Harris&Ewing Childs Restaurant, Washington, DC 1918
Losing their religion.
Some countries with high public debt levels might be able to “just live with it,” because cutting back carries its own risks, three IMF officials said in a paper that disputes decades of dogma about the benefits of austerity. The euro zone and other advanced economies have struggled with ballooning debt in the wake of the 2007-09 global financial crisis. Some have faced pressure to satisfy markets through fast fiscal consolidation. The IMF has already cautioned that cutting back on spending or raising taxes too quickly after the crisis could hurt growth. Now, IMF economists Jonathan Ostry, Atish Ghosh and Raphael Espinoza take that advice a step further, arguing that countries able to fund themselves in markets at reasonable costs should avoid the harmful economic impact of austerity.
“A radical solution for high debt is to do nothing at all,” they write in a blog accompanying a Staff Discussion Note, which does not represent the IMF’s official position, but could help shape its policies. “Debt is bad for growth … but it does not follow that paying down debt is good for growth. This is a case where the cure may be worse than the disease: paying down the debt would require further distorting the economy, with a corresponding toll on investment and growth.” Instead, countries can wait for their debt ratios to fall through higher economic growth or a boost in tax revenues over time. The austerity debate has become a hot political topic in countries such as the United Kingdom and Greece as voters protest the pain of budget cuts.
Greece’s Syriza government swept to power in January promising an end to austerity, but now faces pressure for more cuts in exchange for cash from international lenders. The IMF economists did not mention many specific countries, but cited a 2014 chart from Moody’s Analytics that put most advanced economies, including the United States, United Kingdom and Germany, solidly in the “green zone” of ample fiscal space, meaning there is no rush to cut back debt. France, Spain, Ireland should be cautious about debt, while Portugal faces “significant risk.” Japan, Italy, Greece and Cyprus face “grave risk,” meaning they must cut back, according to the chart.
Note: as I wrote recently, the savings rate includes debt payments. Which makes it highly misleading. There is no savings glut.
No commentary necessary on this piece originally posted on the Wall Street Journal by Jon Hilsenrath (the same ad hoc, trial ballooning Fed mouthpiece whose work as it relates to the Federal Reserve has to be precleared by the Federal Reserve itself as we first reported five years ago). And no, to our best knowledge, this is not the WSJ transforming into the Onion.
from HILSENRATH’S TAKE: A LETTER TO STINGY AMERICAN CONSUMERS
Dear American Consumer,
This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?
We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you. We know stock prices collapsed and that was shocking too. We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite countertops. You’ve been working very hard to pay off this debt and we admire your fortitude. But these shocks seem like a long time ago to us in a newsroom. Is that still what’s holding you back? Do you know the American economy is counting on you? We can’t count on the rest of the world to spend money on our stuff. The rest of the world is in an even worse mood than you are. You should feel lucky you’re not a Greek consumer. And China, well they’re truly struggling there just to reach the very modest goal of 7% growth.
The Federal Reserve is counting on you too. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.
Please let us know the problem. You can reach us at any of the emails below. Sincerely,
The Wall Street Journal’s Central Bank Team -By Jon Hilsenrath
“.. the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis..”
It looks like Goldman Sachs doesn’t agree with Carl Icahn on at least one big issue: share buybacks. While the billionaire activist investor has continued to push Apple to purchase more of its stock, Goldman has published a note recommending companies stop spending their cash on buying back their overpriced shares and instead use those overpriced shares to buy other companies’ equity. As the bank puts it, “U.S. equity valuations look expensive on most metrics,” with the typical stock in the S&P 500 now trading at a price equal to more than 18 times forward earnings.
In the note, “What managements should do with their cash (M&A) and what they will do (buybacks),” Goldman strategists led by David Kostin argue that the current price to earnings (P/E) expansion phase has lasted 43 months and will likely end when the Federal Reserve starts raising interest rates, which the bank now expects will happen in September. As a firm, you would much rather buy back your stock when it’s trading at lower P/E multiples and get a better price. But as it turns out, corporate managers (much like investors) are pretty bad at timing the stock market. Using history as a guide, the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis, Goldman notes.
Exhibiting poor market timing, buybacks peaked in 2007 (34% of cash spent) and troughed in 2009 (13%). Firms should focus on M&A rather than pursue buybacks at a time when P/E multiples are so high.
However, Goldman doesn’t expect companies to listen to its advice. The temptation to give investors what they seem to want is just too much.
