Harris&Ewing F Street N.W., Washington, DC 1918
Oh what fun it is to play….
Global Financial Stress Index spikes up most since Aug 2011…
As Brexit polls surge towards "Leave"…
As USDollar Scarcity (panic demand) rears its ugly head again…
And GDP-weighted European Sovereign risk surged to 2 year highs…
They were always only illusionary.
During the financial crisis of 2008-09, politicians facing difficult and electorally unpopular decisions cleverly passed the responsibility for the economy to central bankers. These policymakers accepted the task to nurse the global economy to health. But there are increasing doubts about central banks’ powers and their ability to deliver a recovery. Policymakers have engineered an artificial stability. Budget deficits, low-, zero-, and now negative interest rates , and quantitative easing (QE) have not restored global growth or increased inflation to levels necessary to bring high-debt under control. Instead, low rates and the suppression of volatility have encouraged asset-price booms in many world markets.
Since prices of assets act as collateral for loans, central banks are being forced to support these inflated values because of the potential threat to financial institutions holding the debt. As the tried and tested policies lose efficacy, new unconventional initiatives have been viewed by markets with increasing suspicion and caution. Key to this debate is negative interest rate policy (NIRP), now in place in Europe and Japan, and most recently affecting German bonds. Markets do not believe that NIRP will create the borrowing-driven consumption and investment that generates economic activity. Existing high-debt levels, poor employment prospects, low rates of wage growth, and overcapacity have lowered potential growth rates, sometimes substantially.
NIRP is unlikely to create inflation for the same reasons, despite the stubborn belief among economic clergy that increasing money supply can and will ultimately always create large changes in price levels. There are toxic by-products to this policy. Low- and negative rates threaten the ability of insurance companies and pension funds to meet contracted retirement payments. Bank profitability also has been adversely affected. Potential erosion of deposits may reduce banks’ ability to lend and also reduce the stability of funding.
The capacity of NIRP to devalue currencies to secure export competitiveness is also questionable. The euro, yen and Swiss franc have not weakened significantly so far, despite additional monetary accommodation. One reason is that these countries have large current account surpluses: the eurozone (3.0% of GDP), Japan (2.9% of GDP), and Switzerland (12.5% of GDP). The increasing ineffectiveness of NIRP in managing currency values reflects the fact that the underlying problem of global imbalances remains unresolved.
The European Central Bank has pledged to flood the financial system with euro liquidity if credit markets seize up after a Brexit vote. The move came as European bank stocks plummeted across the board for another day, the epicentre of stress as nerves fray over the potential fall-out from British referendum. The Euro Stoxx index of bank equities fell to a four-year low, and is nearing levels last seen in during the eurozone debt crisis in 2012. Europe’s banks have lost half their value in the last year. “We have taken the necessary precautionary measures to meet liquidity needs,” said Ewald Nowotny, Austria’s central bank governor and an ECB board member. “We have assured that there will be no liquidity bottlenecks, either among English banks or European banks, if it becomes necessary,” he said.
The soothing words put to rest any fear that the ECB might withhold full cooperation from the Bank of England in the poisonous political mood after a withdrawal vote. A spat might have sparked fears of a funding crunch for international banks in the City of London with short term debts in foreign currencies. The Bank of England cannot print euros or dollars. The world’s central banks tend to work closely together as an Olympian fraternity, knowing that their fates are bound together regardless of the political fighting around them. The US Federal Reserve and the central banks of Japan, Switzerland, Sweden, and Canada are all working as tightknit team with the Bank of England and the ECB, determined to avoid being caught off guard as they were when the payments system went into meltdown after the Lehman crisis.
[..] German banks are in surprisingly deep trouble, struggling with the corrosive effects of negative interest rates on their profit margins. But Italian lenders worry regulators most as tougher capital adequacy rules come into force, and the eurozone’s new ‘bail-in’ policy for creditors turns the sector into a lepers’ colony. The non-performing loans of Italian banks have reached 18pc of their balance sheets, the legacy of Italy’s economic Lost Decade. This is coming into focus as premier Matteo Renzi bleeds support and risks losing a make-or-break referendum in October.
