Harris&Ewing No caption, Washington DC 1915
All that’s getting lost is virtual capital. But there’s lots of it.
• Mining Shares Plunge As Commodities Index Hits 13-Year Low (FT)
Billions of dollars of shareholder value was erased from the world’s largest mining companies on Wednesday as an index of commodities prices plumbed a fresh 13-year low. The Bloomberg commodity price index, which tracks a basket of the world’s most commonly used raw materials, fell to 95.5 points, its lowest reading since March 2002. The Bloomberg commodity index has declined by more than 40% since September 2011, with the recent slide intensifying selling of shares in mining companies. The gold price declined by $12 to $1,088 an ounce, marking the third time it has fallen below $1,100 after a bout of panic selling in China erupted on Sunday. “Precious metals appear to be the main driver” of this current outbreak of negative sentiment, said Nic Brown at Natixis.
He added that the commodities sector had been persistently underperforming for several months, with a gradual deceleration in Chinese growth and a stronger dollar contributing to what felt like “the world’s longest hangover”. Shares in Anglo-American, which is heavily invested in iron ore production in Brazil, dropped 5.59% to the bottom of the FTSE 100 index. Glencore’s shares fell 5.4% to the lowest level since it listed in 2009. Shares in BHP Billiton fell 5.7% in London, after the Anglo-Australian diversified miner revealed in a quarterly update that it planned to take a sizeable charge of $350m to $650m on underlying profit, mostly because of weakness in its copper business. A week ago, BHP wrote down the value of its US shale assets by $2bn.
In its update on Wednesday morning, the miner forecast that prices for all of its leading commodities, apart from iron ore, would be lower this financial year than they were in its previous full-year period. Shares in gold miners, which have dropped drastically this month, were relatively unscathed on Wednesday, however. Barrick Gold, of Canada, was 0.7% lower after the first few hours of New York trading. The shares have lost more than 40% of their value since late April, although the company claims its production is low cost, forecasting a maximum AISC (all-in sustaining cost) of $895 per tonne for its current financial year.
• Gold Isn’t Even Close To Being The Biggest Loser Among Commodities (MarketWtch)
Gold’s collapse to five-year lows is dominating headlines, but it has been a rough year so far for commodities in general. Expectations the Federal Reserve will move later this year to raise rates, potentially leading to more strength for the U.S. dollar, gets much of the blame. Most commodities are priced in dollars, making them more expensive to users of other currencies as the greenback strengthens. The ICE dollar index, a measure of the U.S. unit against a basket of six major rivals is up by around 7.8% year-to-date. “The wider commodity market is seeing plenty of downward pressure on the back of an ever-strengthening dollar,” said Craig Erlam, senior market analyst at Oanda, in a note. One thing that might stand out is that while gold has taken it on the chin lately, it isn’t the biggest loser.
By a wide margin, that distinction goes to coffee futures, which are off 23.5% (Only, don’t tell coffee purveyor Starbucks, which is raising the prices of java at its stores). Coffee is feeling the pangs of a weaker Brazilian real currency, favorable harvest conditions in that country, and expectations for a rebound in inventories. Coffee had rallied into the autumn of 2014 on crop worries tied in part to a drought in Brazil. Meanwhile, cocoa futures have outperformed, albeit in highly volatile fashion. Prices of cocoa tumbled early in the year but eventually recovered as worries mounted over the impact of a severe Harmattan wind on harvests in Ivory Coast, the world’s largest producer, and Ghana, which is No. 2, noted analysts at Capital Economics. That rally gave way as fears eased, but renewed concerns over dry weather and low fertilizer use in Ghana eventually sent futures soaring anew, the analysts noted.
Here’s a table looking at the performance since the end of last year through Tuesday afternoon of some of the most traded and closely watched commodities compared with the Bloomberg Commodity Index. This is a non-comprehensive list:
Bloomberg Commodity Index -7.6%
Cocoa (Nymex) +14.7%
Cotton (Nymex) +6.8%
Corn (CBT) +5.2%
Natural gas (Nymex) -0.3%
Brent crude oil (ICE) -0.5%
Soybeans (CBT) -1.9%
WTI crude oil (Nymex) -4.6%
Silver (Comex) -5.2%
Lean hogs (CME) -6.4%
Gold (Comex) -7.2%
Wheat (CBT) -11%
Live cattle (CME) -11.2%
High-grade copper (Comex) -12.3%
Coffee (IFUS) -23.5%
“Lombard Street Research says China’s true economic growth rate is currently below 4pc, using proxy measures of output.”
• Capital Exodus From China Reaches $800 Billion As Crisis Deepens (AEP)
China is engineering yet another mini-boom. Credit is picking up again. The Communist Party has helpfully outlawed falling equity prices. Economic growth will almost certainly accelerate over the next few months, giving global commodity markets a brief reprieve. Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”. The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.
Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money. China’s bond sales automatically entail monetary tightening. What we are seeing is the mirror image of the boom years, when the PBOC was accumulating $4 trillion of reserves in order to hold down the yuan, adding extra stimulus to an economy that was already overheating. The squeeze earlier this year came at the worst moment, just as the country was struggling to emerge from recession. I use the term recession advisedly. Looking back, we may conclude that the world economy came within a whisker of stalling in the first half of 2015.
The Dutch CPB’s world trade index shows that shipping volumes contracted by 1.2pc in May, and have been negative in four of the past five months. This is extremely rare. It would usually imply a global recession under the World Bank’s definition. The epicentre of this crunch has clearly been in China, with cascade effects through Russia, Brazil and the commodity nexus. Chinese industry ground to a halt earlier this year. Electricity use fell. Rail freight dropped at near double-digit rates. What had begun as a deliberate policy by Beijing to rein in excess credit escaped control, escalating into a vicious balance-sheet purge. The Chinese authorities have tried to counter the slowdown by talking up an irresponsible stock market boom in the state-controlled media. This has been a fiasco of the first order.
The equity surge had no discernable effect on GDP growth, and probably diverted spending away from the real economy. The $4 trillion crash that followed has exposed the true reflexes of President Xi Jinping. Half the shares traded in Shanghai and Shenzhen were suspended. New floats were halted. Some 300 corporate bosses were strong-armed into buying back their own shares. Police state tactics were used hunt down short sellers. We know from a vivid account in Caixin magazine that China’s top brokers were shut in a room and ordered to hand over money for an orchestrated buying blitz. A target of 4,500 was set for the Shanghai Composite by Communist Party officials.
It’s all about the USD.
• A $4 Trillion Force From China That Helped the Euro Now Hurts It (Bloomberg)
For almost a decade, China’s effort to diversify the world’s biggest foreign-exchange reserves supported the euro. Now, the almost $4 trillion force may be working against the single currency. China’s central bank depleted $299 billion of reserves in the year through June to keep the yuan from falling, offsetting the private sector’s sales of the currency for dollars amid a stock-market rout and faltering economy. The decline in reserves is the longest in People’s Bank of China data going back to 1993. It may mark the end of an era of accumulation that led the bank to buy euros as part of reducing reliance on the dollar. After unloading dollars to bolster the yuan, the central bank may find its reserves out of balance.
That may lead it to replenish holdings of the U.S. currency and dump some euros, according to Credit Suisse. After the dollar, the euro is the most widely used reserve currency for central banks, IMF data show. “There’s a structural change underway,” said Robin Brooks at Goldman Sachs. “This adds to the case in our minds for lower euro-dollar.” China has been limiting yuan moves in recent months to encourage greater global use and keep money from flowing out of the world’s second-biggest economy as it pushes for reserve-currency status at the IMF. While the yuan has gained about 34% since China stopped pegging it to the dollar a decade ago, its appreciation has come to a halt.
The Chinese exchange rate has held within 0.35% of 6.2 per dollar since March, and has moved less than 0.1% every day in July. The euro has slumped about 2.2% against the dollar this month to about $1.0905, and reached the lowest since April. The drop has traders eyeing the euro’s March low of $1.0458, which was the weakest level since January 2003. The shared currency will weaken to $1.05 by year-end, according to the median forecast in a Bloomberg survey. Goldman Sachs projected the euro will decline to 95 U.S. cents in around 12 months and 80 cents in 2017. “Reserve recycling – a factor associated with euro strength in the past – is unlikely to be sizeable for quite some time,” according to Brooks.
That’s the same as saying they never will. China will be a very different place in 10 years.
• China’s Shoppers May Take 10 Years To Step Up (CNBC)
Chinese policymakers are gung-ho to transition their economy away from investment and toward consumption, but that may not happen for another decade, new data shows. “Without a substantial intervention, we believe consumption’s share of China’s economy is unlikely to rise substantially before 2025,” The Demand Institute, a non-profit organization operated by The Conference Board and Nielsen, said in a new report. Private consumption as a share of gross domestic product (GDP) will average 28% from now until 2025, the think-tank said. To be sure, the mainland has long underperformed the global average in this regard as Beijing previously focused on export-led growth.
Consumption as a share of GDP was 37% last year, according to the Brookings Institution, compared with around 70% in the U.S. and 60% in fellow emerging market, India. The indicator has only recently started to stabilize in recent years. Consumption relative to GDP declined 48 %age points from 1952 to 2011, one of the longest and largest drops of any nation on record. Based on an examination of 167 countries between 1950 and 2011, the report found that nations with similar economic characteristics to China saw consumption remain flat relative to GDP for a considerable period following previous declines. China’s desire to rebalance its economy stems from the need to avoid the dreaded “middle-income trap,” in which developing countries are unable to graduate into high-income countries after achieving a certain level of per capita GDP.