We forecast buybacks will surge by 18% in 2015 exceeding $600 billion and accounting for nearly 30% of total cash spending. We recognize activist investors often advocate for firms to return excess cash to shareholders via buybacks.Tactically, repurchases may lift share prices in the near term, but in our view it is a questionable use of cash at the current time when the P/E multiple of the market is so high. In our view, acquisitions – particularly in the form of stock deals – represent a more compelling strategic use of cash than buybacks given the current stretched valuation of US equities.
Companies in the S&P 500 have so far spent a whopping $2 trillion repurchasing their shares over the past five years.
Rotting from the bottom.
The Governmental Accounting Standards Board is implementing new rules that require governments, for the first time, to report unfunded pension liabilities on their 2015 balance sheets. This sticker shock should create new urgency for meaningful pension reform. A recent study put the unfunded pension liability for all state and local governments at $4.7 trillion. For too long, pension fund officials and politicians have increased payouts and low-balled contributions. As a result, they now have insufficient funds to pay the promised benefits. Accounting gimmicks have hidden the true cost from the public, who are now on the hook to make up the difference between pension promises and assets.
Illinois and New York have unfunded pension debts north of $300 billion each, while New Jersey, Ohio and Texas exceed $200 billion apiece. But nowhere is the problem worse than in California, which accounts for $550 billion to $750 billion of the total, depending on the calculation. The Golden State reveals the damage from long-term financial mismanagement of pension systems. For example, Ventura County’s pension costs have gone from $45 million in 2004 to $162 million in 2013. Overall from 2008 through 2012, California local governments’ pension spending increased 17% while tax revenue grew only 4%. As a result, a larger share of budgets goes to pensions, crowding out spending on core services such as police.
In San Jose, the police department budget increased nearly 50% from 2002 through 2012, yet staffing fell 20%. More money has been consumed by police pensions, leaving less money to hire and retain officers. In Oakland, police officers were given the option in 2010 to contribute 9% of their salary into their pensions and save 80 police jobs, or keep paying nothing into their pensions and see 80 jobs eliminated. The police union voted to continue paying nothing. Now the department refuses to respond to 44 different crimes because of the staffing cutbacks. Any pension system that forces this trade-off is immoral by threatening life and property.
Skyrocketing pension costs also crowd out other quality-of-life services. Public libraries, parks and recreation centers are shortening their hours or closing. Potholes go unfilled, sidewalks unrepaired and trees untrimmed. A new pension rate hike for California’s local governments will cost the city of Sacramento $12 million more a year – the equivalent of cutting 34 police officers, 30 firefighters and 38 other employees. California’s vested rights doctrine locks local governments into pension benefits for life on the day they hire an employee. They cannot modify pensions, forcing them to cut core services or declare bankruptcy, as happened in Vallejo, Stockton and San Bernardino.
“Europe’s economic crisis was an opportunity to show financial markets that the euro is to Greece as the dollar is to, say, West Virginia. Whatever happens next, we now know different.”
With both sides said to be drawing up final proposals, and a definitive debt crunch thought to be imminent, the months of brinkmanship over Greece may at last be drawing to a close. But who knows, really? You might think making this shambles any worse would challenge even these principals. I don’t know. I think they’re up to it. Whatever happens, take a moment to reflect on the damage already done during the stalemate — damage that will persist even if the brink isn’t crossed, and a deal is done to avoid a Greek default plus exit from the euro system. First, Greece’s economic situation, which was bad to begin with, has deteriorated further. Savers have been withdrawing deposits from Greek banks. Investors have hammered the stock market.
Under these conditions, few businesses choose to invest or expand. Despite cheap oil and a weaker euro, the Greek economy has fallen back into recession. Second, as a result, the country’s bad fiscal situation is now worse. Whatever fiscal targets are eventually agreed to — assuming that happens — will be harder to meet. A deal sufficient, four months ago, to stabilize Greece’s public finances and restore growth might no longer work. Greece already has two failed bailout programs to its name. The stalemate makes the failure of the next program, if there is one, more likely. Third, the world has learned that exit from the euro system is not just thinkable but has actually been advocated, as a kind of disciplinary measure, by officials in Germany and other countries.
It’s widely understood that if Greece leaves the euro system or is forced out, attention will turn, sooner or later, to the question of who’s next. Every serious economic setback will raise that question. Less widely understood is that much of this damage to the euro zone’s foundations has already been done, and is irreversible. Once you think the unthinkable — debate the pros and cons, start to plan for it — there’s no going back.
