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The European Union predicted Thursday that up to 3 million additional asylum seekers could enter the 28-member bloc by the end of next year, suggesting the staggering pace of new arrivals in recent months shows no sign of abating. The forecast, buried in a 204-page report on the future of the European economy, will add to an already burning debate in Europe about whether the continent can handle the influx, which has broken all modern records. So far this year, more than 760,000 people have entered the continent seeking refuge or jobs, according to the U.N.’s refugee agency. The new arrivals have badly strained government resources in countries all along the trail, which leads from the Mediterranean Sea in the south to richer nations in Europe’s north.

One of the more affluent countries, Sweden, said Thursday that it would apply for emergency E.U. aid, an admission that it is failing to cope. Sweden, which has taken the largest per capita share of refugees of any E.U. country, is expecting 190,000 asylum seekers this year — double its previous record. “The major problem today is that the number of asylum seekers is growing faster than we can arrange for accommodation,” Morgan Johansson, the minister for justice and migration, told reporters. “Sweden can no longer guarantee accommodation to everyone who comes. Those who are arriving could be met with the news that there isn’t anywhere to stay.” [..] Despite the unprecedented scale of the flows, the overall population of the European Union was forecast to rise only 0.4% as a result of the influx.

In a separate forecast, the U.N. High Commissioner for Refugees said it predicted that an average of up to 5,000 migrants a day would travel from Turkey to Greece over the next four months. That would mark a substantial departure from the migrant travel patterns in previous years, when winter’s harsh weather vastly reduced the numbers. The refugee agency appealed for nearly $100 million to winterize tents and sanitation systems while it warned of more deaths among refugees if adequate measures are not taken. Peter Sutherland, the U.N. secretary general’s special representative on migration issues, told the BBC that there was no sign that the flow of migrants was diminishing, despite a rising death toll from rougher autumn seas. He called for Europe to take collective action to deal with the crisis. “This is now a global responsibility, but it is a particular European responsibility”, he said. “And in Europe we can’t say simply that those who are the closest to the problem, and therefore receive most of the migrants, have to handle it themselves”.

At 5,000 a day, you don’t get to 3 million. Actually, you get to 1,825 million.

• UN Expects Daily Refugee Flow Of 5,000 To Europe This Winter (Reuters)

Refugees and migrants are likely to continue to arrive in Europe at a rate of up to 5,000 per day via Turkey this winter, the United Nations said on Thursday, appealing for more funds to avert tragedy in Greece and the Balkans in coming months. More than 760,000 people have already crossed the Mediterranean so far this year, mainly to Greece and Italy, after fleeing wars in Syria, Afghanistan and Iraq, as well as conflicts in Eritrea and other parts of Africa. “Harsh weather conditions in the region are likely to exacerbate the suffering of the thousands of refugees and migrants landing in Greece and travelling through the Balkans, and may result in further loss of life if adequate measures are not taken urgently,” the U.N. High Commissioner for Refugees (UNHCR) said.

“UNHCR’s new winter plan anticipates that there could be up to 5,000 arrivals per day from Turkey between November 2015 and February 2016,” it said. The agency is seeking an additional $96.15 million to support Croatia, Greece, Serbia, Slovenia and the former Republic of Macedonia, bringing the total amount that it is trying to raise for Europe’s refugee crisis to $172.7 million. The fresh funds will be used to upgrade shelter and reception facilities for winter conditions, and to supply family tents and housing units equipped with heating, the statement said. Sanitation and water supply systems will also be improved. “Winter clothing and blankets, as well as other essential items for protecting people from the elements, will be included in the aid packages to be distributed to individuals with specific needs,” it said.

He should be much more vocal on this.

• From Lesvos, Tsipras Says Greece Cannot Cope With Refugees (Reuters)

Greece’s prime minister conceded on Thursday that the country was unable to cope with the thousands of migrants arriving daily on its shores, just days after saying that he was shamed by Europe’s handling of the crisis. Alexis Tsipras was visiting Lesvos the Greek island which has received the bulk of arrivals and where aid groups condemned living conditions for refugees as dire. ”I think we are battling something which is beyond our abilities, and everyone should understand that,” he said, on a visit to a packed migrant registration center with Martin Schulz, head of the European Parliament. Cash-strapped Greece has been struggling to handle an influx of hundreds of thousands of migrants fleeing from war and hardship in the Middle East. Aid organisations estimate more than 601,000 have entered Europe through Greece this year.

With at least 430 people having died this year trying to make the short sea crossing along Greece’s border with Turkey, Tsipras said it was “imperative” to reach a deal with Ankara to stem the flow. About 15,000 refugees and migrants were effectively stranded on Lesvos on Thursday because a ferry strike had stopped reception centres forwarding arrivals onto the Greek mainland. “It’s an asphyxiating situation,” Tsipras said. International aid agency IRC, which has a unit on Lesbos, said conditions at one main centre were unacceptable and that Greece had struggled for years to cope with far fewer migrants. At Moria, an army camp converted into a refugee centre, Schulz and Tsipras got a taste of some of the frustration. “We are here three days. We are hungry. I have two children, my children are sick,” one man shouted at Tsipras.

Tsipras patted his arm. “We will do our best.” The United Nations refugee agency UNHCR launched a new funding appeal on Thursday, saying it needed $96.15 million in additional support for Greece and affected Balkan countries. Greece has had €5.9 million in EU aid so far this year. UNHCR forecasts up to 5,000 arrivals per day from Turkey between now and February. With a recent bout of bad weather, people smugglers have started offering discounts on journeys with flimsy inflatables and charging more for trips on boats. “We were unfortunate enough to see an improvised dinghy as we were heading in, full of refugees,” Tsipras said. “It’s criminal.” ”It is imperative that we reach an agreement with Turkey to stop the flows by targeting the smugglers.”

Far too late, and wrong meeting. What’s needed is something much higher up: UN.

• Tsipras To Hold Emergency Meeting On Refugees With Mayors And Governors (AP)

Greek Prime Minister Alexis Tsipras has invited mayors of eastern Aegean islands bearing the brunt of the current refugee influx to Athens for an emergency meeting on how to deal with the crisis. The meeting, scheduled for midday Friday, was also to be attended by the north and south Aegean regional governors as well as mayors and religious officials from the islands of Lesvos, Samos, Kos, Leros and Chios, and government officials.

Greece is the main gateway into the European Union for hundreds of thousands of people fleeing war and poverty at home. The vast majority arrive after a short but dangerous sea journey to Greek islands from the nearby Turkish coast and then head to the mainland and on to more prosperous northern EU countries through the Balkans. Hundreds have drowned, including many children, when their overcrowded and unseaworthy boats have sunk or capsized.

“Before the war, Syria had a population of 23ml, it was a middle income country and had one of the best education systems in the Arab world with 90% literacy rate. Today, more than half, 12.5ml people cannot survive without humanitarian aid..”

• A Hand in the Water is not Like a Hand in the Fire (Press Project)

The number of internally displaced people in Syria is estimated at 7.6ml while the number of those who fled to neighboring countries; Turkey, Lebanon, Jordan and Iraq is more that 4ml. Before the war, Syria had a population of 23ml, it was a middle income country and had one of the best education systems in the Arab world with 90% literacy rate. Today, more than half, 12.5ml people cannot survive without humanitarian aid. 50% of the children no longer attends school, half of the population has no access to running water and electricity-not simply because they have no money to pay for it but, mostly, because the war has destroyed 50% of the water and electricity infrastructure. Syria used to host 12 refugee camps which accommodated 560.000 Palestinians.

Today, after the war, 450.000 Palestinians are still in the country, scattered everywhere. Jordan closed its borders to Palestinians from Syria at the beginning of the war while Lebanon did the same on May, 2015. In all, 80.000 Palestinians from Syria have found refuge in Turkey, Lebanon, Jordan, and Egypt hoping to be able to cross over to Europe. Almost all of them fear extradition back to Syria due to their particular circumstances. As expected, the first Syrian refugees fled to the neighboring countries; Jordan, Lebanon, Turkey and, in smaller numbers, Iraq and Egypt. The Syrians who chose to move to those countries usually did it because they could not pay the trafficker’s fees for a passage to Europe- during the first years the prices were three times higher than today. Another reason was that some of them believed that the war would not last long and they would be able to return to their country relatively soon.

As Rome burns and babies drown…

• Merkel Hit By Refugee Crisis Setback As Berlin Drops Transit Zones Plan (Guar.)

Angela Merkel has suffered a setback in her attempt to stabilise the influx of refugees into Germany by setting up “transit zones” on the border with Austria. The zones, denounced as detention camps by the Social Democrats (SPD), the German chancellor’s junior coalition partner, were rejected at crisis talks in Berlin on Thursday. Instead, her government announced it would establish up to five reception centres inside Germany for the swifter processing of asylum claims and the prompt deportation of those with little chance of obtaining refugee status, mainly people from the Balkans. Merkel’s climbdown came as the European commission predicted the arrival of up to 3 million people in the EU by 2017.

The Berlin agreement – reached at crisis talks between Merkel’s Christian Democrats, its Bavarian sister party, the Christian Social Union, and the SPD – represented an unusual defeat for the centre-right and a victory for Sigmar Gabriel, the SPD leader and vice-chancellor. The German interior ministry indicated the massive scale of the movement of people towards Germany this year when it supplied the latest figures on Thursday for registered refugees – 758,000, a record-breaking figure that suggests the number will exceed 1 million this year. They mainly came from Syria and Iraq, Afghanistan, Albania and Kosovo. The migrants from the latter two places are likely to be deported promptly under the tighter regime Merkel is trying to create while remaining open to those viewed as bona fide refugees.

The Merkel’s climbdown on transit zones came as the EU prepares for a crucial week of summitry devoted for the fifth time in a matter of months to the migration emergency. EU interior and justice ministers are to meet on Monday to ponder their options amid growing evidence that their governments are failing to come up with coherent policies or to come good on repeated pledges of money, resources and refugee-sharing by quotas.

Economic models on 3 million extra refugees are completelyt useless: nobody has a clue.

• The Economic Impact of the European Refugee Crisis (Atlantic)

Three million refugees and migrants could arrive in Europe by the end of 2017, the European Commission says in its economic forecast for the fall of 2015. The report says the newcomers will have a relatively small economic impact in the medium term, with GDP rising between 0.2% and 0.3% above the baseline by 2020. But, the EC notes, that could vary by country with destination countries such as Germany seeing a more significant impact than transit countries. Here’s more:

“The impact from higher public spending and a larger labour force with a skillset similar to the existing one in the EU is expected to: “contribute to a small increase in the level of GDP this year and next, compared to a baseline scenario, rising to about 0.25% by 2017”. This however is less than the rise in the underlying population, implying a small, negative impact on GDP per capita throughout the period; and “strengthening the outlook for employment (which is expected to improve gradually to about 0.3% more employed persons by 2017), in part from a wage response.”

The EC reports points out that, typically, non-EU migrants typically receive less in individual benefits than they contribute in taxes and social contributions. And their employment is the most important factor of net fiscal contribution. The influx excluding failed asylum applications will increase the EU’s population by 0.4%, the forecast says. The report further says:

“For Member States with an ageing population and shrinking workforce, migration can alter the age distribution in a way that may strengthen fiscal sustainability yet, if the human potential is not used well, the inflow can also weaken fiscal sustainability. Moreover, while migration flows can partly offset unfavourable demographic developments, earlier studies have shown that immigration could not on its own solve the problems linked to ageing in the EU.”

Economic models examining the integration of 3 million extra people over the next two years notwithstanding, Europe is deeply divided over how to handle the most severe refugee crisis since World War II. More than 760,000 refugees and migrants have entered the EU in the first nine months of this year, but the bloc has only agreed on relocating 160,000 of them. Of these, as we reported Wednesday, 116 have been sent to their new homes. About 1.2 million people have sought asylum in the EU since the start of 2014. Many of them are people fleeing the Syrian civil war, and unrest in Afghanistan, Iraq, Eritrea, and elsewhere. Others, however, are economic migrants, and will likely be turned away by Europe.

The ECB should not be buying a single piece of paper.

• Is Europe’s Economy So Bad the ECB Will Run Out of Things to Buy? (Bloomberg)

With European Central Bank President Mario Draghi hinting at further easing by the central bank next month, markets are busy trying to work out whether the next move will be to lower deposit rates even further into negative territory or ramp up asset purchases. Or perhaps both. The terms of the ECB’s quantitative easing, or QE, program mean that it theoretically has a fixed universe of assets to purchase – a limit that could be hit earlier than its intended September 2016 deadline if the bank substantially increases the size of its purchases. Under its current rate of €60 billion a month, the ECB should be more than capable of purchasing the 893 billion euros of agency and government bonds with yields above the deposit rate planned through next September.

However, if the rate of purchases is ramped up then it could come close to running out of available assets, according to Bloomberg Intelligence economist David Powell. Instead, he said, the ECB could cut the deposit rate to increase the investible universe of assets, as well as significantly increasing QE purchases. “BI Economics calculates that a decline in bond yields of 25 basis points across the curve would shrink the universe of bonds to €1.3 trillion,” he said. “In that instance, a cut to the deposit rate would be required to implement asset purchases of €90 billion much beyond September 2016 – the total through September would be roughly €1.2 trillion of overall purchases of agency and government bonds.”

Rather than relying on a rate cut to free up assets, the ECB could simply shift the mix of purchases to agency debt, corporate debt, or even debt from other countries. In December last year, Draghi directly addressed the issue of eligible assets under the ECB’s QE program. Asked whether the board had discussed buying gold or U.S. Treasuries, he replied: “On what sort of assets should be included in QE, my sense and recollection is that we discussed all assets, but gold.” In other words, asset scarcity should not be a problem. However, lowering the deposit rate might be.

Only blatant nonsense spouts from Brussels. Europe is toast.