While many economists believe the economic transition is already underway, albeit at a gradual pace, they also expect it will take a while before consumption’s share of GDP spikes higher. “Only towards the end of decade, when the economy slows further to 5-6%, consumption’s share of GDP will become more important,” said Jian Chang, China economist at Barclays. “But we have seen investment slow significantly and I think total consumption as a share of GDP could near 50% this year.” Beijing’s strategic vision of boosting consumption was first outlined in 2011’s 12th Five-year Plan and since then, the government has unleashed a slew of measures, including raising wages and slashing import tariffs on high-demand goods.
No riots at all last night.
• Greek Parliament Approves EU Demands in Order to Keep the Euro (Bloomberg)
Greece passed a second bundle of policy measures demanded by the country’s European creditors as Prime Minister Alexis Tsipras urged lawmakers to stop the country being forced out of the euro. Tsipras won the support of at least 151 lawmakers in a televised, public vote in the 300-seat parliament in Athens for a bill that will simplify court decisions and transpose European rules on failing banks. Echoing the rhetoric of the predecessors he once demonized, Tsipras said he’ll implement the creditors’ program even though he thinks the policies being imposed are wrong. He insisted he’ll do everything he can to improve the final deal.
“Conservative forces within Europe still insist on their plans to kick Greece out of the euro,” Tsipras told legislators in the early hours of Thursday. “We chose a compromise that forces us to implement a program we don’t believe in and we will implement it, because the choices we have are tough.” The prime minister is trying to hold together his ad hoc majority long enough to finalize the €86 billion bailout program the country needs to stave off financial collapse. Abandoned by party hardliners, Tsipras is reliant on his political opponents to deliver the measures that creditors have demanded.
The new banking rules will, in theory, shield taxpayers from the cost of bank failures and stipulate that unsecured depositors – those with more than €100,000 with an individual bank – will face losses before the public purse. Shareholders, senior and junior creditors will be in line to take a hit before depositors. However, the law won’t come into effect until the start of 2016 and Finance Minister Euclid Tsakalotos told lawmakers that banks will already have been recapitalized by then. Greek lenders are in line for as much as 25 billion euros of new capital under the outline terms of the new bailout program.
” Europe’s shared currency accounted for 20.7% of global central-bank holdings in the three months ended March 31, the lowest proportion since 2002..”
• Euro’s Resilience During Greece Debt Crisis Belies Damage Done (Bloomberg)
The euro may have avoided the indignity of losing a member, yet the wrangling over Greece has delivered lasting damage to its image in the eyes of investors. Millennium Global and M&G, which manage a combined $413 billion, say the political brinkmanship leading up to last week’s bailout deal exposed the euro zone’s weakness: the lack of a fiscal union. Commerzbank, Germany’s No. 2 lender, warns the ongoing crisis will erode demand for the euro as a reserve currency, which reached a 13-year low in March. “There are cracks in the edifice of the currency union,” said Richard Benson at Millennium Global in London. With or without Greece leaving the euro, “our longer-term view of the euro is diminished because of the political breakdown.”
Because the euro remained resilient as Greece came close to leaving the currency bloc, the pressures it faces show up best in long-term measures such as reserves data and cross-border flows. Those suggest investors are discriminating more between member states. At stake is nothing less than the 19-nation currency’s status as an irrevocable symbol of European unity. The biggest risk for investors, and euro-zone policy makers, is contagion from Greece to other countries in the region’s periphery. Spain and Portugal are often named as countries that may follow if Greece was forced out of the currency bloc. Flows into Spanish and Portuguese companies from mergers and acquisitions total $16.9 billion this year, down 46% from the same period in 2014, data compiled by Bloomberg show.
Evidence of lingering stress can also be found in the nations’ bond yields versus those of benchmark German securities. While they’re a fraction of their highs in 2012, when the region’s debt crisis was at its peak, they remain elevated compared with the euro’s early years through 2007. For Spain, the difference in 10-year yields is about 1.24%age points, compared with the median of 0.01%age point from the start of 2003 to the end of 2006. The stress is less visible in the single currency’s value, which rose to $1.0951 in Tokyo on Thursday after Greek lawmakers voted through a second package of creditors’ demands. The euro is about 2% stronger than three months ago. Europe’s shared currency accounted for 20.7% of global central-bank holdings in the three months ended March 31, the lowest proportion since 2002 and down from 22.1% at the end of last year, IMF data show.
Wait till the real negotiations start.