In his celebrated (if belated) intervention in 2012, ECB President Mario Draghi said he would do whatever it took to keep the euro system intact; Europe’s economy rallied. Whatever happens this week or next regarding Greece, Europe’s leaders have reneged on that promise: They might do whatever it takes, but they’ll need to think about it first. Europe’s economic crisis was an opportunity to show financial markets that the euro is to Greece as the dollar is to, say, West Virginia (no disrespect to that fine state). Whatever happens next, we now know different.
They knew the Greek proposal was coming. And they didn’t even look at it?!
The impasse over Greece’s future lingered as both sides worked on rival proposals for the conditions of a financial lifeline with debt payments looming. Greek Prime Minister Alexis Tsipras said his government submitted a new plan, while officials from the country’s creditors were said to be finalizing what would be a final offer to avoid the country defaulting. While the euro rallied on optimism over a deal, Dutch Finance Minister Jeroen Dijsselbloem, who leads the euro-area finance ministers’ group, said institutions are still far from any agreement. “As long as it doesn’t meet economic conditions, we can’t come to an agreement,” he told RTL television. “It’s not right to think that we can meet half way.”
After four months of antagonism and extended deadlines, there’s evidence now of greater urgency in efforts to break the deadlock and decide Greece’s fate. At the same time, there were mixed messages over how final any offer might be and whether any agreement can be reached in coming days. While Greece says it can make a debt repayment to the IMF on Friday, it’s the smallest of four totaling almost €1.6 billion this month. The timing coincides with the expiration of a euro-region bailout by the end of June. The deputy parliamentary leader of German Chancellor Angela Merkel’s party, Ralph Brinkhaus, described the negotiating situation as “very confused.”
It’s up to Juncker now to save his precious ‘union’,
Greek Prime Minister Alexis Tsipras will meet European Commission President Jean-Claude Juncker Wednesday for make-or-break bailout talks with a deadline looming for Athens to make a critical repayment. Greece and its international creditors have exchanged proposals to reach a deal to unlock €7.2 billion to help Athens make Friday’s repayment, but months of fractious talks have been deadlocked over creditors’ insistence that Athens undertake greater reforms which Greece’s anti-austerity government has refused to match. Meanwhile there are fears that Greece could default, possibly setting off a chain reaction that could end with a messy exit from the eurozone.
Jeroen Dijsselbloem, the head of the Eurogroup which is comprised of the eurozone’s 19 members, has said he was unimpressed with progress made in the debt talks, after Athens claimed its plan was a «realistic» one. His remarks come with Tsipras due to meet Juncker in Brussels on Wednesday evening, a government source said. Tsipras on Tuesday raised hope of a breakthrough, with the leader of Greece’s left-wing Syriza government telling reporters: «We have made concessions because a negotiation demands concessions, we know these concessions will be difficult.” In Brussels, the European Union called the exchange of documents a positive step, but stopped short of saying a deal was imminent.
“Many documents are being exchanged between the institutions and the Greek authorities… The fact that documents are being exchanged is a good sign,» European Commission spokeswoman Annika Breidthardt said. Asked about the possibility of a deal, she added: «We’re not there yet.”
I don’t see Syriza rolling over.
The Greek Prime Minister is expected to come under pressure on Wednesday to reach a much-needed deal with the country’s international creditors, who have reportedly drafted an agreement – although Greece denies that it has seen the proposals yet. On Tuesday, the Troika drafted the broad lines of an agreement to put to the Greek government, according to Reuters, in a bid to resolve months of tense negotiations over Greek reforms and debt. It comes after the German and French leaders, Angela Merkel and Francois Hollande, held emergency talks with the creditors on Monday night and urged them to find a solution. A Greek government official told CNBC Wednesday that Greece hadn’t yet seen the proposals, however.
“They have not submitted the text and this is what has surprised us. We think it is very odd,” the official, who did not want to be named due to the sensitive nature of the ongoing discussions, told CNBC. The source confirmed that Prime Minister Alexis Tsipras was due to travel to Brussels to meet with the Commission’s President, Jean-Claude Juncker, later in the day. “We’re going to use this evening’s meeting as a basis to discuss our own proposals, which are full and concrete plans and include a final review of our existing bailout program,” the official added. “We have very good ideas about a growth plan and have a set of proposals that will take any thoughts of a ‘Grexit’ (a Greek exit from the euro zone) off the table.”
Any offer of a deal from creditors puts the ball firmly in Greece’s court, although the consequences of it rejecting an agreement could be dire. Athens faces a €300 million payment to the IMF on Friday, but there are doubts that the country can honor the debt without further financial aid. In something of a pre-emptive strike, Greece submitted its own reform proposals to its European counterparts earlier this week, but they were deemed – not for the first time – “insufficient.” Michael Hewson, chief market analyst at CMC Markets, said Wednesday that given the tense negotiations between Greece and its lenders over the last four months, a quick agreement was unlikely.