• EU Cuts Growth and Inflation Outlook as ECB Decision Looms (Bloomberg)

The European Commission cut its euro-area growth and inflation outlook for next year, citing more challenging global conditions and fading impetus from lower oil prices and a weaker euro. GDP in the 19-nation bloc is set to grow 1.8% in 2016, down from a previous projection of 1.9% in May, the Commission said in its autumn forecast published Thursday. Inflation is seen accelerating to 1.6% in 2017 from 0.1% this year. The economic recovery in the 19-nation region is resting on unprecedented stimulus by the European Central Bank. With a slowdown in emerging markets weighing on global trade, risks have increased that growth won’t be strong enough to sustain the decline in unemployment and bring inflation back in line with the ECB’s goal of just below 2%.

“Today’s economic forecast shows the euro-area economy continuing its moderate recovery,” Valdis Dombrovskis, vice president of the European Commission, said in a statement. “Sustaining and strengthening the recovery requires taking advantage of” temporary tailwinds including “low oil prices, a weaker euro exchange rate and the ECB’s accommodative monetary policy,” he said. While noting that the recovery has proved to be resilient to external shocks so far, uncertainty surrounding the economic outlook shows few signs of abating. Risks include a larger-than-anticipated slowdown in China and financial-market volatility triggered by a normalization of U.S. monetary policy, according to the report.

In Germany, factory orders dropped 2.8% in the third quarter from the previous one amid a slump in demand from outside the euro area, the Economy Ministry in Berlin said in a separate release on Thursday. Orders from within the country and the currency bloc are still supporting manufacturing, it said. The Commission upgraded its euro-area growth forecast for this year 1.6%, from a previous estimate of 1.5%. Output should accelerate to 1.9% in 2017, it said. Breaking down growth components, the Commission predicts domestic demand will pick up this year and continue to maintain its momentum over the near term, supported by a boost to nominal income, purchasing power and improving labor-market conditions.

Meanwhile, investment is forecast to strengthen “gradually,” albeit at a lower pace than in past recoveries, pointing to subdued demand expectations, credit-supply constraints and persistent corporate deleveraging pressures. Reacting to the report, EU Commissioner for Economic and Financial Affairs Pierre Moscovici said the recovery “remains on course,” but warned improvement is still unevenly spread across the euro area and major challenges remain going into next year. “These require bold and determined policy responses in 2016, especially in the face of an uncertain global outlook,” he said in a statement.

Cutting spending in a contracting economy. Who still thinks Greece is better off inside the EU?

• Brussels Demands More Austerity ‘Measures’ In Greece (Kath.)

The European Commission expects the recession that returned to Greece this year to continue into 2016 and is calling on the government to immediately draw up additional measures for 2017. Along with the release of its fall forecasts on Thursday, Brussels also criticized Athens for reversing the positive momentum recorded in the economy last year, which is attributed to the renewed uncertainty during 2015 and the introduction of capital controls. The Commission expects the Greek economy to contract 1.4% this year and 1.3% in 2016, before rebounding by 2.7% in 2017.

It blamed the loss of the 2014 momentum on the uncertainty created by the unsuccessful completion of the second bailout program, the referendum called by Prime Minister Alexis Tsipras in July, the three-week bank holiday and the capital controls, which came into effect on June 28. Despite the above constraints, the Greek economy expanded 1% in the first half of the year, although this was due to the rise in consumption as Greeks feared for their incomes and savings. It further reflected the decline in imports, while the very positive course of tourism for a second year in a row also helped. In the current second half of the year, Brussels believes that the Greek economy is burdened by the great volume of tax obligations that have to be paid out by the end of the year, the wait-and-see attitude of investors and the lack of credibility in the economy.

The Commission hopes that the stabilization of the credit sector after a successful recapitalization, the recovery of confidence and the return of investors through the privatizations program could lead the economy back to growth in the latter half of next year. It stressed that the application of the agreed reforms is key to a Greek recovery. Regarding the necessary primary budget surplus, the Commission says that besides the measures for 2015-17 already taken, amounting to 4% of gross domestic product, the government should take extra measures adding up to another 1.75% of GDP for 2017.

“Imports into China – mostly raw materials – are dropping at a double-digit rate. Exports are rolling over, too. There is nothing like easy money to cause people to make mistakes. Americans overspent. China overproduced. Now, Americans can’t step up their buying (they owe too much already)… and China has too much capacity.”

• How China Broke the World’s ‘Bubble Machine’ (Bonner)

Here’s how it worked: Once the world’s money lost its golden anchor in 1971, things got a little funny. Americans spent money they never earned and never saved – dollars created “out of nothing” with nothing more than keystrokes on a computer. Much of this new money went overseas, where foreign nations – notably China – had to print their own currency to keep up with it. But you’ve heard this story before. China makes. The U.S. takes. In the process, a glut of dollars ends up in the hands of the Chinese feds as foreign exchange reserves. The buildup of these reserves is both the cause and the measure of the globalized boom the world has enjoyed since the early 1980s. As Americans bought more goods from China than they sold to China, they sent more dollars to the Middle Kingdom.

These dollars boosted the world’s money supply… and set heads a’spinning, wheels a’turning, and chimneys a’smokin’. China (and other countries) filled the orders and banked the dollar sales. Of course, you can’t easily spend dollars in China. So the Chinese central bank, the People’s Bank of China (PBoC) exchanged merchants’ and manufacturers’ dollars for renminbi at a fixed rate (otherwise, the demand for renminbi would push up its exchange value – something the Chinese have been keen to avoid). This left the PBoC with lots of dollars. What could it do with its stash? Buy U.S. Treasury bonds! As China recycled its export dollars into U.S. government debt, it lowered U.S. interest rates and increased the amount of money bidding for U.S. financial assets.

That – roughly – is how we got to where we are today. China’s supply of foreign currency reserves rose from zero in 1979 to $4 trillion in 2014. Worldwide, reserves grew by $12 trillion. Here, you can easily see the difference between this new credit-based system and the gold-backed system it replaced. You could never add $12 trillion to the world’s money supply in the same way if it was linked to gold. All the gold ever mined has a present value of only about $6 trillion. This big increase in the global money supply was what set off the booms and bubbles of the last 35 years. But now, what’s this? The bubble machine is broken? The PBoC is no longer adding to its dollar reserves. Instead, it is offloading them. About $400 billion has been clipped from China’s foreign exchange reserves since 2014.

This drop is a big change for China… and for the world’s financial system. Imports into China – mostly raw materials – are dropping at a double-digit rate. Exports are rolling over, too. There is nothing like easy money to cause people to make mistakes. Americans overspent. China overproduced. Now, Americans can’t step up their buying (they owe too much already)… and China has too much capacity. China’s growth, by the way, has been heavily concentrated on building factories and infrastructure – capital investment. China spent $4.3 trillion on fixed capital investment in 2013 – 10 times more than in 2000. But when you produce too much already, building more factories only makes the situation worse. Prices fall; on a year-over-year basis, producer prices in China haven fallen every month for the last three and half years.

Steve comes in at 13 minutes+.

• The Valeant Scandal and Steve Keen on China and Portugal (RT)

The European Union cuts its Eurozone growth forecast for 2016. Despite this being the third year of consecutive growth for the European Union, growth is slow and will slow even further. Ameera David weighs in. Ameera also highlights a new smart Gmail feature that will be able to scan your email and offer quick replies. Then, Ameera and RT correspondent Manuel Rapalo update their earlier discussion on Airbnb’s fight in to stay legal in San Francisco and discuss Expedia’s $3.9 billion deal to buy Airbnb competitor HomeAway. Afterwards, Paul Craig Roberts gives us his take on the elimination of two popular social security claiming measures, part of his interview with Boom Bust’s Bianca Facchinei that will air Friday.

After the break, Boom Bust’s Edward Harrison sits down with Steve Keen, head of economics, history, and politics at Kingston University to get his thoughts on the path forward for China, emerging markets, and the global economy, as well as to assess whether politics in Portugal are radicalizing. And in The Big Deal, Ameera and Edward Harrison talk about the scandal surrounding former stock darling Valeant Pharmaceuticals.

Casino.

• China’s Stock-Market Bulls Are Back, But Where Are the Earnings? (Bloomberg)

Hao Hong has seen this movie before, and it didn’t end well for China’s stock-market bulls. Five months after an equity boom built on weak corporate profits turned into a $5 trillion crash, a similar scenario is playing out in China today. The benchmark Shanghai Composite Index has surged 20% from its Aug. 26 low, despite third-quarter profits that trailed analyst estimates at 68% of companies in the index, the eighth straight quarter of disappointing results. The absence of a rebound in earnings is one reason why Hong at Bocom International says the latest surge in stocks is a “bear market rally.” Foreign investors seem to agree: they’ve been selling mainland equities through the Shanghai-Hong Kong exchange link for four straight weeks, cutting holdings by the most in two months on Thursday.

“It’s very difficult to see this rally sustaining without an earnings recovery,” said Tony Chu at RS Investment. Foreign investors “don’t have a very strong medium-to-longer-term view.” The rally in China follows an unprecedented government campaign to prop up share prices, along with increased monetary stimulus to combat the deepest economic slowdown in 25 years. The official support has helped revive confidence among local investors, spurring a pick-up in trading activity and sending the Shanghai Composite to an 11-week high on Thursday. The $1.6 trillion recovery in Chinese share prices is also boosting valuations as earnings shrink. Trailing 12-month profits at Shanghai Composite companies have dropped 10% so far this year, leaving the index with a price-to-earnings ratio of 18. While that’s still below the multiple of 25 reached at the height of the boom in June, it’s about 38% more expensive than the five-year average.

From bonds to stocks and back?

• China’s Bonds Set for Worst Week Since May as PBOC Seen on Hold (Bloomberg)

China’s 10-year sovereign bonds headed for the biggest weekly drop in five months on speculation investors are taking profits amid signs the central bank is done cutting borrowing costs for now. The People’s Bank of China has lowered benchmark deposit and lending rates six times since November and reduced lenders’ reserve ratios in an attempt to spur a slowing economy. The monetary authority will leave its policy rates unchanged through the end of next year, a Bloomberg survey showed last week. China’s local-currency sovereign debt rallied for five months through October and the 10-year yield fell to a six-year low last week. The yield on the notes due October 2025 climbed six basis points from Oct. 30 and two basis points on Friday to 3.14% as of 10 a.m. in Shanghai, according to National Interbank Funding Center prices.

That’s the biggest weekly increase for a benchmark of that maturity since May. “Profit-taking will probably continue to be the theme through to the end of the year, especially for active traders,” said Qu Qing at Huachuang Securities. “Given the slide in yields earlier, this may not be a good time to enter the market.” The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose three basis points this week to 2.35% and declined one basis point on Friday. The seven-day repo rate, a gauge of interbank funding availability, fell four basis points from Oct. 30 and three basis points on Friday to 2.26%, a weighted average from the National Interbank Funding Center shows.

What we have said for almost ten years now.

• Monetary Bazookas Or Not, “Global Crisis Is Inevitable” (Saxobank)

Until recently, the consensus assumed a strengthening of the global economy in 2016. It won’t happen. If the global economic growth manages to reach 3.1% next year, as forecast by the IMF, it will be a miracle. We haven’t realised that the global economic recovery is already here for over six years. This recovery phase is weaker than previous ones and much more disparate. Since the onset of the global financial crisis in 2007, the potential growth rate has been much lower everywhere: from 3% to 2% for the US, from 9.4% to 7.20% for China and from over 5% to below 4% for Poland. Many regions, such as the euro area, have remained on the sidelines and experienced stalling economic growth. Over the last two decades, economic cycles have been shortened due to the financialization of the economy, trade globalization, deregulation and the acceleration of innovation cycles.

Since the 1990s, the US went through three recessions: in 1991, 2001 and 2009. It is erroneous to believe that the recovery has just begun. We are close to the end of the current economic cycle. The outbreak of a new global crisis in the coming years is inevitable. The lack of economic momentum next year and short periods of deflation related to falling oil prices will certainly push central banks to pursue their disastrous “extend-and-pretend” strategy which will increase the price of financial assets and global debt. The ECB could push further interest rates into negative territory and could increase or lengthen the purchase program. Several options are on the table: the central bank could drop the 25% purchase limit on sovereign bonds with AAA rating or could add a program to help the corporate bond market.

Following the same path, China could take out the monetary bazooka in the first half of 2016 by launching its own version of QE-style bond buys. Along with a dovish monetary policy, China could implement a massive Keynesian stimulus programme, relying on the already-expected bond issue plan which could raise 1 billion yuan. This move could temporarily reassure world markets. The only central bank that has a leeway to hike rates is the US Federal Reserve. 52% of investors expect a tightening of US monetary policy in December. However, the speed and magnitude of tightening will remain low. It is unlikely the rates will be back anytime soon to where they were before the global financial crisis. Too high interest rates could cause a myriad of bankruptcies in heavily indebted industries, such as the shale oil sector in the US.

The Fed and other central banks are in a dead-end having fallen in the same trap as the Bank of Japan. If they increase rates too much, they will precipitate another financial crisis. It is impossible to stop the accommodative monetary policy.

Let’s get rid of the absurd idea that central banks can control economies. Not even the Soviet Union succeeded in that.

• Deflation Risks May Warrant Radical New Central-Bank Thinking: IMF (WSJ)

The Bank of Japan and other central banks around the world may need to try radical new easy-money policies to stave off the rising specter of deflation and revive sickly economic prospects, the IMF’s new chief economist warns. “I worry about deflation globally,” new IMF Economic Counselor Maurice Obstfeld said in an interview ahead of an annual IMF research conference that focuses this year on unconventional monetary policies and exchange rate regimes. “It may be time to start thinking outside the box.” Weak—and in some cases falling—price growth has plagued Japan, Europe, the U.S. and other major economies since the financial crisis. Plummeting commodity prices are exacerbating the so-called “lowflation” and deflation problems that curb investment, spending and growth.