Euro Intelligence reports that he faces an “insurrection” after ex-premier Massimo D’Alema – supposedly a Renzi ally – said he has switched his support to the radical Five Star movement of comedian Beppe Grillo. It is no longer implausible to imagine a Five Star government in charge of Italy within months, setting off a political earthquake. The picture is equally dramatic in Spain where the ultra-Left Podemos coalition has pulled well ahead of the establishment Socialist Party (PSOE) in the polls and has an outside chance of winning the elections on June 26, opening the way for an anti-austerity government in Madrid. The possibility of a ‘Syriza-style’ rebellion in Spain is viewed with horror in Brussels.
No shit, Justin.
An influx of capital from Asia is partly responsible for soaring housing prices in Vancouver and Toronto, Justin Trudeau has said, as a new study showed more than 90% of all detached homes in Vancouver are now worth more than C$1m($772,141). “We know that there is an awful lot of capital that left Asia in the past few years,” Canada’s prime minister told public broadcaster CBC on Friday. “Obviously overseas money coming in is playing a role” in Canada’s housing affordability crisis, he said. Trudeau provided no supporting data Friday to back up his remarks, although his government set aside funds to study the widespread perception that overseas investors and speculators are to blame for Canada’s housing bubble.
Concern over the overheated property market has focused on Vancouver, where the proportion of million-dollar homes in the city has climbed this year to 91%. The figure marks a leap from two years ago, when around 59% of houses were worth a million or more, according to the study by Andy Yan, acting director of Simon Fraser University’s City Program. “This shows how what used to be the earnest product of a lifetime of local work is perhaps quickly becoming a leveraged and luxurious global commodity,” Yan said. The median household income in Vancouver, meanwhile, rose just 8.6% between 2009 to 2013, according to the most recent data from Statistics Canada. Adjusted for inflation, it would be about C$77,000 a year in 2016.
That puts typical incomes well below the threshold needed to purchase million-dollar homes, said Yan, noting other factors must be driving the sharp increase in home values in Vancouver. “It’s global cash, meeting cheap money, meeting limited supply,” he said, adding that all three factors are working to “magnify each other” and drive further speculation.
To quote myself: “You sure about those Olympics?”
The Brazilian state of Rio de Janeiro has declared a financial emergency less than 50 days before the Olympics. Interim Governor Francisco Dornelles says the “serious economic crisis” threatens to stop the state from honouring commitments for the Games. Most public funding for the Olympics has come from Rio’s city government, but the state is responsible for areas such as transport and policing. Interim President Michel Temer has promised significant financial help. The governor has blamed the crisis on a tax shortfall, especially from the oil industry, while Brazil overall has faced a deep recession.
The measure could accelerate the release of federal emergency funds. Rio state employees and pensioners are owed wages in arrears. Hospitals and police stations have been severely affected. In a decree, Mr Dornelles said the state faced “public calamity” that could lead to a “total collapse” in public services, such as security, health and education. He authorised “exceptional measures” to be taken ahead of the Games that could impact “all essential public services”, but no details were given.
Make that the entire western world.
One of our longtime friends in Japan just sold the family business. The writing was on the wall, and had been for the past decade: fewer customers, with less money, and no end of competition for the shrinking pool of customers and spending. Our friend is planning to move to another more vibrant economy in Asia. She didn’t want to spend the rest of her life struggling to keep the business afloat. She wanted to have a family and a business with a future. It was the right decision, not only for her but for her family: get out while there’s still some value in the business to sell. [..] The Keynesian Fantasy is that encouraging people to borrow money to replace what they no longer earn is a policy designed to fail, and fail it has.
Borrowing money incurs interest payments, which even at low rates of interest eventually crimps disposable earnings. Banks must loan this money at a profit, so interest rates paid by borrowers can’t fall to zero. If they do, banks can’t earn enough to pay their operating costs, and they will close their doors. If banks reach for higher income, that requires loaning money to poor credit risks and placing risky bets in financial markets. Once you load them up with enough debt, even businesses and wage earners who were initially good credit risks become poor credit risks. Uncreditworthy borrowers default, costing the banks not just whatever was earned on the risky loans but the banks’ capital.