“.. local governments have borrowed as much as $4 trillion, mostly through shadowy off-balance-sheet financing vehicles; around $300 billion of that debt matures this year.”
Chinese Premier Li Keqiang says that rebalancing China’s economy will be as painful as “taking a knife to one’s own flesh.” That may not be much of an exaggeration. The news on China’s economy is bad. Growth has slowed to a little over 5% (quarter on quarter, at an annual rate); prices are falling; consumer confidence is weak; corporate and local-government debts remain dangerously high. Even now, a well-managed exit from the country’s credit binge may be possible, but an entirely painless one is not. Trying too hard to delay the inevitable will end up making things worse. What scares the government most is the prospect of a wave of corporate and municipal defaults.
According to Mizuho Securities Asia, local governments have borrowed as much as $4 trillion, mostly through shadowy off-balance-sheet financing vehicles; around $300 billion of that debt matures this year. Plunging property prices and declining land sales – as well as slower manufacturing investment as companies focus on paying down debt – are worsening the problem by squeezing demand and holding back growth. Several economists expect China to have difficulty meeting its target of 7% growth in gross domestic product this year. Slower growth will make it even harder for local governments to make their payments. Beijing is leading an effort to restructure the borrowing and make it more transparent – but the plan envisioned won’t cover all the debts coming due this year.
China’s State Council recently admitted as much, telling banks to roll over some of the obligations. The directive was understandable; even so, forcing banks to prop up local governments means throwing good money after bad. The problem isn’t solved, and the day of reckoning, when it comes, will be worse. Meanwhile, applying much the same logic, the government has talked up a stock market that now looks wildly inflated. Since last summer, it has been urging households to invest, and official reassurance follows every market setback. Even after a 6.5% plunge on May 28, the Shanghai Composite is still up 127% over the past year, despite the slowing economy and falling profits. On the tech-heavy Shenzhen Composite Index, price-to-earnings ratios in excess of 100 aren’t uncommon.
“Why would the government want to risk the possibility hundreds of millions of aggrieved day traders heading onto the streets with protest banners?”
Many observers assume that China is on a path to become the next Japan – a major economy mired in a multiyear deflationary funk that deflates its global clout. And it’s certainly true that the way that Beijing has been downplaying its debt problems is eerily reminiscent of Tokyo’s public relations strategy from the 1990s. But take a closer look at China’s situation, and you’ll realize a better analogy is South Korea. China’s expanding effort to pile debt risks on individual investors is straight out of Seoul’s playbook. South Korea’s economy crashed in 1997 under the weight of debts compiled by the country’s family-owned conglomerates. The government’s strategy for dealing with the fallout consisted of shifting the debt burden to consumers.
With a blizzard of tax incentives and savvy PR, Korea shrouded the idea of amassing household debt to boost growth in patriotic terms. That push still haunts Korea. Today, the country’s household debt as a ratio of gross domestic product is 81%. That far exceeds the ratios in U.S., Germany and, at least for the moment, China. As a result, Korea has been particularly susceptible to downturns in the global economy, which is why the country is now veering toward deflation. Is China repeating Korea’s mistakes? Granted, the specific of Beijing’s economic strategy vary greatly and China’s $9.2 trillion economy is seven times bigger than Korea’s. But the Chinese government’s efforts to prod households to buy stocks and assume greater financial risks are highly reminiscent of Korean policy.
Beijing has been encouraging everyone in the country, from the richest princelings to the poorest of peasants, to buy stocks. And China’s markets have been booming as a result: Over the past 12 months, the Shanghai exchange is up 141%, and the Shenzhen exchange is up 188%. Margin trading, which has fueled these rallies, seems to have jumped another 45% in May, to a total of $484 billion. [..] But who will suffer when stocks inevitably swoon? Beijing is making a risky bet, by assuming Chinese savers will be capable of dealing with the burden of a stock market downturn. This strategy is morally questionable – it’s another instance of Chinese savers being set up to take the fall for government policy, as they were during the hyperinflation of the 1940s, and in modern times, when they faced strict limits on deposit rates.
Moreover, it would be far easier for Beijing to bail out a handful banks and dispose of bad loans that are concentrated at a few dozen companies, than deal with debts that are distributed to households across the country. Increasingly, there are signs that a reckoning will soon be in the offing. On May 28 alone, Shanghai lost $550 billion in market value – a reminder stocks can’t surge 10% a week forever, not even in China. Why would the government want to risk the possibility hundreds of millions of aggrieved day traders heading onto the streets with protest banners?