Surveying several dozen of the largest economies around the world, Mr. Obstfeld said the number of countries experiencing low inflation is rising. Combined with slowing emerging market output, ballooning government debt and monetary policy constrained by the lower limits of interest rates, the deflation risk is fueling fears the global economy could be fast stuck into a deep low-growth mire. In the wake of the financial crisis, the Federal Reserve, the Bank of Japan and the ECB launched unprecedented easy-money stimulus programs to avert economic disaster and jumpstart growth. The Fed’s efforts have cut the unemployment rate but failed to sufficiently juice inflation. Tokyo has struggled to pull the long-listless economy out of the doldrums. And the ECB’s efforts have only narrowly avoided a triple-dip recession. Some economists argue the ECB’s actions have pumped up corporate cash reserves, but done little to boost employment or investment.

So, what would be thinking outside the box for Mr. Obstfeld? One option is a proposal by Adair Turner, a member of the Bank of England’s Financial Policy Committee, for central bankers to overtly finance increased budget stimulus with permanent increases in the money supply. By contrast, the increased money supply resulting from recent central bank bond-buying programs is meant to be temporary. In a paper prepared for the IMF conference, Mr. Turner contends Japan will be forced to use such “monetary financing” within the next five years and says the policy should become a normal central bank tool for all economies facing stagnation. Such an option would be highly provocative to fiscal hawks and those who fear giving central banks too much power, especially when many economists question both the returns and financial-turmoil side effects from existing easy-money policies.

2016 will be a very bad year for banks.

• Standard Chartered’s Shares Plunge 7% After Fitch Downgrade (Bloomberg)

Standard Chartered shares slumped in Hong Kong after Fitch Ratings downgraded the bank, citing the outlook for the lender’s profits and asset quality. The London-based bank this week unveiled plans to tap investors for $5.1 billion, eliminate thousands of jobs and cut risky assets across Asia. The bank’s shares fell as much as 7.1% Friday in Hong Kong. They were down 4.8% as of 11:30 a.m. local time, extending this year’s decline to 35%. The benchmark Hang Seng Index slipped 0.9%. Standard Chartered is now lagging behind the Bloomberg World Banks Index by the most since the gauge started in 2003. While Chief Executive Officer Bill Winters’s measures to restructure the lender and boost capital address some of Fitch’s concerns about the bank, implementing the plan could be challenging because of credit risks and high management and staff turnover, the ratings firm said in a statement.

Fitch on Thursday cut the lender’s credit rating one grade to A+ from AA-, with a negative outlook. Winters, who took over in June, on Tuesday unveiled 15,000 job losses to help save $2.9 billion by 2018, with the bank scrapping the second-half dividend. Standard Chartered will also restructure or exit $100 billion of assets and reduce its riskiest lending in Asia after loan impairments surged. The bank reported an unexpected third-quarter loss of $139 million, compared with a profit of $1.5 billion a year earlier. The bank’s impaired-loan ratios remain above its peers’ and appear to have become more volatile as a result of concentrated sector and country exposures, Fitch said. “Standard Chartered remains vulnerable to volatility from a difficult operating and regulatory environment.” The bank’s shares fell 6.3% in London on Thursday.

Apparently, the US army called the hospital prior to the attack to ask if there were any Taliban present.

• MSF Says US Planes Attacked Staff Fleeing Kunduz Hospital (Reuters)

Medical aid group Medicins Sans Frontieres (MSF) said Thursday it was hard to believe a U.S. strike on an Afghan hospital last month was a mistake, as it had reports of fleeing people being shot from an aircraft. “All the information that we’ve provided so far shows that a mistake is quite hard to understand and believe at this stage,” MSF General Director Christopher Stokes told reporters while presenting the group’s internal report on the incident. The report said many staff described “seeing people being shot, most likely from the plane” as they tried to flee the main hospital building, which was under attack by U.S. military aircraft. At least 30 people were killed when the hospital in Kunduz was hit by a powerful U.S. attack aircraft on Oct. 3 while Afghan government forces were battling to regain control of the northern city from Taliban forces who had seized it days earlier.

The United States has said the hospital was hit by accident and two separate investigations by the U.S. and NATO are underway. But the circumstances of the incident, one of the worst of its kind during the 14-year conflict, are still unclear. Stokes told reporters the organisation was still awaiting an explanation from the U.S. military. “From what we are seeing now, this action is illegal in the laws of war,” Stokes said. “There are still many unanswered questions, including who took the final decision, who gave the targeting instructions for the hospital.” Capt. Jeff Davis, a Pentagon spokesman, said MSF shared the report in advance with the U.S. Defence Department. “Since this tragic incident, we have worked closely with MSF to determine the facts surrounding it,” he said in a statement, which did not address the report’s specifics.

Exxon knew it all. But that means so did everybody else.

• Exxon Mobil Investigated for Possible Climate Change Lies (NY Times)

The New York attorney general has begun an investigation of Exxon Mobil to determine whether the company lied to the public about the risks of climate change or to investors about how such risks might hurt the oil business. According to people with knowledge of the investigation, Attorney General Eric T. Schneiderman issued a subpoena Wednesday evening to Exxon Mobil, demanding extensive financial records, emails and other documents. The investigation focuses on whether statements the company made to investors about climate risks as recently as this year were consistent with the company’s own long-running scientific research.

The people said the inquiry would include a period of at least a decade during which Exxon Mobil funded outside groups that sought to undermine climate science, even as its in-house scientists were outlining the potential consequences — and uncertainties — to company executives. Kenneth P. Cohen, vice president for public affairs at Exxon Mobil, said on Thursday that the company had received the subpoena and was still deciding how to respond. “We unequivocally reject the allegations that Exxon Mobil has suppressed climate change research,” Mr. Cohen said, adding that the company had funded mainstream climate science since the 1970s, had published dozens of scientific papers on the topic and had disclosed climate risks to investors.

Mr. Schneiderman’s decision to scrutinize the fossil fuel companies may well open a new legal front in the climate change battle. The people with knowledge of the New York case also said on Thursday that, in a separate inquiry, Peabody Energy, the nation’s largest coal producer, had been under investigation by the attorney general for two years over whether it properly disclosed financial risks related to climate change. That investigation was not previously reported, and has not resulted in any charges or other legal action against Peabody. Vic Svec, a Peabody senior vice president, said in a statement, “Peabody continues to work with the New York attorney general’s office regarding our disclosures, which have evolved over the years.”

Here’s the only safe bet: nothing will happen that costs too much money.

• World Only Half Way To Meeting Emissions Target With Current Pledges (Guardian)

Current global efforts to cut greenhouse gas emissions leave about half of the reductions needed still to be found, according to a new analysis by the UN. The report suggests that governments will have to go much further in their pledges to limit future carbon dioxide emissions, which have been submitted to the UN ahead of the crunch conference on climate change taking place this December in Paris. Ways for governments to ramp up their commitments in future are one of the key components of the Paris talks. The UN Environment Programme (Unep) published a report showing that global emissions levels should not exceed 48 gigatonnes (GT) of carbon dioxide equivalent by 2025, and 42 GT in 2030, if the world is to have a good chance of holding global warming to no more than 2C on average above pre-industrial temperatures.

The 2C threshold is regarded by scientists as the limit of safety, beyond which the ravages of climate change – such as droughts, floods, heatwaves and sea level rises – are likely to become catastrophic and irreversible. But current pledges, known as Intended Nationally Determined Contributions (INDCs), are likely to lead to emissions of 53 to 58 GT of carbon dioxide equivalent in 2025, and between 54 and 59 GT in 2030. This means that emissions in 2030 are likely to be about 11GT lower than they would have been without the INDCs. But, according to Unep, they need to be about 12GT lower than that to give the world a two-thirds chance of avoiding more than 2C of warming. This leaves a large “emissions gap” to be made up.

Much work has gone into analysing the emissions pledges that countries have made, with branches of the UN, the International Energy Agency, the New Climate Economy group, and other independent organisations producing reports on what can be expected if the Paris pledges are fulfilled. There is broad consensus that the commitments that have so far been made are not yet adequate to meet the 2C limit. However, the commitments – which will come into force from 2020, when current international commitments on emissions, agreed at the Copenhagen summit in 2009, are scheduled to run out – represent a marked improvement on “business as usual”. The IEA has calculated that, if followed through, the emission plans would result in the growth of emissions from the energy sector slowing to near zero by the end of the next decade.

This would not be enough to meet scientific advice, but would be a remarkable reversal of the near-relentless upward trend of greenhouse gas emissions in modern times. Other analyses, endorsed by the UN, have suggested that warming would be limited to about 2.7C to 3C by the end of this century, under the current INDCs. While this would still not satisfy scientific advice, it would put the world on a much better footing than it is at present, as on current trends warming would reach as much as 5C above pre-industrial levels by 2100.

Debt Rattle April 10 2015

Apr 102015

April 10, 2015 Posted by Raúl Ilargi Meijer at 10:49 am Finance Tagged with: China, CO2, crime, fiscal shock, Greece, Iran, migrants, oil, pensions, poverty, Russia, wages 9 Responses »

G. G. Bain Navy dirigible, Long Island 1915

• It’s A Crime To Be Poor In America (MarketWatch)

• US States Are Not Prepared for the Next Fiscal Shock (Bloomberg)

• Why Your Wages Could Be Depressed for a Lot Longer Than You Think (Bloomberg)

• The Fed’s Calamitous Corruption Of Corporate Finance (David Stockman)

• U.S. Consumers Will Open Their Wallets Soon Enough (Bloomberg)

• We Traveled Across China and Returned Terrified for the Economy (Bloomberg)

• Lagarde Warns of ‘Bumpy Ride’ as Fed Prepares for Rates Liftoff (Bloomberg)

• Wall Street Fees Wipe Out $2.5 Billion in New York City Pension Gains (NY Times)

• China Seeks Dominance in Athens Harbor (Spiegel)

• Varoufakis: The Three Critical Elements of a Good Deal for Greece (Bloomberg)

• Varoufakis Says Greece Not Looking to Russia to Fix Debt Crisis (Bloomberg)

• Greece Met Its Latest Debt Payment, But Where Did The Money Come From? (Ind.)

• The Changes To Russia’s Business Environment That Flew Below The Radar (Forbes)

• Here’s How Iran Could Prevent A Rebound In Oil Prices (MarketWatch)

• Shell Shareholders Less Than Impressed With $70 Billion Bid For BG (Ind.)

• Ukraine Creditor Group Has Plan to Avoid Writedown in Debt Talks (Bloomberg)

• Homeowners In Auckland’s Fringe Saving Up To $50,000 A Year (NZ Herald)

• New Zealand Unlikely to Deliver on 2015 Budget Surplus Promise (Bloomberg)

• Japan To Pledge 20% CO2 Cut (Guardian)

• Dying at Europe’s Doorstep (Bloomberg)

“In many states, offenders are expected to finance the justice system, including court costs, room and board while incarcerated, probation supervision and drug-treatment programs.”

• It’s A Crime To Be Poor In America (MarketWatch)

In America, you’re presumed innocent until proven guilty. Unless you’re poor, that is. Increasingly, it’s a crime to be poor, and the punishment is often further impoverishment. Fifty years ago, Chuck Berry sang about a brown-eyed handsome man who was “arrested for the crime of unemployment.” Little has changed since then. For poor people, even minor scrapes with the law can have major consequences, including prison time, probation, endless debt and permanent joblessness. For people of means, those same legal problems are a nuisance, but they aren’t life-changing events. More cities and states have realized that poverty can be a profit center.

Not for poor people, of course, but for government treasuries and for private companies hired to handle the influx into the criminal justice system of people whose only crime was the inability to pay a traffic ticket or a misdemeanor fine. Cash-strapped cities like Ferguson, Mo., count on fines and court-imposed fees to balance their budgets, and that reliance on the revenue from petty violations was cited by the Justice Department as a contributing factor in Ferguson’s high rates of traffic stops and arrests for minor crimes and misdemeanors. In many states, offenders are expected to finance the justice system, including court costs, room and board while incarcerated, probation supervision and drug-treatment programs.

For anyone living paycheck to paycheck, even a $100 fine can be a challenge, and paying off the debt to the court and to the privatized probation company can be impossible, especially if the arrest has led to the loss of a job or a driver’s license. Just being arrested can be devastating: Half a million people are languishing in jail awaiting trial because they can’t afford to pay the bail. People who are let out of prison are often said to have “paid their debt to society.” But in most cases, they haven’t paid their debt for the costs of their imprisonment and probation. More than 80% of people let out of prison leave owing money, according to an investigation by NPR and the Brennan Center for Justice. Those of us who live sheltered middle-class lives often wonder why anyone would run away from the police or resist arrest.

Running away can cost you your life, as what happened to Walter Scott. Why would he risk being shot in the back by a police officer? Perhaps he feared that an arrest for a minor traffic violation (the tail light on his car was out) would lead to a downward spiral of fines, jail time and permanent joblessness, as it has for others. According to relatives, Scott was behind on his child-support payments, and he may have feared that he’d be jailed for his failure to pay. Which, of course, would have cost him his job and any chance he and his family had of a future. So he ran, and he died.

Hanging on by their fingernails.

• US States Are Not Prepared for the Next Fiscal Shock (Bloomberg)

U.S. states, still grappling with the lingering effects of the longest recession since the 1930s, are even more vulnerable to another fiscal shock. The governments have a little more than half the reserves they’d stashed away before the 18-month recession that ended in June 2009, according to a report last month by Pew Charitable Trusts. New Jersey, Pennsylvania, Illinois and Arkansas have saved the least. Skimpier rainy-day funds have implications for the national economy, which is in its sixth year of expansion. States would have to cut spending or raise revenue by a combined $21 billion in the event of a recession, exacerbating economic weakness, Moody’s found in a stress test of state finances. Reserves take on added importance for governments balancing obligatory pension and health-care costs with swings in tax collections, said Daniel White at Moody’s.

“What the Great Recession has shown is that things have fundamentally changed in terms of the way that state fiscal conditions are determined,” White said. “They need to be much more prepared for very volatile fiscal conditions than they had been in the past.” Investors are monitoring states’ fiscal balances after seeing how reserves helped some governments weather the recession, said John Donaldson at Haverford Trust. California won credit upgrades and saw borrowing costs shrink after voters in November agreed to bolster rainy-day funds. With Fitch Ratings lifting California to A+ in February, its fifth-highest level, the state has its highest marks from the three biggest rating companies since at least 2009.