• Awkward Alliance Running Germany Exposed by Greek Crisis (Bloomberg)
In 2000, Angela Merkel pushed past Wolfgang Schaeuble on her way to the top of the political ladder. As finance minister, he’s won her pledge of a free hand in policy making in exchange for his loyalty. Now the awkward alliance that forms the core of Europe’s financial crisis-fighting effort is under its biggest strain yet. As officials prepare a third Greek bailout, Merkel is holding fast to the view that the 19-member currency union must stay intact. Schaeuble has pushed back, dangling the threat of expulsion to what he considered an untrustworthy government. “Merkel and Schaeuble operate according to different logic,” Andrea Roemmele, a political scientist at the Hertie School of Governance in Berlin, said by phone.
For Merkel, “to some extent it’s about her legacy” as German chancellor at a time of crises, “and that’s something that Schaeuble just doesn’t think about,” she said. The mostly cordial entente between the two has dragged skeptical lawmakers to back bailouts that about half of Germans oppose. The cantankerous Schaeuble has given voice to backbenchers’ doubts, while Merkel has reminded Germany of its unique responsibility in holding the euro together. Ultimately, Germany has provided the biggest share of almost half a trillion euros ($547 billion) of aid offered to five euro-area countries in the past five years. “Merkel and Schaeuble are singing from the same sheet, but they’re singing different melodies,” said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels. “It falls to the finance minister to be the bad guy.”
Their roles have been further strained by Schaeuble’s evident distaste for Greek Prime Minister Alexis Tsipras’s Germany-bashing. That has deepened questions about Greece’s ability to repay its debt. At issue for Merkel is cutting loose a NATO ally in a region vulnerable to Vladimir Putin’s increasingly aggressive foreign policy. The conflict between the two played out during three days of European diplomacy in Brussels this month, where Merkel’s view that Greece can’t be suspended from the euro without its consent carried the day amid pressure from France and Italy. That unlocked a deal on July 13 to begin talks on a third bailout tied to further austerity for Greece.
The hypocrisy is stunning. In more ways than one, Greece is a lab rat.
• On Reform, Europe Asks Greece To Go Where Many Fear To Tread (Reuters)
Greece’s new bail-out deal imposes a stiff dose of budget rigor and market deregulation which critics say few leaders of Western Europe’s biggest nations have dared serve their own voters. “Francois Hollande is very good at telling others how to do their reforms,” opposition French conservative Xavier Bertrand said in a dig at France’s Socialist leader, a key broker in the Greek accord clinched on July 13 after all-night Brussels talks. “So what’s he waiting for in France?” said Bertrand, who was labor minister in the 2007-2012 government of former President Nicolas Sarkozy, which also struggled to make good on campaign pledges to revamp the euro zone’s second largest economy.
While euro zone leaders deflect cries of double standards by insisting the tough measures are justified to rescue Greece from collapse, such jibes underline how uneven reform has been in the 19-member currency area since its launch in 1999. While she has balanced Germany’s budget for the first time since 1969, Angela Merkel faces regular criticism that she has done little in a decade in power to modernize the bloc’s biggest economy since taking over from Gerhard Schroeder, voted out in 2005 after introducing a raft of painful labor reforms. The demands made on Athens to win a new bail-out worth up to €86 billion would, if implemented, transform the Greek economy from the bad boy of Europe into a reform poster-child.
They come as Greece pursues spending cuts of such rigor that it eked out a small primary budget surplus before debt service for the second successive year in 2014, in stark contrast to repeat deficit-sinning by France. Desperate times call for desperate measures, Greek creditors respond, arguing that this is what happens when your national debt hits 177% of gross domestic product and a crumbling economy leaves one in four of the workforce with no job. But as Greek Prime Minister Alexis Tsipras braced to push a further batch of measures through parliament on Wednesday, it is worth recalling that much of what Athens has been told to achieve has proven so socially and politically explosive that others in Europe have struggled to do the same.
• Germany And Greece Need Counselling (Guardian)
Political Berlin feels emotional right now. A high-level German politician put it this way to me recently: “It’s like a whole hysteria going on here. The Berlin political world is emotional all the time. It has to stop, but I don’t know how. The anger is on the left, it’s on the right.” The historian Jacob Soll touched on this outpouring of emotion as it relates to Greece in a column in the New York Times last week, and his conclusion is that Germans must regain their cool if they want to lead Europe. He is right, but he is skipping a step. Germans cannot regain their cool until they reduce the outrage they feel towards Greece, which they perceive as the guilty partner in their eurozone marriage. To do this, both nations must engage an impartial, outside mediator to help them mitigate the outrage they feel towards each other.
In a structured, therapy-like setting, relevant policymakers from both sides would then finally be able to sit together and create a shared vision to wrest Greece from its economic depression. Outrage-mitigation mediation works in situations where activists and corporations find themselves at loggerheads. Ideally, corporations and their critics commit to sitting together in a room and sharing their dilemmas – to actually explaining their positions in the safe space created by the mediators. The chief executive of a corporation that has flouted environmental laws might say something like: “You activists just don’t get it. This pollution is not that bad. It creates X amount of jobs and it allows us to earn Y amount of profit. We can then pay Z taxes and thereby fulfil our role in society.”