They borrowed money from umpteen different sources.
If one sentence sums up the farce that the hyper-speculative ponzifest that is the 500% club in China it is “Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing.” While the stock has been cut in half, lenders remain mired in opacity as they try to figure out, as Bloomberg reports, which of Chinese billionaire Li Hejun’s many creditors risk losing every yuan they put into his company? Shenzhen and CHINEXT indices are lower out of the gate today after a 14% and 18% surge in the last 2 days as a group of 11 lenders (ranging from large banks to small asset managers) ask for a meeting to discuss various loans with various Hanergy entities… and whatever they find in Hanergy is bound to have been repeated manifold across China’s manic markets.
As investors grow a little weary of “the opacity about parent finances and billings,” in Hanergy and across numerous other names we are sure. As Bloomberg reports, a plethora of Chinese lenders are exposed to Hanergy Thin Film and its parent company, including Industrial and Commercial Bank of China, which is owed tens of millions of dollars.
“The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,” said Charles Yonts, an analyst with CLSA Asia-Pacific Markets in Hong Kong. “The opacity about parent finances and billings is extraordinary.” A Bloomberg examination of debt held by Hanergy Thin Film and its closely held parent, Hanergy Holding Group Ltd., show Li has tapped a variety of financing sources since the Hong Kong unit’s stock started surging last year. They include policy-bank lending, short-term loans from online lenders with interest rates of more than 10% and partnerships with local governments.
Anything for a subsidy.
Oil companies that have pumped trillions of barrels of crude from the ground are now saying the future is in their other main product: natural gas, a fuel they’re promoting as the logical successor to coal. With almost 200 nations set to hammer out a binding pact on carbon emissions in December, fossil-fuel companies led by Shell and Tota say they’re refocusing on gas as a cleaner alternative to the cheap coal that now dominates electricity generation worldwide. That’s sparked a war of words between the two industries and raised concern that Big Oil is more interested in grabbing market share than fighting global warming “Total is gas, and gas is good,” Chief Executive Officer Patrick Pouyanne said Monday, in advance of this week’s World Gas Conference in Paris.
His remarks echoed comments two weeks earlier by Shell CEO Ben Van Beurden, who said his company has changed from “an oil-and-gas company to a gas-and-oil company.” Shell began producing more gas than oil in 2013 and Total the following year. Exxon Mobil ’s output rose to about 47% of total production last year from 39% six years ago. Companies are pushing sales in China, India and Europe. Coal from producers led by Glencore and BHP Billiton produces about 40% of the world’s electricity. Shell, Total, BP and other oil companies said Monday in a joint statement that they’re banding together to promote gas as more climate friendly than coal. “The enemy is coal,” Pouyanne said Monday. He vowed to pull out of coal mining and said Total may also halt coal trading in Europe.
A key strategy for gas producers to push this agenda is asking governments to levy a price on carbon emissions from power plants. That creates an economic incentive to switch from coal, the top source of greenhouse gases, to cleaner options. BP CEO Bob Dudley called for a carbon price at the company’s shareholder meeting April 16, while Exxon head Rex Tillerson on May 27 reiterated support for a carbon tax if consensus emerges in the U.S. Even without carbon pricing, gas has been displacing coal in the U.S., Tillerson said in Paris today. “Natural gas use in the U.S. has reduced carbon dioxide emissions to levels not seen since the 1990s,” he said in a speech. “And the U.S. has no comprehensive cost of carbon policy.”
A dearth of investment by governments and business has left the global economy vulnerable to a renewed slowdown, a leading thinktank has warned as it slashed its forecasts for the United States. The Organisation for Economic Cooperation and Development (OECD) said the recovery since the global financial crisis had been unusually weak, costing jobs, raising inequality and knocking living standards. In its latest outlook, it saw global growth gradually strengthening but not until late 2016 will it return to the average pace of pre-crisis years. The Paris-based thinktank noted a slowdown for many advanced economies in the opening months of 2015 and singled out a sharp dip for the US, the world’s biggest economy.
It cut its projection for US economic growth to 2% this year from a forecast of 3.1% made in March. For 2016, US growth is seen at 2.8%, down from the previous 3% forecast. The OECD is cautious, despite hoping that the weakness in the first quarter of this year was down to temporary factors, such as unusually harsh weather in the US. “The world economy is muddling through with a B-minus average, but if homework is not done and with less-than-average luck, a failing grade is all too possible,” said OECD chief economist Catherine Mann. “On the other hand, how to get the A is known and within reach,” she added, highlighting the need for more investment.