Bond buyers demand about 0.3 percentage point of extra yield to own 10-year California munis instead of benchmark debt, close to the lowest spread since 2007, data compiled by Bloomberg show. “We’re looking for stability and credit quality,” said Richard Ciccarone at Merritt Research. “A rainy-day fund is a symbol of conservative financial management.” States were unprepared for the last recession. In 2009, budget gaps totaled $117 billion, about twice the level of reserves, according to Pew, a research group. With more of a cushion, they would’ve cut fewer jobs, White said. The governments employ about 5.1 million nonfarm workers, about 140,000 fewer than the 2008 peak, Bureau of Labor Statistics data show.

Because the whole shebang is imploding.

• Why Your Wages Could Be Depressed for a Lot Longer Than You Think (Bloomberg)

As if watching your paycheck stagnate for the last couple years hasn’t been bad enough, Federal Reserve researchers are out with more (potentially) bad news: Unless we get some big shifts in global economic forces, your wages could be weak for a while. Longer-term changes including soft productivity growth and labor’s declining share of income are at the heart of the problem, Filippo Occhino and Timothy Stehulak at the Cleveland Fed find. These two macroeconomic shifts, which result from broad themes such as globalization and technology, are felt all the way down to the U.S. worker. Productivity is important because it fosters faster economic growth without generating higher inflation. Companies can pay their workers more while still seeing their earnings increase.

Labor productivity — measured as the amount of goods or services produced by an employee in one hour — has averaged 1.5% growth in the 10 years ended 2014. That compares with 3.6% from the second quarter of 1997 to the end of 2003 — the salad days of American productivity. Gains in productivity have been slow to come by as companies hold off on investing in new capital equipment. Some economists such as Robert Gordon have argued that the U.S. is doomed to stagnant growth, with the low-hanging fruit of big technological innovations, such as the steam engine, all picked.

Another factor keeping wage growth depressed is labor’s declining share of income, the Fed authors note. While it’s been on the downtrend for years, “the evolution of the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies” have exacerbated it since 2000, likely holding down wage growth, they wrote. The faster decrease since then has shaved 0.4 percentage point each year from average real wage growth, compared to the period before 2000.

“..only savings from current production and income generate additional primary capital that can foster future wealth.”

• The Fed’s Calamitous Corruption Of Corporate Finance (David Stockman)

Central bank financial repression results in the systematic and severe mispricing of financial assets. And that has sweeping consequences far beyond the munificent windfalls it bestows on the thin slice of mankind that frequents the casinos of Wall Street, London, Tokyo and Shanghai. The fact is, the prices of money, debt, equity, traded commodities and all their derivatives comprise a vast and instantaneous signaling system that cascades through every nook and cranny of the real economy. When these signals are systematically falsified by a few dozen central bankers they cause hundreds of millions of ordinary businessmen, workers, investors and entrepreneurs to alter their economic calculus. And not in a good way. False signals lead to mistakes, excesses, losses and waste.

They ultimately reduce economic efficiency and productivity and lower the rate of economic growth and real wealth gains. Since the Greenspan age of financial repression incepted in the late 1980s, for example, the returns to savings have been obliterated while the rewards for speculation have soared. That’s important because only savings from current production and income generate additional primary capital that can foster future wealth. By contrast, leveraged speculation merely causes existing financial assets to be re-priced and a temporary redistribution of paper wealth from the cautious to the gamblers. In an honest free market, in fact, there is no excess return to leveraged speculation at all.

Natural market makers arbitrage out the spread between the costs of carry and the returns to carried assets such as long-dated futures contracts, term debt and various and sundry forms of equity and other risk assets. A relative handful of market makers can make a decent living arbing an honest market, but the mass of investors can not speculate their way to wealth. The latter can happen only when the central bank has its big fat thumb on the financial scales, pressing the cost of carry – that is, leveraged financial gambling – toward the zero bound.

Dumbest piece so far this year? Then again, competition is fierce.

• U.S. Consumers Will Open Their Wallets Soon Enough (Bloomberg)

People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren’t spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there’s still a “global savings glut.” Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending. The U.S. personal savings rate—5.8% in February—is the highest since 2012. “After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow,” Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too much really can be a problem when spending is weak.

There are only two things you can do with a dollar, after all: spend it or save it. If you spend it, great—that’s money in someone else’s pocket. If you save it, the financial system is supposed to recycle your dollar into productive investment with loans for new houses, factories, software, and research and development. But if no one’s in the mood to invest more and interest rates are already as low as they can go (as they are in much of the world), the compulsion to save can sap demand and throw people out of work. For the U.S. economy, the good news is that the jump in the personal savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities in New York explained why in a March 25 report called U.S. Consumers: Still Shopping, Not Dropping.

While noting a “deceleration” in consumer spending, they wrote, “we think that concerns about the outlook for the consumer are overstated.” Their model of the U.S. economy predicts the savings rate will fall to 3% to 3.5% by 2017. Other economists have also concluded that the spending dropoff is temporary, which is why the slowdown in job growth, to just 126,000 in March, didn’t set off many alarm bells. “Consumer spending is starting to look more and more like a coiled spring,” says Guy Berger, U.S. economist at RBS Securities. One sign that consumers aren’t retrenching: On April 7 the Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the recent past.

And yet, still persisting in that 7% growth prediction?

• We Traveled Across China and Returned Terrified for the Economy (Bloomberg)

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country. What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook. “China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

The China Steel Profitability Index compiled by Bloomberg Intelligence barely rose in March, a time after the annual Lunar New Year when demand would usually surge, and so far this month has resumed its decline. Steel use this year is down 3.4%, after slumping as much as 4% in 2014, according to BI. It had steadily risen for more than a decade. Prices for commodities from iron ore to coal are sinking as China’s leadership tries to steer the economy away from debt-fueled property investment and smokestack industries, embracing services and domestic-led consumption. At the same time, President Xi Jinping is stepping up efforts to combat pollution, further squeezing industry. Deteriorating economic data has led traders and analysts to speculate that China’s central bank will act to revive growth.

The bank has said it will keep an “appropriate balance between loosening and tightening” of interest rates. It has cut interest rates twice since November and lowered lenders’ reserve-requirement ratios once. Economists are forecasting 7% growth in China for this year, in line with government targets and down from 7.4% in 2014, according to the median of 59 estimates compiled by Bloomberg. That’s about half the last decade’s peak rate of 14.2% in 2007. The slowing steel and metals activity suggests the outlook could be grimmer. “There is a big fear this is going to get worse before it gets better,” Hoffman said in an interview. “It’s as bad as the data looks, if not worse.”

She sounds like The Automatic Earth: “..liquidity can evaporate quickly if everyone rushes for the exit at the same time..”

• Lagarde Warns of ‘Bumpy Ride’ as Fed Prepares for Rates Liftoff (Bloomberg)

IMF Managing Director Christine Lagarde says the world could be in for a “bumpy ride” when the Federal Reserve starts raising interest rates, with overpriced markets and emerging economies likely to take the biggest hits. While risks to the global economy have decreased over the last six months, threats to the world’s financial system have actually risen, Lagarde said on Thursday ahead of next week’s spring meetings of the IMF and World Bank in Washington. A long period of low interest rates in the U.S. and other advanced economies has fostered a higher risk tolerance among investors, “which can lead to overpricing” and could pose “solvency challenges” for life insurers and defined-benefit pension fund, she said.

Lagarde, 59, warned that “liquidity can evaporate quickly if everyone rushes for the exit at the same time – which could, for example, make for a bumpy ride when the Federal Reserve begins to raise short-term rates,” she said the text of a speech at the Atlantic Council in Washington. The turbulence could be especially rough for commodity-exporting emerging economies, which may find themselves caught between falling prices for their goods and a stronger dollar, which increases the burden of dollar-dominated debt, she said. Lagarde’s warning comes as Fed policy makers led by Chair Janet Yellen consider when to raise their benchmark lending rate amid a strengthening labor market, which has pushed U.S. unemployment to the lowest level since May 2008.

The dollar has appreciated 19% over the last year as the U.S. economy has strengthened. The risk is that a surging greenback and higher interest rates will make it harder to service U.S.-denominated debt held outside the country by non-bank borrowers. This debt is estimated at $9 trillion by the Bank for International Settlements. Lagarde urged policy makers to take steps to ensure that markets have enough liquidity, improve prudential policies for non-banks, and follow through on regulatory reforms such as shielding “too-big-to-fail” institutions.

This is repeated all across the nation, if not the entire world.

• Wall Street Fees Wipe Out $2.5 Billion in New York City Pension Gains (NY Times)

The Lenape tribe got a better deal on the sale of Manhattan island than New York City’s pension funds have been getting from Wall Street, according to a new analysis by the city comptroller’s office. The analysis concluded that, over the past 10 years, the five pension funds have paid more than $2 billion in fees to money managers and have received virtually nothing in return, Comptroller Scott M. Stringer said in an interview on Wednesday. “We asked a simple question: Are we getting value for the fees we’re paying to Wall Street?” Mr. Stringer said. “The answer, based on this 10-year analysis, is no.” Until now, Mr. Stringer said, the pension funds have reported the performance of many of their investments before taking the fees paid to money managers into account.

After factoring in those fees, his staff found that they had dragged the overall returns $2.5 billion below expectations over the last 10 years. “When you do the math on what we pay Wall Street to actively manage our funds, it’s shocking to realize that fees have not only wiped out any benefit to the funds, but have in fact cost taxpayers billions of dollars in lost returns,” Mr. Stringer said. Why the trustees of the funds — Mr. Stringer included — would not have performed those calculations in the past is not clear. Mr. Stringer, who was a trustee of one of the funds when he was Manhattan borough president before being elected comptroller, said the returns on investments in publicly traded assets, mostly stocks and bonds, have traditionally been reported without taking fees into account.

The fees have been disclosed only in footnotes to the funds’ quarterly statements, he said. The stakes in this arena are huge. The city’s pension system is the fourth largest in the country, with total assets of nearly $160 billion. It holds retirement funds for about 715,000 city employees, including teachers, police officers and firefighters. Most of the funds’ money – more than 80% – is invested in plain vanilla assets like domestic and foreign stocks and bonds. The managers of those “public asset classes” are usually paid based on the amount of money they manage, not the returns they achieve. Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97% — has been eaten up by management fees, leaving just $40 million for the retirees, it found.

Solid read.

• China Seeks Dominance in Athens Harbor (Spiegel)

One could argue that China’s long path to Piraeus, Greece, began on April 27, 1961. It’s the day Mao Zedong founded the communist state’s first freight company, the China Ocean Shipping Company (COSCO). The Great Leap Forward, Mao’s plan for industrialization, had proven to be a disaster at the time, leaving millions dead or starving. With Cosco, China had its eyes on overseas markets. Almost 54 years later, the company is steering toward a major prize in Greece. After lengthy wavering, the Greek government – comprised of Prime Minister Alexis Tsipras, his far-left Syriza party and the right-wing populist Independent Greeks – has announced it will be selling the majority of its share in Athens’ Piraeus Port Authority. So far, Cosco is the most promising bidder.

Throughout, Fu Cheng Qui, or “Captain Fu,” as the chief executive of Cosco’s Piraeus subsidiary is called by those who know him, will be closely monitoring the bidding process. Fu has already been in Piraeus for a long time with the company, and he is determined to stay. He has placed the bid on behalf of his company and has little doubt it will be accepted. In his position, 65-year-old Fu is the guardian of China’s gateway to Europe. He may soon control the container piers, cruise-ship terminals and ferry quays of Greece’s biggest port. “The government has changed four times since I have been in Greece,” Fu says. “They all always talk a lot. But what counts? Actions count. Actions! Only actions!”

On the way to the cargo port, a small sign indicates a fork in the road – with one route leading to OLP and the other to PCT. Each to a different world. Pier I belongs to the primarily Greek state-owned OLP port authority. These days, though, most trucks take the other route, to PCT, to pier II and pier III, which is run by Piraeus Container Terminal, a subsidiary of Cosco. “Just look,” Fu says as he steps up to the window. Then the show begins. On Pier II, 11 container gantry cranes are in constant, powerful movement. All are new and made in China. Trucks move across the ground at an interval of only minutes.

“.. we are prepared to make all sorts of compromises, we are not prepared to be compromised.”

• Varoufakis: The Three Critical Elements of a Good Deal for Greece (Bloomberg)

In an interview with Bloomberg TV at the Institute for New Economic Thinking earlier today, Greek Finance Minister Yanis Varoufakis said he is confident that an agreement will be reached later this month. He identified three pre-conditions for such a deal.

• “Prioritize deep reforms that will deal with the malignancy of the Greek social economy, of the Greek state.”

• “Deal with the ill effects of a five-year catastrophic recession.”

• “A resolution of long term, sustainable fiscal plan that involves three elements. One has to do with appropriate primary surpluses, so we need primary surplus. We never are going to fall back into primary deficits again, but at the same time this should not be excessive because it will crush the private sector. We need a sensible policy for crowding in private investment and that must involve a package of public investment..from some kind of European authority or institution that will help with the process of crowding in private investment..and a rationalization on the different slices of the Greek debt without any haircuts for anyone but in a way that maximizes the amount of value that our creditors will get back from the Greek state.”

He ended the interview by saying that compromises are to be expected, but he is not ready to be compromised. “We wouldn’t be fit for the purpose if we were not prepared to take the political costs which are necessary to stabilize Greece and lead it to growth, but let me be very precise on this, we are prepared to make all sorts of compromises, we are not prepared to be compromised.”

“We should be very clear: our bailout fallout needs to be dealt with in the European family..”