The activists might reply: “We won’t accept that logic, because – aside from the fact that you’re ruining the environment, perhaps with the tacit acceptance of regulators whom you’ve bought off – your pollution is just shifting the cost of your business to society, which has to deal with all of these sick and/or dead people. But, OK, we get that your business has an economic purpose, so if you stop polluting and move to another model, we will mobilise our base and our leadership to support you.” Germany can look to its own transformation away from nuclear power to renewables as an example here. This process, accelerated after Fukushima, saw anti-nuclear activists, politicians and the power industry jointly define the vision for the future state of Germany’s energy supply.
Since everyone has bought into the vision, activists and industry stand eagerly behind the transformation. In fact, buy-in for this green movement has become so widespread that it has become part of Germany’s national identity. Seen in this light, last week’s deal imposing a 77% VAT increase – from 13% to 23% – and other punitive measures on Greece are bound to fail: not only because they would seem to contradict a century of economic theory, but also because neither Germany nor Greece has bought into them. Everyone hates this deal. Germany feels it is being asked for a gift at the end of a gun, sinking money into a country that will never actually pay it back and that it does not perceive as critical for its national and economic security. Greece is outraged that more austerity will further lower its standard of living, and it is tired of being called lazy and inept by Europe’s de facto hegemonic power.
“..any bankrupt nation that wants to survive is going to have to roll out bold incentive programs to attract talented people, growing businesses, and capital.”
• Greece Isn’t The Problem; It’s A Symptom Of The Problem (Simon Black)
All eyes may be on Greece right now, but in reality, the economic malaise is widespread across the continent. Italy is gasping to exit from its longest recession in history, while unemployment figures across Southern Europe remain at appalling levels. In France, the unemployment rate is near record highs. Finland, once a darling of the Eurozone, is posting its worst unemployment figures in 13-years. Even in Austria growth is flat and sluggish. It’s clear that Greece is not the problem. It’s a symptom of the problem. The real problem is that every one of these nations has violated the universal law of prosperity: produce more than you consume. This is the way it works in nature, and for individuals. If you spend your entire life going in to debt, making idiotic financial decisions, and rarely holding down a stable job, you’re not going to prosper.
Yet governments feel entitled to continuously run huge deficits, rack up historic debts, and make absurd promises that they cannot possibly keep. This is a complete and total violation of the universal law of prosperity. And as their financial reckoning days approach, history shows there are generally two options. The first outcome is that a country is forced to become more competitive– to rapidly change course and start producing more than it consumes. It’s like a bankrupt company bringing in a turnaround expert: Apple summoning Steve Jobs in its darkest hour. But here’s the thing: if a nation wants to produce, it needs producers. That means talented employees, professionals, investors, and entrepreneurs. So any bankrupt nation that wants to survive is going to have to roll out bold incentive programs to attract talented people, growing businesses, and capital.
This includes cutting taxes, reducing red tape, establishing easy residency programs for talented foreigners, etc. And it’s already happening. Even the UK has been working to slash its corporate tax burden and attract more multinationals to its shores. Portugal has been offering residency in exchange for real estate investment, which has helped stabilize its troubled property market. Malta offers economic citizenship, providing public finances with vital capital. And I expect Greece to launch similar programs; we might even see the Greek government selling off passports bundled together with an island. No joke. They’d be well advised to do so; because the second option for bankrupt nations is to slide deeper into chaos.
Nice, but gets stuck in train of thought.
• Moving on From the Euro (O’Rourke)
In the short run, the eurozone needs much looser monetary and fiscal policy. It also needs a higher inflation target (to reduce the need for nominal wage and price reductions); debt relief, where appropriate; a proper banking union with an adequate, centralized fiscal backstop; and a “safe” eurozone asset that national banks could hold, thereby breaking the sovereign-bank doom loop. Unfortunately, economists have not argued strongly for a proper fiscal union. Even those who consider it economically necessary censor themselves, because they believe it to be politically impossible. The problem is that silence has narrowed the frontier of political possibility even further, so that more modest proposals have fallen by the wayside as well.
Five years on, the eurozone still lacks a proper banking union, or even, as Greece demonstrated, a proper lender of last resort. Moreover, a higher inflation target remains unthinkable, and the German government argues that defaults on sovereign debt are illegal within the eurozone. Pro-cyclical fiscal adjustment is still the order of the day. The ECB’s belated embrace of quantitative easing was a welcome step forward, but policymakers’ enormously destructive decision to shut down a member state’s banking system – for what appears to be political reasons – is a far larger step backward. And no one is talking about real fiscal and political union, even though no one can imagine European Monetary Union surviving under the status quo.