On the upside, the OECD expected growth to be shared more evenly across regions of the world and says labour markets continue to heal in advanced economies while risks of deflation have receded. “Yet, we give the global economy only the barely-passing grade of B-,” said Mann. The dissatisfaction is not just down to an “inauspicious” starting point after a weak first quarter, she added.
The number of over-75’s who still carry a mortgage has tripled.
Of all the financial threats facing Americans of retirement age — outliving savings, falling for scams, paying for long-term care — housing isn’t supposed to be one. But after a home-price collapse, the worst recession since the 1930s and some calamitous decisions to turn homes into cash machines, millions of them are straining to make house payments. The consequences can be severe. Retirees who use retirement money to pay housing costs can face disaster if their health deteriorates or their savings run short. They’re more likely to need help from the government, charities or their children. Or they must keep working deep into retirement.
“It’s a big problem coming off the housing bubble,” says Cary Sternberg, who advises seniors on housing issues in The Villages, a Florida retirement community. “A growing number of seniors are struggling with what to do about their home and their mortgage and their retirement.” The baby boom generation was already facing a retirement crunch: Over the past two decades, employers have largely eliminated traditional pensions, forcing workers to manage their retirement savings. Many boomers didn’t save enough, invested badly or raided their retirement accounts. The Consumer Financial Protection Bureau’s Office for Older Americans says 30% of homeowners 65 and older (6.5 million people) were paying a mortgage in 2013, up from 22% in 2001.
Federal Reserve numbers show the share of people 75 and older carrying home loans jumped from 8% in 2001 to 21% in 2011. What’s more, the median mortgage held by Americans 65 and older has more than doubled since 2001 — to $88,000 from $43,400, the financial protection bureau says. In markets hit hardest by the housing bust, a substantial share of older Americans are stuck with mortgages that exceed their home’s value. In Atlanta, it’s 23% of homeowners 50 and older, according to the real-estate research firm Zillow. In Las Vegas, it’s 26%.
It eats away profits elsewhere.
Prime Minister Tony Abbott doesn’t understand the housing market, doesn’t care about housing affordability, and is therefore poorly versed on the issues facing Australia’s non-mining sector. The housing market and the business sector are intrinsically and unavoidably linked. Neither operates in a vacuum; developments – good and bad – in one market inevitably spill over into the other. The business sector, for example, pays our wages, which many of us obviously use to pay down our mortgages. Meanwhile, land prices are a considerable cost for most businesses – they need floor space to sell their goods or new land to build or expand a factory. If you are prime minister of a country you need to understand how this works.
It’s basic economics and yet there is clear evidence that Abbott simply doesn’t get it. His comments yesterday on the property market and housing affordability were a case in point. “As someone who, along with the bank, owns a house in Sydney I do hope our housing prices are increasing,” Abbott said during question time yesterday. “I do want housing to be affordable, but nevertheless I also want house prices to be modestly increasing.” I am sure that many readers will agree with this sentiment. But Abbott is charged with acting in the public interest; that is the standard by which he is judged. Unfortunately, rising house prices – particularly the type of growth experienced in Sydney – are neither in the public interest nor in the broader interest of Australian businesses.
High land prices are a crippling barrier for many Australian corporations. It’s a key reason – along with high wages – why Australian manufacturing continues to retreat. It hurts shopkeepers and department stores; any business that requires a physical location to operate is hampered by elevated land prices. High land prices make it difficult to produce a sufficient quantity to get fixed costs down to competitive levels. Unfortunately, it’s too costly to buy new land and build a new factory, which means too many Australian businesses fall short of their potential.
WikiLeaks announced an effort Tuesday to crowd-source a $100,000 reward for the remaining chapters of the Trans-Pacific Partnership trade deal, after the organization published three draft chapters of the deal in recent years. “The transparency clock has run out on the TPP. No more secrecy. No more excuses. Let’s open the TPP once and for all,” WikiLeaks founder Julian Assange said in a statement.
Critics say that the deal being negotiated by the United States and other Pacific Rim countries would hurt American workers and the economy, while proponents argue that it would help the United States establish a stronger economic foothold in the region with regard to China. The three chapters that WikiLeaks has already published include sections on intellectual property rights, published in November 2013, the environment, published in January 2014, and investment, published this March. The $100,000 reward marks the beginning of a new program for the organization, in which users can pledge funding to get the chapters they want the most.
“This must be what comes of viewing the world through your cell phone.”
