbiased settlement of contracts. Without public support, financiers must seek political protection. But only those who enjoy large rents can afford the lobbying.
Thus, in the face of public resentment, only rent-extracting finance – above all, the mightiest banks – survive. Inevitably, this further fuels the outrage. None of this is to deny that finance is essential to any civilised and prosperous society. On the contrary, it is the very importance of finance that makes the abuses so dangerous. Indeed, there is substantial evidence that a rise in credit relative to gross domestic product initially raises economic growth. But this relationship appears to reverse once credit exceeds about 100% of GDP. Other researchers have shown that rapid credit growth is a significant predictor of a crisis.
Beware housedold debt, hiding behind the housing bubble.
• Canada’s Economy Out Of The Woods? Think Again (CNBC)
The state of Canada’s finances is back in focus this week with economists questioning whether the country has managed to combat a worrying rise in private debt. An independent policy think tank, called the Fraser Institute, made headlines last Wednesday when it described concerns as “overblown,” adding that there was little evidence that Canadian households were irresponsibly borrowing too much. However, that argument is now being challenged by David Madani, an economist focused on the north American nation at Capital Economics. He called the research “misleading” as it only showed the payments on debt interest, not the principal repayments which reduce the original loan amount.
“Principal repayments often represent a large portion of debt obligations, especially when it comes to housing mortgage debt,” he said in a note released on Monday. “Should market interest rates rise over the next several years, as we anticipate, household debt obligations will become much more onerous.” Canada’s economy has seen house prices and debt levels continue to climb despite the global financial crash of 2008. Former governor of the Bank of Canada, Mark Carney, warned of elevated household debt levels on several occasions during his tenure.
New statistics in March showed that Canadian households held roughly C$1.63 ($1.32) of credit market debt for every dollar of disposable income in the fourth quarter of 2014 – a record high, according to Statistics Canada who published the data. The country has also had to deal with a dramatic fall in the price of oil with its economy very much reliant on the commodity. The central bank delivered a rate cut in January and market participants are gearing up for another policy meeting this week. The current governor of the Bank of Canada, Stephen Poloz, said last week that this policy was “working” and that the cut would benefit households with a mortgage.
Question: how did the NY times know where and when the arrests were going to take place?
• FIFA Officials Arrested on Corruption Charges; Face Extradition to US (NY Times)
Swiss authorities conducted an extraordinary early-morning operation here Wednesday to arrest several top soccer officials and extradite them to the United States on federal corruption charges. As leaders of FIFA, soccer’s global governing body, gathered for their annual meeting, more than a dozen plain-clothed Swiss law enforcement officials arrived unannounced at the Baur au Lac hotel, an elegant five-star property with views of the Alps and Lake Zurich. They went to the front desk to get keys and proceeded upstairs to the rooms. The arrests were carried out peacefully, with at least two men being ushered out of the hotel without handcuffs. One FIFA official, Eduardo Li of Costa Rica, was led by the authorities from his room to a side-door exit of the hotel. He was allowed to bring his luggage, which was adorned with FIFA logos.
The charges allege widespread corruption in FIFA over the past two decades, involving bids for World Cups as well as marketing and broadcast deals, according to three law enforcement officials with direct knowledge of the case. The charges include wire fraud, racketeering and money laundering, and officials said they targeted members of FIFA’s powerful executive committee, which wields enormous power and does its business largely in secret. The arrests were a startling blow to FIFA, a multibillion-dollar organization that governs the world’s most popular sport but has been plagued by accusations of bribery for decades.
The inquiry is also a major threat to Sepp Blatter, FIFA’s longtime president who is generally recognized as the most powerful person in sports, though he was not charged. An election, seemingly pre-ordained to give him a fifth term as president, is scheduled for Friday. Prosecutors planned to unseal an indictment against more than 10 officials, not all of whom are in Zurich, law enforcement officials said. Among them are Jeffrey Webb of the Cayman Islands, a vice president of the executive committee; Eugenio Figueredo of Uruguay, who is also an executive committee vice president and until recently was the president of South America’s soccer association; and Jack Warner of Trinidad and Tobago, a former member of the executive committee who has been accused of numerous ethical violations.
It can produce enough food for everyone, while at the same time cutting CO2 and toxicity in our food. It can not generate gigantic profits fro Big Ag and the chemical industry, though.
• Can Organic Farming Counteract Carbon Emissions? (WSJ)
Organic practices could counteract the world’s yearly carbon dioxide output while producing the same amount of food as conventional farming, a new study suggests. The white paper by the Rodale Institute, a nonprofit that advocates for the use of organic practices, says that using “regenerative organic agriculture,” such as low or no-tillage, cover crops and crop rotation, will keep photosynthesized carbon dioxide in the soil instead of returning it to the atmosphere. Citing 75 studies from peer-reviewed journals, including its own 33-year Farm Systems Trial, Rodale Institute concluded that if all cropland were converted to the regenerative model it would sequester 40% of annual CO2 emissions; changing global pastures to that model would add another 71%, effectively overcompensating for the world’s yearly carbon dioxide emissions.
Michel Cavigelli, a research soil scientist at the USDA’s Agricultural Research Service, which has a slightly different 19-year side-by side study, says his research also shows that organic soil has higher carbon content than conventional but warns that the devil is in the details. For example, the USDA study tills the organic plot and that might cause the manure’s carbon to stay deeper in the soil. But the question organic farming always comes back to is whether farming without synthetic pesticides and genetically modified organisms is really a viable way to feed the planet. Rodale Institute believes it can do that and better. In the longest-running study of its kind, Rodale’s Farming Systems Trial compares organic farming with conventional farming, by farming neighboring plots just as organic farmers and traditional farmers would.
That means its organic farming plot utilizes techniques like crop rotation and cover crops while the conventional plot uses common synthetic pesticides and genetically modified organisms. Both organic and conventional fields were divided into tilled and no-till areas to reflect that farmers use both practices. The findings show that organic farming yields are lower than conventional in the first few years, while conventional crops do better in the first years than they do later on. Over time the production equals out and with organic outperforming conventional farming production in years of drought (organic corn yields 31% more than conventional corn during drought).
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