Meanwhile, the political damage is ongoing: not all protest parties are as pro-European as Greece’s ruling Syriza. And domestic politics is being distorted by the inability of centrist politicians to address voters’ concerns about the eurozone’s economic policies and its democratic deficit. To do so, it is feared, would give implicit support to the skeptics, which is taboo. Thus, in France, Socialist President François Hollande channels Jean-Baptiste Say, arguing that supply creates its own demand, while the far-right National Front’s Marine Le Pen gets to quote Paul Krugman and Joseph Stiglitz approvingly. No wonder that working-class voters are turning to her party.
Koo shows his head is not a balanced one.
• EU Refuses To Acknowledge Mistakes Made In Greek Bailout (Richard Koo)
Strictly speaking, Greece confronted two problems simultaneously. One was that GDP had been artificially boosted by a profligate fiscal policy carried out under the cover of understated deficit data. The other was a balance sheet recession triggered by the collapse of the massive housing bubble that resulted from the ECB’s ultra-low-interest- rate policy that lasted from 2000 to 2005. The artificial increase in GDP (Mr. Blanchard correctly noted that Greek output was “above potential to start” in 2008) was something that other periphery countries like Spain and Ireland did not have to confront. A certain decline in GDP from such a level was inevitable as profligate fiscal policy was replaced by the necessary fiscal consolidation.
But what complicated matters in Greece is that in addition to the standard decline in GDP that results when profligate government spending eventually sparks a fiscal crisis, Greece was also in the midst of a balance sheet recession. The nation’s housing bubble and subsequent collapse were actually larger than those of Spain in terms of housing price appreciation and decline. If all of Greece’s current problems were simply the price to be paid for past fiscal indulgence, the decline in output would have been much smaller than the actual 30 percent. But because the economy also faced a serious balance sheet recession, the fiscal consolidation measures implemented to address excess government spending caused GDP to fall by nearly 30%.
Admittedly, it would have been extremely difficult for anybody to balance the need to end the profligate fiscal policy while maintaining sufficient fiscal stimulus to keep the country in balance sheet recession from falling off the fiscal cliff. But now that it is where it is, the policymakers must find ways to get the economy to grow again. There is also the possibility that the way data was presented by the EU and IMF further widened the perceptual gap between European lenders and the Greek public. Nearly all of the Greek analysis produced by the IMF and the EU has discussed matters relative to GDP, whereas Greek standards of living are linked directly to the absolute level of GDP.
The numbers dwarf our AE for Athens Fund.
• Bank Curbs Hit Greek Charities (Reuters)
Donations to Greek children’s charities have dived since the government imposed drastic curbs on bank withdrawals, putting some volunteer-run services at risk just when they are needed most. One charity chief is turning to the millions of Greeks who live abroad for help, as business and individual donors at home cannot get hold of cash beyond the 60 euros they are allowed to take out of their accounts each day, or €420 every week. The Smile of the Child – a charity which receives almost no state funding – said much of its income had been almost wiped out since the government introduced capital controls just over three weeks ago to avert a run on the banks. “As soon as capital controls were implemented, we saw a complete drop in donations to almost nothing,” the charity’s president, Costas Giannopoulos, told Reuters.
The public health system is struggling following five years of economic crisis and government austerity policies. However, the charity runs services including mobile health units offering free pediatric, dental and eye care to children, as well as a helpline which receives thousands of calls a year where young people can report issues such as physical and sexual abuse. With living standards tumbling, growing numbers of Greeks rely on these services. Asked what would happen if the capital controls are not eased, Giannopoulos said: “It means we’ll be in danger.” “That’s why we are trying to mobilize Greeks abroad … to understand that there is a Greece which is fighting to support people at the bottom of the chain.”
The ethnic Greek diaspora spans the world, with large populations in the United States, Australia, Britain and Germany. The Smile of the Child needs around €1.3 million a month to operate fully but has only around €400,000 in the bank. A new deal struck between Greece and its creditors last week could also push up demand for volunteer-run clinics and food banks across Greece. The cost of living already rose on Monday with value-added tax raised to 23% on a range of services and foodstuffs. Cuts to pensions, further tax increases and reductions in public spending will follow under a third bailout program for Greece. The Smile of the Child already expects to help around 50% more children this year than in 2014, with around 120,000 under-18s expected to benefit, up from 83,000 in 2014. In 2011, only around 20,000 babies and youngsters were being supported, a sign of the social crisis following years of high unemployment and cuts to areas such as health and education.
Finland has failed.