If there is a Pulitzer Booby Prize for stupidity, waste no time in awarding it to The New York Times’ Monday feature, The Unrealized Horrors of Population Explosion. The former “newspaper of record” wants us to assume now that the sky’s the limit for human activity on the planet earth. Problemo cancelled. The article and accompanying video was actually prepared by a staff of 23 journalists. Give the Times another award for rounding up so many credentialed idiots for one job. Apart from just dumping on Stanford U. biologist Paul Ehrlich, author of The Population Bomb (1968), this foolish “crisis report” strenuously overlooks virtually every blossoming fiasco around the world. This must be what comes of viewing the world through your cell phone.
One main contention in the story is that the problem of feeding an exponentially growing population was already solved by the plant scientist Norman Borlaug’s “Green Revolution,” which gave the world hybridized high-yielding grain crops. Wrong. The “Green Revolution” was much more about converting fossil fuels into food. What happens to the hypothetically even larger world population when that’s not possible anymore? And did any of the 23 journalists notice that the world now has enormous additional problems with water depletion and soil degradation? Or that reckless genetic modification is now required to keep the grain production stats up?
No, they didn’t notice because the Times is firmly in the camp of techno-narcissism, the belief that the diminishing returns, unanticipated consequences, and over-investments in technology can be “solved” by layering on more technology — an idea whose first cousin is the wish to solve global over-indebtedness by generating more debt. Anyone seeking to understand why the public conversation about our pressing problems is so dumb, seek no further than this article, which explains it all. Climate change, for instance, is only mentioned once in passing, as though it was just another trashy celebrity sighted at a “hot” new restaurant in the Meatpacking District. Also left out of the picture are the particulars of peak oil (laughed at regularly by the Times, which proclaimed the US “Saudi America” some time back), degradation of the ocean and the stock of creatures that live there, loss of forests, the political instability of whole regions that can’t support exploded populations, and the desperate migrations of people fleeing these desolate zones.
Being monitored was a notion fit for crazies not long ago; now it’s a certainty for everyone.
A long time ago—almost a quarter of a century—I worked in a research lab, designing measurement and data acquisition electronics for high energy physics experiments. In the interest of providing motivation for what follows, I will say a few words about the job. It was interesting work, and it gave me a chance to rub shoulders (and drink beer) with some of the most intelligent people on the planet (though far too fixated on subatomic particles). The work itself was interesting too: it required a great deal of creativity because the cutting edge in electronics was nowhere near sharp enough for our purposes, and we spent our time coming up with strange new ways of combining commercially available components that made them perform better than one had the right to expect.
But most of my time went into the care and feeding of an arcane and temperamental Computer Aided Design system that had been donated to the university, and, for all I know, is probably still there, bedeviling generations of graduate students. With grad students just about our only visitors, the atmosphere of the lab was rather monastic, with the days spent twiddling knobs, pushing buttons and scribbling in lab notebooks. And so I was quite pleased when one day an unexpected visitor showed up. I was busy doing something quite tedious: looking up integrated circuit pin-outs in semiconductor manufacturer’s databooks and manually keying them into the CAD system—a task that no longer exists, thanks to the internet.
The visitor was a young man, earnest, well-spoken and nervous. He was carrying something wrapped in a black trash bag, which turned out to be a boombox. These portable stereos that incorporated an AM/FM radio and a cassette tape player were all the rage in those days. He proceeded to tell me that he strongly suspected that the CIA was eavesdropping on his conversations by means of a bug placed inside this unit, and he wanted me to see if it was broadcasting on any frequency and to take it apart and inspect it for any suspicious-looking hardware.
Interesting as data, but lousy as analysis. Retail deflation is a nonsense misleading term.
Prices in British shops have moved into their third year of decline as a result of widespread supermarket discounting and cheaper fresh food , according to new industry figures. The British Retail Consortium (BRC) said shop prices in May were down 1.9% on last year’s levels, unchanged from April’s rate of decline and the 25th straight month of deflation. The fall will reinforce expectations that the broader official measure of inflation in the UK will remain low for some months to come after turning negative in April. The BRC found food prices again fell 0.9% in May while non-food deflation held at 2.5%.
Within those categories, fresh food fell at a record pace of 1.9% thanks to meat, milk, cheese and eggs all being cheaper than a year ago, according to the BRC report with market research company Nielsen. Comparable records began in December 2006. The latest BRC-Nielsen Shop Price Index shows prices fell 1.9% in May from a year ago. It was the 25th consecutive month of falling shop prices. Falling non-food prices are now in their third year and food prices have been in deflationary territory for five straight months. “Retailers continue to use price cuts and promotions to stimulate sales which is helping to maintain shop price deflation, and we see little evidence to suggest that prices will rise in the near future,” said Mike Watkins, Nielsen’s head of retailer and business insight.