• Varoufakis Says Greece Not Looking to Russia to Fix Debt Crisis (Bloomberg)

Greek Finance Minister Yanis Varoufakis said his country isn’t looking outside Europe to resolve its financial crisis, adding that he’s confident of reaching an agreement with European partners this month. Asked about a meeting between Prime Minster Alexis Tsipras and Russian President Vladimir Putin Wednesday, Varoufakis denied any links with talks Greece is holding with euro-area governments that are the country’s creditors. “We should be very clear: our bailout fallout needs to be dealt with in the European family,” Varoufakis said in an interview with Bloomberg Television in Paris. “This government is not seeking an extra-European solution to a European problem.”

Greece, Europe’s most-indebted state, is negotiating with euro-area countries and the IMF on the terms of its €240 billion rescue. The standoff, which has left Greece dependent upon ECB loans, risks leading to a default within weeks and the country’s potential exit from the euro area. The ECB approved a €1.2 billion increase in the emergency funds available to Greek lenders Thursday, a person familiar with the decision said. The Governing Council raised the cap on Emergency Liquidity Assistance provided by the Bank of Greece to €73.2 billion in a telephone conference, said the person who asked not to be named because the decision is confidential.

Greek officials said this week they are targeting an April 24 meeting of euro-area finance ministers as a deadline for approving new money. A looming cash crunch in the summer, when the ECB needs to be repaid, means a new bailout deal will be needed before then.
“I am very confident,” Varoufakis said, when asked about the talks. “The negotiations are proceeding quite well. It is in our mutual interest to strike a deal by the 24th and I’m sure we will.”

With all the next payments coming up, it’s more interesting to wonder where the money WILL come from.

• Greece Met Its Latest Debt Payment, But Where Did The Money Come From? (Ind.)

Greece met a loan payment of €459 million to the IMF on Thursday, according to reports, as the EU discusses whether the country has reformed enough to merit a further cash injection. “The payment order has been given,” a finance ministry source told AFP. But no one is quite sure where the money came from – a consequence of the opaque Greek finance system. There are few trained accountants in the country and they do not adhere to international accounting standards, so records are thin and many citizens do not pay tax. Poor accounting standards are blamed by some for the uncertain numbers that have come out of Greece regarding the country’s debt.

Athens is aware of the tax problem. It promised to hire tourists and cleaners as part time tax inspectors in a recent round of reforms drawn up to meet EU criteria for further cash. The latest IMF payment was ordered at the same time as Greek Prime Minister Alex Tsipras met Putin in Moscow to discuss co-operation between the two orthodox Catholic nations. While both parties denied that Greece had financial aid had been requested, the two sides are said to have talked about extending a Turkish natural gas pipeline through Greece and relief from Russian sanctions on European food produce. Russian investment in key Greek infrastructure, including the port of Thessaloniki, is also in discussion.

Greek finance minister Yanis Varoufakis said during a visit to Washington this week that Greece would meet the April 9 payment and every other until the debts are cleared. He still has some way to go – next month, Athens owes a further €950 million to the IMF. Over €2 billion euros in six- and three-month treasury bills are also due to mature on April 14 and 17 – though they should roll on to the next maturity without incurring further cost. This week Athens raised another €1.14 billion in six-month Treasury bills and announced a further sale of €625 million next week. The country is dependent on such short terms bonds to raise cash, but the takers are mostly domestic investors because Greece is shut out of international debt markets.

Bit dull perhaps, but potentially powerful.

• The Changes To Russia’s Business Environment That Flew Below The Radar (Forbes)

Companies doing business in Russia have been on a roller coaster ride for the last year. The combination of Western sanctions, a weakened currency and continued geopolitical uncertainty have threatened even the most robust of balance sheets. Yet amid these headline-grabbing harbingers of new challenges in Russia’s business environment, one seems to have gone largely overlooked: last September, Russian lawmakers passed unprecedented changes to their country’s corporate legislation. The aim was to update business legal frameworks and to extend additional protections to minority corporate stakeholders, but it remains uncertain whether the law will have the desired effect. The sweeping changes generally affect the rules for how companies and their stakeholders interact. They also overhaul the different classes of legal entities that are permitted to do business. Some highlights:

• All Russian legal entities are reclassified. Previously, entities were conceptually seen as either for-profit and “commercial” or “non-commercial,” today all organizations are split between the “unitary” and “corporate” categories. A “unitary” organization’s founder does not directly participate in the business’s affairs or ownership, while the founder of a “corporate” entity retains the right to remain a shareholder or manager.
• The rules for joint stock companies have changed. Companies were previously classified as open or closed, according to whether new shareholders could legally enter the company’s ownership structure. Now they are classified as public or non-public. The option to publicly trade their securities or shares distinguishes the former, who must accordingly include the word “public” in their name. All other corporation types, including the non-trading joint stock companies, are non-public by default and face no need to alter their names. Notably, the obsolescent open and closed joint stock companies do not have to reclassify themselves by the new guidelines until they have to alter their charter documents, but must comply with the new rules regardless.

“.. Iran would be able to grow production and exports by 300,000 to 400,000 barrels a day within weeks of a final deal.”

• Here’s How Iran Could Prevent A Rebound In Oil Prices (MarketWatch)

Investors looking for a bottom in oil prices argue that a deal to curb Iran’s nuclear program and ease sanctions against the country won’t flood the market with more unwanted crude. But one analyst thinks Iran’s return to the market would continue to keep a lid on prices. Oil futures plunged Wednesday as U.S. crude inventories rose yet again. But oil had rallied earlier this week on ideas that fears Iran would soon be able to dump more supply on the market had been overdone. After all, a final deal isn’t due until June 30—and that deadline could easily slip. Moreover, Iran’s degraded infrastructure is likely to keep a lid on production even if a deal is struck, analysts said.

Of course, the likelihood of a deal remains up for debate. Iran’s supreme leader declared Thursday that there was no guarantee of a final agreement, saying world powers couldn’t be trusted to negotiate in good faith. Vikas Dwivedi, a Houston-based oil and gas strategist at Macquarie Capital, sounds far from convinced that a return to the market by Iran would be taken in stride. Making a pun on a 1982 New Wave hit, Dwivedi wrote a note this week entitled “Iran Not So Far Away, Dwivedi argues that Iran would be able to ramp up production significantly in the weeks after the final approval of a deal. But the real pressure, he says, might come from how Arab Gulf producers respond.

Dwivedi says Iran would be able to grow production and exports by 300,000 to 400,000 barrels a day within weeks of a final deal, but that the need for substantial capital upgrades to Iran’s reservoirs means it would take another six to nine months to ramp up production by the 1 million barrels a day needed to recapture the level of output seen before the sanctions.. Meanwhile, Arab Gulf members of OPEC would probably prove themselves unwilling to cede market share to accommodate rising Iranian output, Dwivedi writes. That means OPEC 2015 production could reach 32 million barrels a day or higher versus a previous call of 28.2 million, Dwivedi said. OPEC supply rose to 30.63 million barrels a day in March, according to a Reuters survey.

“To make it pay, Shell really needs the oil price to move up to $90, and quickly.”

• Shell Shareholders Less Than Impressed With $70 Billion Bid For BG (Ind.)

The City is slathering with excitement at Shell’s £47bn bid for BG group. Its shareholders are less than impressed. The problem for them is that the price represents a 50 per cent premium to where BG shares languished prior to the deal’s announcement. To make it pay, Shell really needs the oil price to move up to $90, and quickly. The question its investors have to ask themselves is whether Shell could pick up something like BG’s portfolio, the opportunity it represents and the earnings stream it generates, with its existing assets and resources. Even if they think it can, and such an outcome won’t be quick, they still have to ask if they’d be happy for someone else to have BG, the profits of which will at least help to power the generous dividend Shell pays them. A dividend that represents a welter burden to their company.

What is certain is that this will not be the last mega-deal to be done in the energy sector, as its giants seek cheaper alternatives to risking cash they’re not earning on exploration. It likely won’t be the biggest either. BG’s most likely suitor was long rumoured to be Exxon, the American giant, which represents the most likely threat to this deal’s completion. But Exxon may have it’s eyes cast in the direction of an even bigger B in the form of BP. BG’s drift had become sufficiently aimless that its board felt the need to risk shareholders ire by offering an appalling £25m with nary a condition attached to lure Helge Lund from Norway’s Statoil. He’s now going to sail off into the sunset in a boat filled with cash.

BP’s board might wish it had only that to worry about. For the US lawyers ranged against it, the Deepwater Horizon disaster is the gift that keeps on giving. The company is more than half owned by Americans, it is run by one (Bob Dudley), and it has substantial operations in the country. But they still insist on referring to it as “British” Petroleum across the Atlantic. The logic of putting it formally into American hands via the mega-deal to end all mega-deals with Exxon is that it could take an awful lot of feet from off its neck.

Let me guess: what’s that plan? Make the people pay?

• Ukraine Creditor Group Has Plan to Avoid Writedown in Debt Talks (Bloomberg)

Five creditors that own about $10 billion of Ukraine’s bonds are working on a debt-restructuring deal that won’t involve a reduction to their principal holdings as the government seeks to change the terms of its external debt. The committee is working on a plan that “provides Ukraine with the necessary financial liquidity support,” the group said in a statement released by Blackstone. Franklin Templeton, Ukraine’s biggest bondholder with about $7 billion of the nation’s debt, hired Blackstone to represent the creditor group in mid-March, according to Blackstone. Ukraine needs to reach an agreement with creditors by the end of May to save $15.3 billion over four years as a condition for receiving the next tranche of a $17.5 billion IMF loan.

“For sure, the creditors will try to achieve” a deal with no principal reduction, “but realistically it is not viable,” Michael Ganske at Rogge in London, said. “Ukraine’s debt-to-GDP is much too high and the economy is shrinking.” Public-sector debt is set to rise to 94% of gross domestic product this year, according to the IMF, after a yearlong conflict with pro-Russian separatists in the nation’s east crippled its economy. Output shrank 7 to 10% in the first quarter, Finance Minister Natalie Jaresko said on March 24. The country is seeking to restructure at least $21.7 billion, data compiled by Bloomberg News. A price of about 40 cents signals creditors will face writedowns to their principal holdings of about 20%, Bank of America said in March.

Think I’ll keep my New Zealand theme going for a bit.

• Homeowners In Auckland’s Fringe Saving Up To $50,000 A Year (NZ Herald)

Buying a house on the city’s outskirts can save Aucklanders up to $50,000 each year in mortgage repayments, despite the added commuting costs, new figures reveal. The research, carried out by real estate firm Bayleys, factored in the cost of mortgage repayments as well as the cost of travel from the respective areas. Lower house prices in outlying suburbs – like Papakura, New Lynn, Sunnyvale and Manukau – meant even with transport costs homeowners were still paying significantly less than those in city-fringe suburbs. Bayleys calculated the first-year mortgage repayment costs for different suburbs based on median house prices from the Real Estate Institute of New Zealand (REINZ) and the ANZ variable rate of 6.74%.

It found the annual cost of servicing a mortgage for a median priced Orakei or Remuera home ($1.35 million) was $84,060 in the first year. In Pukekohe, where the median price of a home is $500,000, the annual mortgage repayment in the first year would be $31,128. Even factoring in the $4032 annual cost of commuting from Pukekohe to the CBD by train on the At Hop card system – as well as the $768 public transport cost from Orakei to the city – living in the southern suburb was about $50,000 cheaper. Bayleys Research manager Ian Little said even if a Pukekohe resident commuted by car and chose to park in the central city, it was still cheaper.

Elected on a promise, and then back out with feeble excuses? Tar and feathers!

• New Zealand Unlikely to Deliver on 2015 Budget Surplus Promise (Bloomberg)

New Zealand’s government is unlikely to return its budget to surplus this year as it promised ahead of an election in 2014, Finance Minister Bill English said. “Lower inflation, while good for consumers, is making it less likely that the final accounts in October will show a surplus for the whole year,” English said in a statement Friday. The budget showed a NZ$269 million ($203 million) deficit in the eight months ended Feb. 28, the Treasury Department said earlier Friday. Prime Minister John Key won a third term last year, campaigning on his economic management and pledging to post the nation’s first budget surplus in seven years in the 12 months ending June 30, 2015.

In May last year, English projected a surplus of NZ$372 million for 2014-15. The Treasury in December said low inflation, which curbs nominal economic growth and tax revenue, suggested the budget would remain in deficit. English, who delivers his next annual budget May 21, previously said that the Treasury forecasts may be proved wrong by the time the full-year financial statements are prepared in October. Consumer prices rose 0.8% in the fourth quarter from a year earlier and were down 0.2% from the prior three-month period – the first quarterly decline in three years. The central bank last month forecast annual inflation would fall to zero in the first quarter.

Only possible with more nukes.

• Japan To Pledge 20% CO2 Cut (Guardian)

Japan will promise to cut its greenhouse gas emissions by 20% from 2013 levels ahead of a global summit on climate change this year, a report said Thursday, despite uncertainty over post-Fukushima energy policy. The government will likely announce the new target at the G7 summit in June in Germany, the leading business daily Nikkei reported, citing unnamed government sources. In a separate report, Kyodo News said Tokyo will set a target of cutting gas emissions “by at least 20% by 2030, from 2005 levels.” Japan is one of the few leading polluters that has not yet declared a target on emission cuts, as the world works towards a new framework for combating climate change, to be finalised at December’s COP 21 gathering in Paris.

A total of 33 countries – including the no.2 emitter the United States, the no.3 emitter the European Union, and Russia, ranked fifth – submitted their reduction goals to the UN secretariat by the end of last month. The US has pledged to reduce greenhouse gas emissions by 26-28% over 2005 levels within the next decade, while the EU said it will cut its pollution by 40% by 2030 from 1990 levels. Russia said it could drive down emissions by up to 30% compared to 1990 levels, subject to conditions. In earlier rounds of climate talks, Tokyo pledged it would reduce its greenhouse gas output by 25% by 2020 from 1990 levels. But that target was slashed to a 3.8% cut from 2005 levels in the aftermath of the 2011 Fukushima nuclear disaster, which led to idling of the country’s entire nuclear stable.

Finally US media are catching up to this story?