The banking system is designed to fail, and fail it does. Japan has played the pretend-and-extend game for decades by extending defaulting borrowers enough new debt to make minimal interest payments, so the non-performing loan can be listed in the “performing” category. Central banks play the game by lowering interest rates so debtors can borrow more. This works like monetary cocaine for a while, boosting spending and giving the economy a false glow of health, but then the interest payments start sapping earnings, and once the borrowed money has been spent/squandered, what’s left is the interest payments stretching into the future.
“These opportunities come along once in a generation where people actually get to vote on what they want.”
The European Union is too big and is “sinking,” and the United Kingdom should take the chance to get out while it can, economist David Malpass said Friday. British citizens vote next Thursday on whether the U.K. should exit the union. “The EU is just too big. It’s too expensive. It doesn’t work,” the president of Encima Global said in an interview with CNBC’s “Power Lunch.” “They haven’t even made progress on their mission, which was fiscal responsibility, banking reforms, defending the external borders. They’re just not doing the job.” He believes the Brits should not squander the opportunity, noting that the last referendum the country held was in 1975. “These opportunities come along once in a generation where people actually get to vote on what they want.”
More on an old feud.
Keen carved out a major distinction between his approach and that of Krugman, but also of that of many of the economists who agree that money is not neutral. He argues that an increase in bank lending affects the macro economy by increasing demand. It follows that measured growth should be decomposed into workforce growth, productivity growth, and debt growth. Keen’s third term is deeply disturbing, because he goes on to argue that that a major part of the observed economic growth since 1980 has been driven by rising household debt levels.
Since all household debt involves interest, there must be a point at which households have all the debt that they can carry, and don’t take on any more. At this point, argues Keen, the affected economy will become a “debt zombie”, stuck in a low or even negative growth trajectory. Keen proposes a “debt jubilee” to write off excessive household debt and allow growth to resume. On its own, this would only postpose the debt/stagnation crisis; but perhaps after one debt jubilee they could become regular events.
101. But nothing on security threats. Hmm.
Many people know it as the technology behind Bitcoin, but blockchain’s potential uses extend far beyond digital currencies. Its admirers include Bill Gates and Richard Branson, and banks and insurers are falling over one another to be the first to work out how to use it. So what exactly is blockchain, and why are Wall Street and Silicon Valley so excited about it? Currently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.
What’s that about the chain and its weakest link?
The value of the digital currency Ethereum has dropped dramatically amid an apparent huge attack targeting an organisation with huge holdings of the currency. The price per unit dropped to $15 from record highs of $21.50 in hours, with millions of units of the digital currency worth as much as $50 million stolen at post-theft valuations. At a pre-theft valuation, it works out as a staggering $79.6 million. Ethereum developers have proposed a fix that they hope will neutralise the attacker and prevent the stolen funds from being spent. The core Ethereum codebase does not appear to be compromised. Ethereum is a decentralised currency like bitcoin, but it is built in such a way that it also allows for decentralised organisations to be built on top of its blockchain (the public ledger of transactions) and for smart contracts that can execute themselves automatically if certain conditions are met.
One of these organisations is the DAO, the Decentralised Autonomous Organisation, which controls tens of millions of dollars’ worth of the digital currency. ( The bitcoin news site CoinDesk has a good feature explaining more about how the DAO operates.) The DAO is sitting on 7.9 million units, known as ether, of the currency worth $132.7 million. Early Friday morning, it appears to have been hit with a devastating attack, with unidentified attackers appearing to exploit a software vulnerability and draining drain millions of ether – with a theoretical value in the tens of millions of dollars. One ether wallet identified by community members as a recipient of the apparently stolen funds holds more than 3.5 million ether. At an exchange rate of about $14 a unit, that works out at $47 million. At $21.50, the value of ether before the hack, it’s significantly more – $79.6 million.
Germany wants to be able to talk to Russia.