He predicted that discounting will help keep the official consumer price index (CPI) measure of inflation low for some time. “With many food retailers still using price cuts to attract new shoppers, this is lowering the cost of the weekly shop and so the overall CPI figure in the UK. Deflation and price led competition will continue to be a key driver of sales growth for some time yet,” added Watkins.
What a country.
Thousands of children in the UK, many of them British, are living in dangerous, squalid conditions well below the poverty line as a result of rapid changes to government immigration and benefit policies, a report by the Centre on Migration, Policy and Society at the University of Oxford warned on Wednesday. Children are the “collateral damage” of “a dysfunctional system in which they are the ultimate losers” according to the authors of the Compas report, which estimates that 3,391 families and 5,900 children were supported under local authorities’ Section 17 Children Act 1989 duties in 2012/13. Two thirds of families who were supported by local authorities for up to two years or more – at a cost of £28m for the year – were waiting for a decision from the Home Office; of the cases looked at by the study, 52% were granted leave to remain.
Charities seeing an increase in the numbers forced into destitution – with some families living on as little as £1 per person per day – argue it is only a matter of time before a tragedy on the scale of Victoria Climbié occurs to a child from a family who has “no recourse to public funds” (NRPF), a criterion for many attempting to regulate their immigration status. Victoria Climbié, an eight-year-old, was tortured and murdered by her guardians in 2000. Her death led to a public inquiry and produced major changes in child protection policies in the United Kingdom. NRPF families – including those on visas, overstayers and those applying for British citizenship who cannot work or claim benefits – were being abandoned by the Home Office while their status applications were being processed, leaving cash-strapped local authorities struggling to cope with the burden of caring for children whom they had a legal obligation to protect from destitution.
“There is a real tension between the desire to keep these people out of the welfare state and the legal obligation that falls on local authorities,” said co-author Jonathan Price. “There is a question to be asked about the long-term impact on children of living on subsistence rates that are well below welfare rates.” The report, funded by the Nuffield Foundation, found that support from local authorities varied wildly. Families were grateful for any support they received, but subsistence payments “in all cases were well below support for destitute asylum seekers and hard case support rates”, said the report. One authority provided £23.30 per child per week and nothing for parents: for a family with two parents and one child, a little over £1 per person per day.
You can’t eat shifting goalposts.
This September, the world’s leaders will converge on the United Nations to declare a new set of Sustainable Development Goals for planetary progress over the next 15 years. Their first target will be to “eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day.” That’s a heady vision, one already embraced both by U.S. President Obama and Jim Kim, president of the World Bank—the organization that set the $1.25 poverty line back in 2005. There’s just one problem: According to the World Bank, extreme poverty isn’t what it used to be. It turns out that the technique the bank has used in the past to set the extreme poverty line essentially guarantees we won’t wipe out extreme poverty by 2030—or ever.
To save face, the World Bank’s economists are likely to change the method to one that creates a definition of extreme poverty that can be eradicated. But in doing so, they’ll set a poverty line that will move further and further away from anyone’s actual idea of what it is to be poor. Ask people what level of income would make them poor and they tend to come up with a number that’s relative to their income. In the U.S., people are surveyed as to the amount of income necessary for a family of four to “get along.” In 1950, the answer was $48 a week, or around 75% of household mean income that year. More than half a century later in 2007, the average answer was $1,000 a week—or around 77% of mean income. Given that most people define poverty using a relative approach, it isn’t surprising that most governments tend to come up with national poverty lines that are explicitly or implicitly relative to average incomes.
The U.S. is an exception: It has a poverty line that is explicitly absolute—you are poor if your income is lower than the cost of a food basket, plus an allowance for nonfood expenditures like rent. This standard was set in the 1960s and has been updated only to reflect inflation. As a proportion of U.S. median household income, the poverty line has fallen from one-half to below one-quarter since 1963. But the European Union uses a poverty line that is explicitly relative—you are poor if you live in a household with an income that is below 60% of mean household income. And it turns out that while most developing countries purport to use an absolute poverty line, in practice they implement a relative approach.
Most commonly, the poverty line is officially set using a basket of goods meant to reflect basic needs. But as countries get richer, the basic needs bundle gets more generous. Food costs start to include meat and fish alongside grains and vegetables, for example. And nonfood costs add utilities and transport alongside rent. That’s why China doubled its (supposedly absolute) poverty line in 2011 after years of strong economic growth. And it’s why there is a strong positive relationship between GDP per capita and the value of the poverty line across countries.