• Dying at Europe’s Doorstep (Bloomberg)

For people who court danger in foreign lands, Chris Catrambone is a good guy to know. Originally from Louisiana, he made his first $10 million before age 30 investigating insurance claims and lining up medical care for injured workers in some of the world’s most violent places, especially contractors of U.S.-owned companies operating in Iraq and Afghanistan. In 2008, at 27, he moved his two-year-old multinational company, the Tangiers Group, to Malta, the island nation in the central Mediterranean that’s been vital to various empires for more than two millennia, and where moorings are as common as parking spots. Tangiers Group’s portfolio includes travel insurance, up-to-date CIA World Factbook-type reports on emerging markets, and hospitalization and evacuations for expats.

In the summer of 2013, with his wife, Regina, and stepdaughter, Maria Luisa, Catrambone chartered a yacht for a trip to the coast of Tunisia with a stop on the Italian island of Lampedusa, a popular vacation spot. It’s also a landing point used by migrants trying to enter Europe illegally. As the Catrambones left the harbor, Regina spotted a parka floating on the waves. It struck her as incongruous—a winter coat being carried by the warm tide—and she asked their captain about it. He replied that it had almost certainly belonged to one of the thousands who’ve attempted a water crossing to Lampedusa from Libya in inflatable dinghies—one who didn’t make it. “Lampedusa has a beach called Rabbit Beach, and every year it’s rated as one of the top beaches in the world, so of course we wanted to visit it,” Chris says.

“But then we learned that there are bodies of refugees literally washing ashore on this most beautiful beach. So what, you’re going to have a nice swim in the same water where these people are dying? Is that right?” That afternoon, and well into the night, he and Regina discussed what Pope Francis, on his first visit outside the Vatican, had described as “the globalization of indifference” to the plight of refugees at sea. “Papa Francesco said that everyone that could help, should do it, [and] with his own skills,” says Regina, who speaks English as well as her native Italian. “So we start to think, what are our capabilities? We have a good background in helping people in trouble.”

Debt Rattle November 21 2014

Nov 212014

November 21, 2014 Posted by Raúl Ilargi Meijer at 12:47 pm Finance Tagged with: Abe, ABS, Banks, China, CO2, commodities, consumer debt, Draghi, emissions, Krugman, rhino 1 Response »

Russell Lee Hammond Ranch general store, Chicot, Arkansas Jan 1939

• Americans, With Record $3.2 Trillion Consumer Debt, Borrow More (Guardian)

• How Wall Street Banks Traded Lending For Oil, Gas And Nukes (MarketWatch)

• Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)

• China ‘Triple Bubble’ Points To Long Slide For Commodities (MarketWatch)

• ECB Dips Toe Into Dead Sea Of Rebundled Debt (Reuters)

• ECB’s Draghi: ‘Strong Recovery Unlikely’ (CNBC)

• Draghi Says ECB Must Raise Inflation as Fast as Possible (Bloomberg)

• Greece To Submit Contentious Budget For 2015 (CNBC)

• Hanging Around: Why Abe’s Holding an Election in a Recession (Bloomberg)

• Abe Listening to Krugman After Tokyo Limo Ride on Abenomics Fate (Bloomberg)

• US Federal Reserve To Review How It Supervises Major Banks (Reuters)

• Hugh Hendry: “QE ‘Worked’ By Redistributing Wealth Not Creating It” (Zero Hedge)

• Britain Abandons Banker Bonus Fight After EU Court Blow (Bloomberg)

• Russia Warns US Against Supplying ‘Lethal Defensive Aid’ To Ukraine (RT)

• EuroMaidan Anniversary: 21 Steps From Peaceful Rally To Civil War (RT)

• Dutch Government Refuses To Reveal ‘Secret Deal’ Into MH17 Crash Probe (RT)

• Creativity, Companies, And The Wisdom Of Crowds (Robert Shiller)

• China Starts $2 Trillion Leap Forward to Slash Pollution (Bloomberg)

• The Magical Thought That’s Assumed in Climate Studies (Bloomberg)

• Rhino Poaching Death Toll Reaches Record in South Africa (Bloomberg)

• Growth First. Then These Other Things Can Be Dealt With (Clarke&Dawe)

This is going to end well, right?

• Americans, With Record $3.2 Trillion Consumer Debt, Borrow More (Guardian)

Americans are borrowing more even as they have racked up enormous amounts of consumer debt, Federal Reserve data show. The newly released minutes of the last Federal Reserve meeting in October give a wider picture of the US economy. A weak housing market weighed on the US economy, while the fear of Ebola put some brief pressure on the stock markets, the Fed found. The interesting trend, however, is the growing indebtedness of US consumers now that banks have loosened the spigots on lending. The Federal Reserve customarily releases the minutes of its meetings, where the board of governors and staff discuss the major forces at work in the US economy, including employment, housing, borrowing and inflation. The Fed took a positive view of overall economic progress, noting a low unemployment rate, low inflation and, generally, “a continued improvement in labor market conditions”. While the minutes provide a big-picture view of the economy, there are some specific – and strange – worries that make it into the Fed’s discussions.

“Worries about a possible spread of Ebola also appeared to weigh on market sentiment somewhat at times,” the Fed said. The Fed’s meeting was shortly after the first American Ebola patients were being admitted to hospitals. Elsewhere in the economy, the Fed acknowledged that the housing market had slowed. After new home prices hit record highs in 2013, prices have been drifting downward as homeowners still struggle to get mortgages. “Housing market conditions seemed to be improving only slowly,” the central bank said, noting that new home sales were flat in September after moving up in August, and sales of existing single-family homes had not showed much progress and “moved essentially sideways” over the past several months. Banks also loosened the reins and started extending more credit to consumers, particularly through credit cards and auto loans, which some have suggested may be a bubble.

“The three financial holding companies chose to engage in commodity-related businesses that carried potential catastrophic event risks.”

• How Wall Street Banks Traded Lending For Oil, Gas And Nukes (MarketWatch)

A U.S. Senate subcommittee investigation into bank commodities trading has produced some eye-popping findings: Goldman Sachs owned a uranium business that carried the liability of a nuclear accident. J.P. Morgan operated as if it were Con Edison. It owned multiple power-generation plants, exposing it to potential accidents there. Morgan Stanley played the role of Exxon Mobil, stockpiling storage, pipelines, and other natural gas and oil infrastructure.

Together, the report found that banks not only were out of their comfort zone, but put the financial system at risk because they turbo-charged these investments with derivative contracts. They ended up with “huge commodity inventories and participating in outsized transactions,” the Senate Permanent Subcommittee for Investigations said. “The three financial holding companies chose to engage in commodity-related businesses that carried potential catastrophic event risks.” The overreaching foray into commodities underscores how bank “innovation” can take simple services for clients and create massive risk. Banks entered the commodities markets to provide hedges for providers, traders and other market participants. They ended up with huge stakes and, according to the committee, were able to corner at least parts of the market.

This is a far cry from simple brokerage services and investment banking. It is a quantum leap from deposit-taking and lending institutions that are backed by the Federal Reserve and the Federal Deposit Insurance Corp. And it all took place in a market supposedly regulated by the Commodity Futures Trading Commission, which should have at least raised red flags, even if its powers were limited by Congress. While many banks have either left, reduced or signaled they want to exit commodities, the pattern in which simple banking and brokerage products become suddenly dangerous and enormous quagmires may be the larger problem. Regulators can’t put a cop in every division and office on Wall Street, much less every power plant across the country.

“Citigroup is the world’s biggest foreign-exchange dealer ..”

• Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)

The European Central Bank ejected Citigroup from its foreign-exchange market liaison group after the U.S. bank was fined for rigging the institution’s own currency benchmark, two people with knowledge of the move said. The ECB removed Citigroup from the panel, which advises the central bank on market trends, after regulators fined the lender $1 billion for rigging currency benchmarks including the ECB’s 1:15 p.m. fix, said the people, who asked not to be identified because the decision hasn’t been made public. Citigroup was one of six banks fined $4.3 billion by U.S. and U.K. regulators last week and is the only one that also sits on the ECB Foreign Exchange Contact Group. About 20 firms with large foreign-currency operations, ranging from Airbus to Deutsche Bank sit on the committee. The panel’s agenda includes how to improve currency benchmarks.

Citigroup is the world’s biggest foreign-exchange dealer, with a 16% market share, according to a survey by London-based Euromoney Institutional Investor Plc. A spokesman for the New York-based bank declined to comment. The panel isn’t involved in how the ECB’s daily fix is calculated. Currency benchmarks such as the ECB fix and the WM/Reuters rates are used by asset managers and pension funds to value their holdings, including $3.6 trillion in index tracker funds around the world. According to documents released with the settlements, senior traders at the firms shared information about their positions with each other and coordinated trading strategies to the detriment of their clients. They’d congregate in electronic chat rooms an hour or so before benchmark rates were set to discuss their orders and how to execute them to their mutual benefit.

China’s share for some commodities is insane. And it won’t last.

• China ‘Triple Bubble’ Points To Long Slide For Commodities (MarketWatch)

The “commodity super cycle” is dead. Now, it’s time to get used to the “commodity super down cycle, and China is the biggest reason why, warn strategists at Credit Suisse in a Thursday note. Commodity demand tends to be very cyclical. Commodities, however, have been underperforming cyclical indicators of growth, including industrial production and new manufacturing orders (as measured by Institute for Supply Management survey data), they say. Much of the blame is on China, the strategists argue, noting that the country remains the “most significant source” of demand for most industrial commodities. Moreover, they see China on track for a “hard landing” at some point in the next three years. The report adds to some of the recent gloom around China, where the fate of the economy remains a topic for debate.

Standard & Poor’s Ratings Services on Wednesday said its negative outlook for Chinese property developers is casting a pall on the rest of the Asia-Pacific region, though it sees prospects for the sentiment to recover next year thanks to looser government policies, particularly on mortgages. The Credit Suisse strategists, meanwhile, see a “triple bubble” in credit, real estate and investment. On credit, they highlight a private-sector to GDP ratio that is 30%age points above trend. China’s investment share of GDP is 48%, much higher than Japan or Korea at similar stages of industrialization, Credit Suisse says. Real estate, meanwhile, is in a “classic bubble.” Prices have dropped six months in a row. A drop of another 20% or more will make for a “hard landing,” they write.

The headline tells the story.

• ECB Dips Toe Into Dead Sea Of Rebundled Debt (Reuters)

The European Central Bank is set to embark this week on a scheme to buy the kind of rebundled debt that sparked the global economic crash. With sparse investor interest its efforts could fall short. Asset backed securities (ABS), reparcelled debt that mixes high-risk loans with safer credit, gained notoriety when rebundled home loans in the United States unravelled to spark financial turmoil. Seven years on, seeking to pump money into a moribund euro zone economy, the ECB believes the same type of debt may make it easier to get credit to companies. It will be safe, the ECB argues, because such European debt, whether car loans or credit cards, is typically repaid and its repackaging should be simpler to understand. The programme is one plank in a strategy which ECB chief Mario Draghi hopes will increase its balance sheet by up to €1 trillion.

If it falls short and fails to boost the economy significantly, pressure to launch full quantitative easing will reach fever pitch. Regulators and investors are sceptical and even within the ECB expectations are muted, people familiar with its thinking say. To limit its risk, the ECB will buy only the most secure part of such loans in the hope that others pile in behind it to buy riskier credit. It is a strategy with little prospect of success, says Jacques de Larosiere, the former head of the International Monetary Fund who has pushed for the repackaging and sale of loans. “While I welcome the ECB’s initiative … it cannot work if it is alone in buying the senior tranches,” he told Reuters. “That is the very area where there is no problem in finding buyers. In order to have an impact, the ECB or other buyers must also be able to buy the lower-quality riskier tranches of ABS.”

Gee, we had no idea.

• ECB’s Draghi: ‘Strong Recovery Unlikely’ (CNBC)

TThe euro zone economy is likely to remain stagnant in the short-to-medium term and the European Central Bank stands ready to act fast to combat low inflation, President Mario Draghi said on Friday. “A stronger recovery is unlikely in the coming months,” Draghi said in an opening speech at the Frankfurt European Banking Congress, referring to the latest flash euro area Purchasing Managers Index (PMI). The PMI, published on Thursday, showed that new orders in the euro zone fell this month for the first time since July 2013. The composite index read 51.4—below forecasts and below October’s final reading of 52.1.

The ECB has launched a slew of measures to ease credit conditions in the region in order to boost growth and combat dangerously low inflation. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS). The latest reading for headline inflation in the euro zone was 0.4%—well below the close to 2% level targeted by the ECB and down from 0.9% a year ago. “The inflation situation in the euro area has also become increasingly challenging,” said Draghi on Friday. “We see that it has been essential that the ECB has acted —and is continuing to act—to bring inflation back towards 2%.” Speculation has been rife as to if and when the ECB will start a U.S -style sovereign bond-buying program, as a further measures to ease monetary conditions.

Mario must be needing tranquilizers by now.

• Draghi Says ECB Must Raise Inflation as Fast as Possible (Bloomberg)

Mario Draghi said the European Central Bank must drive inflation higher quickly, and will broaden its asset-purchase program if needed to achieve that. “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Shorter-term inflation expectations “have been declining to levels that I would deem excessively low,” he said. Any new action would follow a flurry of activity since June that has included interest-rate cuts, long-term bank loans, and covered-bond purchases, with buying of asset-backed securities due to start as soon as today.

Draghi has declined to rule out large-scale government-bond buying and said after this month’s monetary policy meeting that staff are studying further measures to boost the economy if needed. “Draghi is sending a clear signal that more stimulus is coming,” said Lena Komileva, chief economist at G Plus Economics . in London. “If the ECB’s current measures prove underwhelming and inflation expectations fail to recover, the ECB will act to expand quantitative easing.”

When will the next bond attack start?