• Finns Told Pay Cuts Now Only Way to Rescue Economy From Failure (Bloomberg)
One of Germany’s staunchest allies in backing euro-zone austerity is about to feel some of the pain the policy brings with it. Finnish Prime Minister Juha Sipila will this month battle unions to reduce the cost of labor. Without the measure, he says Finland will need a €1.5 billion austerity package to meet budget goals. “Reducing labor costs is the first big challenge on the path of Finnish economic revival,” Aktia chief economist Anssi Rantala said in an interview. “The country cannot afford to fail in this.” Sipila wants Finnish labor to cost 5% less by 2019, a proposal unions already rejected in May, one month after the self-made millionaire won national elections on pledges to save Finland’s economy.
He’s due to put forward a detailed plan on July 31 and unions have three weeks to respond. Rantala at Aktia, a Finnish bank, says the fastest way to cut labor costs is to increase work hours without raising pay, in what amounts to an effective wage cut that might not look as bad on paper. Sipila needs to push through the unpopular policy to try to revive competitiveness in Finland, which has yet to recover from the loss of a consumer electronics industry once led by Nokia Oyj and a faltering paper manufacturing sector.
Unit labor costs in Finland, where gross domestic product has contracted for the past three years, are almost 20% higher than those of its main trading partners, including Germany. Finland’s euro membership means it can’t rely on a weaker currency to help close that gap. Unemployment has held at, or above, 10% for the past five months. Meanwhile, Sipila got the go-ahead from the Finnish parliament’s Grand Committee earlier this month to start negotiations on a third Greek bailout, after austerity policies failed to end that nation’s crisis. A poll published the same day showed 57% of Finns don’t want their government to back another Greek rescue.
First regional elections. Then 3 weeks later, national elections. Will Spain ever look the same?
• Catalans Spur the Remaking of Spain With Battle for Independence (Bloomberg)
Catalonia’s bid for independence has opened the floodgates: Now all Spain’s major parties are looking to remake the way the state’s power is carved up. Catalan President Artur Mas plans to use voting for the region’s parliament on Sept. 27 – weeks before national elections are due – as a de-facto referendum on leaving Spain. Just as the Scottish independence movement has prompted a rethink of how the U.K. is governed, Spain’s national parties are responding with plans to prevent the disintegration of a country whose mainland borders are unchanged since the 17th century. Prime Minister Mariano Rajoy’s People’s Party is seeking to give the regions much more say in the Senate in Madrid.
The main opposition Socialists are proposing a looser federal state, while the insurgent Podemos and Ciudadanos parties are floating their own ideas. “Mas has contributed to reopening the debate about how Spain should be governed and taxes should be distributed,” said Antonio Barroso, a London-based analyst at Teneo Intelligence. “With Mas or without him, that’s going to be an issue that Spaniards will face over the course of the next legislative term.” Spain’s 1978 constitution set up regional administrations with varying degrees of autonomy. But over the past three years, Mas has moved from seeking more control over taxes to demanding the right for Catalans to break away completely.
He’s already campaigning for September’s regional election. If separatist groups win a majority in the legislature in Barcelona and the central government refuses to negotiate, he says he’ll make a unilateral declaration of independence. “We are ready to do it,” Mas said as he presented a joint list of pro-secession candidates for the election at an event in Barcelona on Monday. “We have been getting ready for months and years.” Opposing Mas’s list, as well as the national parties, will be Unio, which split from Mas last month over the independence demands after running with his Convergencia party on a joint platform since 1978. Polls suggest Mas will fall short of a majority in the 135-member chamber.
A July 6-9 Feedback survey for La Vanguardia newspaper gave the groups in his alliance a maximum of 56 seats, 12 too few. The anti-capitalist Popular Unity Candidates, known as the CUP in Catalan, in line to win as many as 10 seats, also back independence but plan to run separately. Still, a single list including the CUP would gain as many as 72 seats, according to the poll, which was based on 1,000 interviews and with a margin of error of 3.2%. Even if Mas falls short in September, the genie is out of the bottle. Catalonia will be split down the middle, and other regions such as Valencia and the capital, Madrid, are pushing for changes to the tax system.
“Under current law, US companies owe the full 35% corporate tax rate—the highest of any industrialized nation—on income they earn around the world.”
• Tim Cook’s $181 Billion Headache: Almost 90% Of Apple’s Cash Held Overseas (BBG)
Apple’s cash topped $200 billion for the first time as the portion of money held abroad rose to almost 90%, putting more pressure on CEO Tim Cook to find a way to use the funds without incurring US taxes. Booming iPhone sales overseas are adding to Apple’s cash pile, pushing the company to embrace offshore affiliates to preserve and invest the money. Cook, who was called before US Congress in 2013 to defend Apple against allegations of dodging taxes, is facing questions on what Apple will do with its cash pile and fielding calls from investors, such as billionaire activist Carl Icahn, to return shareholder capital. “They don’t really have that much on-shore cash,” said Tim Arcuri at Cowen. “They’re still sort of hamstrung on what they can do, barring the ability to repatriate a bunch of off-shore cash.”