German Foreign Minister Frank-Walter Steinmeier has criticised Nato military exercises in Eastern Europe, accusing the organisation of “warmongering”. Mr Steinmeier said that extensive Nato manoeuvres launched this month were counterproductive to regional security and could enflame tensions with Russia. He urged the Nato military alliance to replace the exercises with more dialogue and co-operation with Russia. Nato launched a simulated Russian attack on Poland on 7 June. The two-week-long drill involves about 31,000 troops, including 14,000 from the US, 12,000 from Poland and 1,000 from the UK. It will also feature dozens of fighter jets and ships, along with 3,000 vehicles.
“What we shouldn’t do now is inflame the situation further through sabre-rattling and warmongering,” Mr Steinmeier said in an interview to be published in Germany’s Bild am Sontag newspaper. “Whoever believes that a symbolic tank parade on the alliance’s eastern border will bring security, is mistaken. “We are well-advised to not create pretexts to renew an old confrontation,” he said. The exercises are intended to test Nato’s ability to respond to threats, and take place every two years. But Russia has repeatedly said that Nato troops close to its borders are a threat to its security.
This is serious. No sovereignty, no independent legal system, and hardly a constitution left. The political system trumps all. This is the EU. And Tsipras should never sign off on it, of course. Bus boy.
The Greek government has sidelined members of an independent authority that had blocked the deportation of Syrian refugees, following sustained pressure from other European countries. Greek MPs voted on Thursday to change the composition of the country’s asylum appeals board, in an attempt to sideline officials who had objected on legal grounds to the expulsion of Syrians listed for deportation to Turkey. The appeals board had jeopardised the EU-Turkey migration deal, the agreement enacted in March that is meant to see all asylum seekers landing on the Greek islands detained in Greece – and then deported. While Greek police had enacted the first part of the plan,
Greek appeals committees have largely held up the planned deportations – potentially giving Syrians greater incentive to reach Greece. The appeals committees argued that Turkey does not uphold refugee law, and is therefore not a safe country for refugees. Currently the three-person appeals committees consist of one government-appointed official, and two appointed independently by the UN refugee agency and Greece’s national committee for human rights. After pressure from European politicians who feared a new surge in arrivals to Greece, Greek MPs have voted to create new committees formed of two administrative judges and one person appointed by the UN, meaning that state officials will now outnumber independent ones on the committees.
An independent appeals committee member interviewed by the Guardian in the run-up to the law change said it was a political move designed to bend an independent judicial process to the will of the executive. Speaking on condition of anonymity, the official said the change was “a serious blow to the independence of the committee. We think like legal scientists. We have a specific view that is based on legal analysis. If we lose our [places on the committee] then the cases will be handled the way that politicians want.”
This mirrors the long held view of our friend Kostas, who we actively support with TAE funds here in Athens: “We cannot accept funding from the EU or the Member States while at the same time treating the victims of their policies..
Aid group Doctors Without Borders said on Friday that it would no longer take funds from the EU in protest at its “shameful” policies on the migration crisis including a deal with Turkey. The charity, more widely known by its French acronym MSF, received €56 million from EU institutions and the 28 member states last year.”MSF announces today that we will no longer take funds from the EU and its Member States in protest at their shameful deterrence policies and their intensification of efforts to push people and their suffering back from European shores,” the group said in a statement. The group singled out for criticism the EU’s deal with Turkey in March to stem the biggest flow of migrants into the continent since World War II.
“For months MSF has spoken out about a shameful European response focused on deterrence rather than providing people with the assistance and protection they need,” Jerome Oberreit, international secretary general of MSF, told a press conference. “The EU-Turkey deal goes one step further and has placed the very concept of ‘refugee’ and the protection it offers in danger.” [..] Oberreit also criticised a proposal last week to make similar deals with African and Middle Eastern countries. He added: “We cannot accept funding from the EU or the Member States while at the same time treating the victims of their polices. It’s that simple.” MSF said it received €19 million from EU institutions and €37 million from member states in 2015, amounting to 8% of its funding. It added that its activities are 90% privately funded.