• Greece To Submit Contentious Budget For 2015 (CNBC)

Greece’s proposed budget for 2015 has put it at loggerheads again with the “Troika” of international monitors, who are worried the plan will land it with a bigger fiscal gap than forecast. The coalition government led by Antonis Samaras has promised the budget will include no further austerity measures—on which its bailout is contingent— in an effort to combat the risk of snap national elections next year. The latest polls show that the anti-austerity left-wing opposition party SYRIZA would win an election, if it was held now. Greek Finance Minister Gikas Hardouvelis will submit the final plan for 2015 to the President of the Parliament at 10 a.m. GMT on Friday. Negotiations in Parliament on the Greek budget for 2015 will then start December 4.

The Troika—the European Commission, International Monetary Fund and European Central Bank – is worried that the budget will land Greece with a much bigger fiscal gap next year than the government says. The disagreement has already delayed the country’s review by the Troika and Greece risks missing a December 8 deadline to receive the final instalment of its bailout from Europe, which is worth 144.6 billion euros. This completion of the review would also pave the way for talks on a possible financial backstop for Greece after the European part of its bailout expires at the end of this year.”Only once a staff-level agreement has been reached for the conclusion of the review can discussions on the follow-up to the program take place. The full staff mission will return to Athens as soon as the conditions are there,” Margaritis Schinas, chief spokesperson of the European Commission told CNBC.

Power games save faces, but not countries.

• Hanging Around: Why Abe’s Holding an Election in a Recession (Bloomberg)

The economy’s in recession, his support is sliding, and he has two years left in office with a big majority. Hardly surprising Japanese voters say they don’t understand why Prime Minister Shinzo Abe has called an election. Abe dissolved the lower house of parliament today for the vote to be held in mid-December. His coalition isn’t likely to lose its majority as the opposition is in disarray. A solid win now would snuff out potential threats from within his own party in a leadership election set for next year. Abe is taking a page out of his family’s history. His great-uncle Eisaku Sato, the longest-serving prime minister since the war, twice called early elections during his eight years in office from 1964-1972 to consolidate his grip on power.

While Abe has already closed the revolving door of one-year prime ministers that began with his own resignation in 2007, he needs to be seen as keeping his pledges to revive the economy to be able to challenge Sato’s record. “Tradition is that as soon as a prime minister’s popularity goes down, you put in another guy,” said Steven Reed, professor of political science at Chuo University in Tokyo. Each of the last six prime ministers “lost popularity rapidly because they didn’t keep any promises,” he said. The risk is that Abe’s plan backfires and he loses enough seats to fuel a challenge from his own allies, who in Japanese politics are often a more formidable threat to a sitting prime minister than the opposition. 63% of respondents in a Kyodo News poll yesterday said they didn’t understand his reasons for calling an election.

Say sayonara Nippon.

• Abe Listening to Krugman After Tokyo Limo Ride on Abenomics Fate (Bloomberg)

When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate. With a December deadline approaching, Prime Minister Shinzo Abe was considering whether to go ahead with a 2015 boost to the consumption levy. Evidence was mounting that the world’s third-largest economy was struggling to shake off the blow from raising the rate in April, which had triggered Japan’s deepest quarterly contraction since the global credit crisis. Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed.

“That nailed Abe’s decision – Krugman was Krugman, he was so powerful,” Honda said in an interview yesterday in the prime minister’s residence, where he has an office. “I call it a historic meeting.” It was in a limousine ride from the Imperial Hotel — the property near the emperor’s palace that in a previous construction was designed by Frank Lloyd Wright — that Honda told Krugman, 61, what was at stake for the meeting. The economist, who’s now heading to the City University of New York from Princeton University, had the chance to help convince the prime minister that he had to put off the 2015 increase. Confronting Honda and fellow members of Abe’s reflationist brain-trust – such as Koichi Hamada, a former Yale University economist, and Kozo Yamamoto, a senior ruling-party lawmaker — were Ministry of Finance bureaucrats.

Timing is everything. What year is today?

• US Federal Reserve To Review How It Supervises Major Banks (Reuters)

The U.S. Federal Reserve said on Thursday it has launched a review of how it oversees major banks, calling on its inspector general to help with the probe after a series of critical reports. Separate studies to be undertaken by the Fed’s Washington-based Board of Governors and its Office of Inspector General are meant to ensure that “divergent views” about the state of large banks are adequately aired. The reviews will determine whether frontline supervisors and other officials at the regional Federal Reserve banks, as well as at the board level, “receive the information needed to ensure consistent and sound supervisory decisions,” the Fed said in a press release.

That includes being made aware of “divergent views” about a bank’s operations, a reference to criticism that supervisors at the Fed’s regional banks have sometimes suppressed the views of staff members considered too critical of the banks they examine. The issue will be the focus of a Senate Banking committee hearing on Friday that features New York Fed President William Dudley as the chief witness. Several Fed regional banks are involved in supervising the country’s 15 largest financial institutions, including Citigroup and Bank of America, that generally have more than $50 billion in assets. But the New York Fed in particular has come under fire for being lax with the banks it oversees and for not reacting forcefully enough in the run-up to the 2007-2009 financial crisis.

A recent inspector general’s report said supervision at the New York Fed was hampered by the loss of key personnel and an inadequate plan for succession into important positions. Secret recordings made by former New York Fed supervisor Carmen Segarra also portrayed the bank as cozy with major institutions like Goldman Sachs. In testimony prepared for the Senate hearing but released on Thursday afternoon, Dudley said “it is undeniable that banking supervisors could have done better in their prudential oversight of the financial system” in advance of the financial crisis.

More Hugh. He has very original insights.

• Hugh Hendry: “QE ‘Worked’ By Redistributing Wealth Not Creating It” (Zero Hedge)

Hendry: This is almost unparalleled in being the most exciting moment for global macro today. And I predicate that upon making an analogy with the Central Bank coordinated policy intervention, in the foreign exchange markets, after the Plaza Accord in, I believe, 1985. There was a profound unease at the current account and particularly the trade deficit that America was running up, especially against the Japanese, which was deemed to be contentious. The real economy is composed of slow-moving prices, wages are slow and the notion of having to wait for productivity improvements and wage price negotiations to work their course, via the U.S. corporate landscape in Japan, such as those deficits would be resolved successfully and become less politically contentious. It was just too long. Politicians just don’t have that time and so they jumped into the world of macro. Macro’s all about fast-moving prices. Foreign exchange is fast. Stock markets prices are fast.

So the notion then was that the Yen and the Deutschmark would appreciate. Now for hedge funds that was amazing. This is the period of the alchemy of finance, as George Soros has celebrated in very successful financial adventures. They just run the biggest long positions. No one stopped to say “Well, the Deutschmark’s getting expensive.” It didn’t really enter into the vernacular of trading in that market. It was macro, there was a policy impulse, a sponsorship by the world’s monetary authorities and you were trending and you had to have that position. By and large it succeeded. So what I would said to you today is that the policy response can’t be found in foreign exchange markets. It’s been muted somewhat by the “Beggar thy neighbour” way that everyone can pursue the same policy. So currencies, up until very lately, haven’t really moved that much. Instead the drama is unfolding in the stock market.

Cameron keeps on losing against the EU.

• Britain Abandons Banker Bonus Fight After EU Court Blow (Bloomberg)

Britain abandoned a bid to overturn a European Union ban on banker bonuses of more than twice fixed pay after it suffered a setback in the EU’s top court. Chancellor of the Exchequer George Osborne said he wouldn’t “spend taxpayers’ money” pursuing the legal challenge any further after Britain’s arguments were rebuffed by a senior official at the EU Court of Justice yesterday. The U.K. government will instead redirect its efforts toward countering the effects of the “badly designed rules,” which include an increase in bankers’ overall pay, Osborne said in a statement. The U.K. Treasury said it may be necessary to “develop standards that ensure that non-bonus or fixed pay is put at risk,” echoing remarks this week by Bank of England Governor Mark Carney.

U.K. banks face a running battle with regulators over the EU remuneration rules, with Barclays, HSBC, Lloyds and Royal Bank of Scotland among more than 30 lenders that have tried to circumvent it by introducing so-called role-based pay. The four banks declined to comment on the court opinion. The European Banking Authority, which brings together financial watchdogs from throughout the 28-nation EU, said in October that role-based allowances violate EU rules in “most cases,” and urged regulators to ensure compliance. Osborne and Carney have criticized the EU bonus curb as counterproductive. Britain started the legal fight against the measure last year.

“Lethal assistance “remains on the table. It’s something that we’re looking at …”

• Russia Warns US Against Supplying ‘Lethal Defensive Aid’ To Ukraine (RT)

Moscow has warned Washington a potential policy shift from supplying Kiev with “non-lethal aid” to “defensive lethal weapons”, mulled as US Vice President visits Ukraine, would be a direct violation of all international agreements. A Russian Foreign Ministry spokesperson said that reports of possible deliveries of American “defensive weapons” to Ukraine would be viewed by Russia as a “very serious signal.” “We heard repeated confirmations from the [US] administration, that it only supplies non-lethal aid to Ukraine. If there is a change of this policy, then we are talking about a serious destabilizing factor which could seriously affect the balance of power in the region,” Russian Foreign Ministry spokesman Aleksandr Lukashevich cautioned.

His remarks follow US deputy National Security Advisor Tony Blinken Wednesday’s statement at a hearing before the Senate Committee for Foreign Affairs, in which he said that Biden may offer the provision of “lethal defensive weapons” as he visits Ukraine. Lethal assistance “remains on the table. It’s something that we’re looking at,” Blinken said. “We paid attention not only to such statements, but also to the trip of representatives of Ukrainian volunteer battalions to Washington, who tried to muster support of the US administration,” Lukashevich said.

Useful timeline.

• EuroMaidan Anniversary: 21 Steps From Peaceful Rally To Civil War (RT)

Protesters who went out to Kiev’s Maidan Square exactly a year ago have their goal – a deal with the EU – achieved. However, they hardly expected the protest would also trigger a bloody civil war which has already claimed 4,000 lives. RT takes a look at the milestone events of the past 365 days, which brought Ukraine – and the world – to where it is now.

1) Then-President Victor Yanukovich’s unwillingness to sign an Association Agreement with the EU led to Maidan (Independence Square) in Ukraine’s capital Kiev filling with protesters on November 21, 2013. The rally participants were holding hands, waving flags and chanting slogans like “Ukraine is Europe!”

2) The brutal dispersal of a protest camp on the morning of November 30 was a turning point in the ensuing events. It’s still unclear whose idea it was to use force against demonstrators. Yanukovich laid the blame on the city’s police chief and sacked him. But that was not enough for the Maidan protesters, who switched from demands of signing the EU deal to calls for the toppling of the government.

3) Over the course of several weeks, which followed the face of Maidan started to change – peaceful protesters were more and more giving way to masked and armed rioters, often from far-right groups. A collective of radicals called the Right Sector were among the most prominent. Peaceful protests evolved into a continuous stand-off between the rallying people and riot police.

4) The deadliest day of the Maidan protests came on February 20 when over a hundred people were killed in the center of Kiev, most of them by sniper fire. The ongoing official investigation blamed a group of elite soldiers from the Berkut riot police for the killings. But there is a lingering suspicion that the massacre was committed by somebody among the anti-government forces.

More secrets, just what the situation needed.

• Dutch Government Refuses To Reveal ‘Secret Deal’ Into MH17 Crash Probe (RT)

The Dutch government has refused to reveal details of a secret pact between members of the Joint Investigation Team examining the downed Flight MH17. If the participants, including Ukraine, don’t want information to be released, it will be kept secret. The respected Dutch publication Elsevier made a request to the Dutch Ministry of Security and Justice under the Freedom of Information Act to disclose the Joint Investigation Team (JIT) agreement, along with 16 other documents. The JIT consists of four countries – the Netherlands, Belgium, Australia and Ukraine – who are carrying out an investigation into the MH17 disaster, but not Malaysia. Malaysian Airlines, who operated the flight, has been criticized for flying through a war zone.

Part of the agreement between the four countries and the Dutch Public Prosecution Service, ensures that all these parties have the right to secrecy. This means that if any of the countries involved believe that some of the evidence may be damaging to them, they have the right to keep this secret. “Of course [it is] an incredible situation: how can Ukraine, one of the two suspected parties, ever be offered such an agreement?” Dutch citizen Jan Fluitketel wrote in the newspaper Malaysia Today. Despite the air crash taking place on July 17 in Eastern Ukraine, very little information has been released about any potential causes. However, rather than give the public a little insight into the investigation, the Dutch Ministry of Security and Justice is more worried about saving face among the members of the investigation.

“I believe that this interest [international relations] is of greater importance than making the information public, as it is a unique investigation into an extremely serious event,” the Ministry added, according to Elsevier. Other reasons given for the request being denied included protecting investigation techniques and tactics as well as naming the names of officials who are taking part in the investigation. The Ministry said it would be a breach of privacy if they were revealed. “If the information was to be released then sensitive information would be passed between states and organizations, which would perhaps mean they would be less likely to share such information in the future,” said the Ministry of Security and Justice. Dutch MP Pieter Omtzigt, who is a member of the Christian Democratic Party, has made several requests for the information to be released to the public. “We just do not know if the Netherlands has compromised justice,” he said in reaction to the ministry’s decision. The MP was surprised that this agreement was even signed, never mind kept secret.

Shiller is a blind man: “If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity”.

• Creativity, Companies, And The Wisdom Of Crowds (Robert Shiller)

Economic growth, as we learned long ago from the works of economists like MIT’s Robert M. Solow, is largely driven by learning and innovation, not just saving and the accumulation of capital. Ultimately, economic progress depends on creativity. That is why fear of “secular stagnation” in today’s advanced economies has many wondering how creativity can be spurred. One prominent argument lately has been that what is needed most is Keynesian economic stimulus – for example, deficit spending. After all, people are most creative when they are active, not when they are unemployed. Others see no connection between stimulus and renewed economic dynamism. As German Chancellor Angela Merkel recently put it, Europe needs “political courage and creativity rather than billions of euros.” In fact, we need both. If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity – particularly policies that promote solid financial institutions and social innovation.