Cook has been vocal about his desire for US law makers to amend the country’s tax laws so that companies can repatriate more cash. Apple’s overseas cash has climbed 70% since Cook spoke to Congress, and now makes up 89% of Apple’s $202.8 billion in cash and investments at the end of June, the company said on Tuesday, up from 72% of $146.6 billion in cash two years ago. Driving that is Apple’s booming global revenue. Sales in greater China, for example, more than doubled to $13.2 billion in the latest quarter from a year earlier. At the same time, Apple’s US federal lobbying spending has been climbing, and reached a record $4.1 million last year as it advocated on a wide range of issues. The company’s lobbying climbed 46% in the second quarter from a year earlier.
The iPhone maker added three lobbyists on the issues of taxes in the past year, and is addressing concerns such as corporate and international “tax reform,” according to records filed with the US senate this week. Under current law, US companies owe the full 35% corporate tax rate—the highest of any industrialized nation—on income they earn around the world. They receive tax credits for payments to foreign governments, and have to pay the US the difference only when they bring the money home. That system encourages companies to shift profits to low-tax foreign countries and leave the money there. As a result, more than $2 trillion is being stockpiled overseas by US companies.
One big happy family.
• Ancient DNA Link Between Amazonians and Australasians Traced (NY Times)
Some people in the Brazilian Amazon are very distant relations of indigenous Australians, New Guineans and other Australasians, two groups of scientists who conducted detailed genetic analyses reported Tuesday. But the researchers disagree on the source of that ancestry. The connection is ancient, all agree, and attributable to Eurasian migrants to the Americas who had some Australasian ancestry, the scientists said. But one group said the evidence is clear that two different populations came from Siberia to settle the Americas 15,000 or more years ago. The other scientific team says there was only one founding population from which all indigenous Americans, except for the Inuit, descended and the Australasian DNA came later, and not through a full-scale migration.
For instance, genes could have flowed through a kind of chain of intermarriage and mixing between groups living in the Aleutian Islands and down the Pacific Coast. Both papers were based on comparisons of patterns in the genomes of many living individuals from different genetic groups and geographic regions, and of ancient skeletons. David Reich of Harvard, the senior author of a paper published Tuesday in the journal Nature, said the DNA pattern was “surprising and unexpected, and we weren’t really looking for it.” Pontus Skoglund, a researcher working with Dr. Reich who was investigating data gathered for previous research, found the pattern, or signal, as he described it. He and Dr. Reich and their colleagues used numerous forms of analysis, comparing different groups to see how distant they were genetically, to determine if there was some mistake.
But, Dr. Skoglund said, “we can’t make it go away.” Dr. Reich reported in 2012, based on some of the same evidence, that a group he called the First Americans came from Siberia 15,000 or more years ago, and were the ancestors of most Native Americans on both continents. There was a second and later migration, he said, that gave rise to a group of Indians including the Chipewyan, Apache and Navajo, who speak similar languages. The Inuit are generally agreed to have made a separate, later migration. Now, based on new evidence and much deeper analysis, he and Dr. Skoglund and colleagues concluded that the first migration, which began 15,000 or more years ago, consisted not only of the group he identified as the First Americans, but of a second group that he calls Population Y.
They could have come before, after or around the same time as the First Americans. But Population Y, he writes, “carried ancestry more closely related to indigenous Australians, New Guineans and Andaman Islanders than to any present-day Eurasians or Native Americans.”
Shouldn’t we really be having another discussion by now?
• The 97% Scientific Consensus on Climate Change Is Wrong-It’s Even Higher (Hill)
In May, Last Week Tonight host John Oliver attempted to visually demonstrate what a true debate on climate change should look like. Instead of bringing out one expert on either side of the issue, Oliver brought on set 97 scientists who support evidence that humans are causing global warming to argue with three climate skeptics—“a statistically representative climate change debate,” he said. The sketch was based on the “climate consensus,” the notion that 97% of climate scientists agree that global warming is occurring and that humans are part of the problem. But if Oliver really wanted to be up-to-date on his stats, he would have put 99.99 scientists on one side of the desk.
That’s according to James L. Powell, director of the National Physical Sciences Consortium, who reviewed more than 24,000 peer-reviewed scientific articles on climate change published between 2013 and 2014. Powell identified 69,406 authors named in the articles, four of whom rejected climate change as being caused by human emissions. That’s one in every 17,352 scientists. Oliver would need a much bigger studio to statistically represent that disparity. “The 97% is wrong, period,” Powell said. “Look at it this way: If someone says that 97% of publishing climate scientists accept anthropogenic [human-caused] global warming, your natural inference is that 3% reject it. But I found only 0.006% who reject it. That is a difference of 500 times.”
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