In his 2013 book Mass Flourishing, Edmund Phelps argues that we need to promote “a culture protecting and inspiring individuality, imagination, understanding, and self-expression that drives a nation’s indigenous innovation.” He believes that creativity has been stifled by a public philosophy described as corporatism, and that only through thorough reform of our private institutions, financial and others, can individuality and dynamism be restored. Phelps stresses that corporatist thinking has had a long and enduring history, going back to Saint Paul, the author of as many as 14 books of the New Testament. Paul used the human body (corpus in Latin) as a metaphor for society, suggesting that in a healthy society, as in a healthy body, every organ must be preserved and none permitted to die. As a public-policy credo, corporatism has come to mean that the government must support all members of society, whether individuals or organizations, giving support to failing businesses and protecting existing jobs alike.

Throw a big number out there and see if it sticks.

• China Starts $2 Trillion Leap Forward to Slash Pollution (Bloomberg)

China, which does nothing in small doses, is planning an environmental makeover in keeping with the political, cultural and market revolutions it has pursued over the past six decades. In his agreement last week with President Barack Obama, Chinese President Xi Jinping committed to cap carbon emissions by 2030 and turn to renewable sources for 20% of the country’s energy. His pledge would require China to produce either 67 times more nuclear energy than the country is forecast to have at the end of 2014, 30 times more solar or nine times more wind power – – more non-fossil fuel energy than almost the entire U.S. generating capacity. That means building roughly 1,000 nuclear reactors, 500,000 wind turbines or 50,000 solar farms. The cost will run to almost $2 trillion, holding out the potential of vast riches for nuclear, solar and wind companies that get in on the action.

“China is in the midst of a period of transition, and that calls for a revolution in energy production and consumption, which will to a large extent depend on new energy,” Liang Zhipeng, deputy director of the new energy and renewable energy department under the National Energy Administration, said at a conference in Wuxi outside of Shanghai this month. “Our environment is facing pressure and we must develop clean energy.” By last year, China had already become the world’s largest producer of wind and solar power. Now, with an emerging middle class increasingly outspoken about living in sooty cities reminiscent of Europe’s industrial revolution, China is looking at radical changes in how its economy operates. “China knows that their model, which has done very well up until recent times, has run its course and needs to shift, and they have been talking about this at the highest levels,” said Paul Joffe, senior foreign policy counsel at the World Resources Institute.

Interesting concept: to meet official goals, ‘We’ll have to suck the carbon out of the air’. We won’t.

• The Magical Thought That’s Assumed in Climate Studies (Bloomberg)

Here’s one way to phrase the basic climate change conundrum: There’s a huge gap between the volume of pollution emitted every year and how much scientists say we can safely send aloft. This has a weird implication for potential fixes governments may need in the future. Emission levels in 2020 could end up about 23% higher than what scientists suggest is safe, according to an annual study of the so-called “emissions gap” put out by the UN Environment Program. The carbon overshoot could grow by 2030 to 40%. “Safe” means what the UN-led climate negotiators have defined it to mean: warming of less than two degrees Celsius above global average temperatures from the beginning of the record, or around 1880. But two degrees doesn’t say much to normal people when you’re talking about the temperature of a planet. That’s why scientists have been beating their heads against walls the last several years to translate “two degrees Celsius” into something incrementally more intelligible – more intelligible even than 3.6 degrees Fahrenheit.

They’ve come up with the idea of a carbon budget, or the volume of pollution we can put into the atmosphere and still have a halfway decent chance of containing the problem. At the rate we’re going, the budget may burn up by the 2040s. Now, in finance, the notion of a budget deficit make sense. When someone overspends, he pays the money back at a later date. Ecological deficits make less sense. How do you pay the ground back in carbon minerals once they’ve been vaporized and are hanging in the atmosphere? Here’s what’s weird, what the Emissions Gap report calls out. It has to do with these “carbon deficits” that result. We’re burning through so much of the budget today that in “safe” projections of the 2070s and 2080s, greenhouse gas emissions must go negative for the climate to stay safe. Smokestacks will have to start inhaling rather than exhaling. We’ll have to suck the carbon out of the air, through reforestation or some as-yet unproven airborne-carbon removal technology.

This is who we are. This is mankind.

• Rhino Poaching Death Toll Reaches Record in South Africa (Bloomberg)

A record 1,020 rhinos have been killed by poachers for their horns in South Africa this year, more than all of 2013 and triple the number four years ago. Kruger National Park, a reserve the size of Israel, has seen 672 rhinos killed since Jan. 1. A total of 1,004 were slaughtered throughout the country in 2013, the Department of Environmental Affairs said today in a statement. The horns are more valuable than gold by weight. Prices for a kilogram of rhino horn range from $65,000 to as much as $95,000 in Asia. “The South African government recognizes that the ongoing killing of the rhino for its horns is part of a multi-billion dollar worldwide illicit wildlife trade and that addressing the scourge is not simple,” the department said. Demand for rhino horns has climbed in Asian nations including China and Vietnam because of a belief that they can cure diseases such as cancer.

South Africa has taken measures including setting up an protection zone within Kruger Park, using new technology, intelligence, and moving rhinos to safe areas within South Africa and other countries where they live. Poachers killed 333 rhinos in 2010 and 668 in 2012, Albi Modise, spokesman for the Department of Environmental Affairs, said today in a mobile-phone text message. “Government will continue to strengthen holistic and integrated interventions and explore new innovative options to ensure the long-term survival of the species,” the department said. Authorities have made a record number of arrests for poaching and related activities, according to the department. A total of 344 alleged rhino poachers, couriers and poaching syndicate members have been apprehended this year, compared with 343 in all of last year, Modise said. Most rhinos in South Africa are white rhinos, the bigger of the two types of the animal found in Africa. They can weigh more than 2 metric tons. The horns are largely made up of keratin, a substance similar to human hair.

The world’s best economic analysts are two Australian comedians. Fitting.

• Growth First. Then These Other Things Can Be Dealt With (Clarke&Dawe)

Debt Rattle November 3 2014

Nov 032014

November 3, 2014 Posted by Raúl Ilargi Meijer at 1:11 pm Finance Tagged with: China, CO2, currency war, Italy, Japan, Korea, living wage, Merkel, Portugal, spending, UK 2 Responses »

DPC Masonic Temple, New Orleans 1910

• Bank of Japan Bazooka To Spark Currency War (CNBC)

• China Faces Trap In Currency War (MarketWatch)

• Germany Ready To Accept British Exit From Europe (Daily Mail)

• For Japanese, Are Higher Prices Really A Good Thing? (Reuters)

• Yen’s Worst Yet to Come in Options After Kuroda Shocks (Bloomberg)

• The Experiment that Will Blow Up the World (Tenebrarum)

• Boj’s Desperate QE Move To Hurt Japanese Spending Power (Steen Jakobsen)

• US Consumers Resisting Enticements To Increase Spending (MarketWatch)

• More Than One Fifth Of UK Workers Earn Less Than Living Wage (Guardian)

• ECB Skips Fireworks for Day One of New Role as Banking Supervisor (Bloomberg)

• Europe’s Crazy Finance Tax (Bloomberg)

• Vicious Circle of Bad Loans Ensnaring Italian Companies (Bloomberg)

• Portugal Sees Chinese Do 90% of Bids at Property Auction (Bloomberg)

• Gold Bulls Retreat With $1.3 Billion Pulled From Funds (Bloomberg)

• Globalisation Is Turning In On Itself And It Is Each Man For Himself (Pal)

• Wanted: 500,000 New Pilots In China By 2035 (Reuters)

• 25 Years Ago, As The Berlin Wall Fell, Checks On Capitalism Crumbled (Guardian)

• Insects Could Be On Your Dinner Menu, Soon (CNBC)

• Greenhouse Gas Levels At Highest Point In 800,000 Years (ABC.au)

• UN Sees Irreversible Damage to Planet From Fossil Fuels (Bloomberg)

All Asian countries MUST participate.

• Bank of Japan Bazooka To Spark Currency War (CNBC)

The Bank of Japan’s (BoJ) stimulus blitz raises the specter of currency wars as a rapidly weakening yen threatens the competitiveness of export-driven economies, say strategists. “Whenever you have these kinds of disruptive moves by central banks, there’s always going to be fall out effects,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management. Markets were caught off guard by the BoJ’s announcement on Friday that it would expand purchases of exchange-traded funds (ETFs) and real estate investment trusts, extend the duration of its portfolio of Japanese government bonds (JGBs), and increase the pace of monetary base expansion. The yen plunged nearly 3% against the U.S. dollar on Friday and extended its selloff on Monday, falling to a fresh 7-year low in early Asian trade. It last traded at 112.71.

“The hottest currency war today is Japan vs Korea. That’s probably the one to keep an eye on. The yen-won cross rate is very sensitive as Japan and Korea compete in a lot of key areas,” said Sean Callow, senior currency strategist at Westpac. The Japanese currency has fallen around 20% against the won since the BoJ launched its unprecedented stimulus program in April 2013. Currency strategists say the BoJ’s actions could encourage the Bank of Korea (BoK) to become more defensive against local currency strength through intervention in the foreign exchange market or a rate cut. “We see increasing risks that it may cut rates by 25 basis points to 1.75% in coming months,” Young Sun Kwon, economist at Nomura wrote in a note late Friday, highlighting that Korea’s export momentum already looks weak.

“The move will be particularly problematic for China, as its slow-crawling managed rate to the U.S. dollar renders it is effectively defenseless when confronted by currency wars.”

• China Faces Trap In Currency War (MarketWatch)

Last Friday, the Bank of Japan effectively tossed a grenade into the region’s currency markets with its surprise announcement of a new round of quantitative easing sending the yen to fresh lows. The move will be particularly problematic for China, as its slow-crawling managed rate to the U.S. dollar renders it is effectively defenseless when confronted by currency wars, in which countries try to steal growth from their trading partners through competitive devaluations. It also comes at a time when Beijing is already battling foes on two fronts: hot-money outflows and an economy flirting with deflation. The consensus is that the world’s largest trading nation will resist the temptation to enter the fray with a competitive devaluation or move to a market-based exchange rate. Yet Japan’s latest actions will hurt, as they hold Beijing’s feet to the fire.

The decision last Friday by the Bank of Japan to boost its bond purchases by more than a third to roughly $725 billion a year, among other actions, sent the yen tumbling to a seven-year low as the dollar rallied to above ¥112. This means the currency of the world’s second-biggest economy has now risen by roughly a third against that of the world’s third-biggest since late 2012. That’s a significant revaluation to swallow by any measure, all the more so as Japan and China are increasingly competing with each other, say analysts. According to new report by HSBC, Japan and China are already rivals in 19 manufactured product lines, and this total is growing. Panasonic has already said it is considering “on-shoring” certain production back to Japan. The other reason Japan’s escalation of QE turns up the heat on China is that it risks exposing the vulnerabilities in Beijing’s piecemeal approach to opening up its capital account.

Major loss of face for Cameron.

• Germany Ready To Accept British Exit From Europe (Daily Mail)

Germany would rather see Britain leave the EU than allow David Cameron to tear up its rules on free movement of labour, Angela Merkel has said. The Chancellor warned the Prime Minister that he is reaching a ‘point of no return’ by pushing for reform of the bloc’s sacred free movement system. The threat has forced Mr Cameron to tone down his ambitions for any deal to curb EU immigration. The pair clashed at a summit in Brussels last month, German magazine Der Spiegel said. Citing senior officials, it said Mrs Merkel told Mr Cameron he was nearing a ‘point of no return’ with plans to introduce quotas for the number of EU workers who can come to Britain.

She threatened to abandon her efforts to keep Britain in the EU unless he backed down. One government insider was quoted on Radio Bavaria saying: ‘The time for talking is close to over. ‘Mrs Merkel feels she has done all she can to placate the UK, but will not accept immigration curbs from EU member states under any circumstances. It has come to a Mexican stand-off and it is now a question of who blinks first.’ Mrs Merkel was confident of winning the battle of wills, the insider added. It came amid reports that Mr Cameron is ditching his quota plan to appease Berlin. Ministers will focus on making the existing rules work better for Britain. A source said Mr Cameron’s plans – to be outlined before Christmas – would stretch EU rules ‘to their limits’.

Why Abenomics and Kuroda will fail: “If prices rise, people might not buy as much.” An entirely overlooked mechanism. Abe et all think that if prices rise, people will spend more, because they’re afraid they’ll rise more.

• For Japanese, Are Higher Prices Really A Good Thing? (Reuters)

Bank of Japan Governor Haruhiko Kuroda does not need to convince Japanese people like Kazue Shibata that deflation brings problems, but getting them to believe that higher prices will make things better is proving to be a harder sell. Shibata, 65, who runs a small dress shop in central Tokyo, worries the BOJ’s mission to hit a 2% inflation target could end up driving business away unless people also have more money in their pockets. “If prices rise, people might not buy as much,” she said, echoing a concern of many private-sector economists. On Friday, Kuroda’s BOJ doubled down on a high-stakes bet that the central bank can shake Japan’s consumers from a defensive set of expectations hardened by a decade and a half of era of falling prices, lower incomes and stop-and-go growth. “It’s important for the BOJ to strongly commit to achieving its price target to get that price target firmly embedded in people’s mindset,” Kuroda said at a news conference on Friday, after the BOJ stunned markets with an unexpected expansion of its monetary stimulus program.

“It won’t do much good in trying to shake off the public’s deflation mindset if you just say inflation will reach 2% some day,” Kuroda said. At the core of Prime Minister Shinzo Abe’s “Abenomics” agenda is the assumption that the outlook for sustained inflation will prompt consumers to anticipate rising prices, and that consumption will rise as a result. That represents a sea change for a country used to deflation, where clinging to cash today meant greater buying power tomorrow, a set of expectations that has proven hard to shake a year-and-a-half into an unprecedented easing by the BOJ. Kaoru Sakai, 65, who runs a hair salon in Tokyo, did not raise prices even after the national sales tax was raised to 8% to 5% in April, worried the sticker shock could scare away business. “The fact is that people don’t feel confident about the future,” Sakai said. “Our society and economy has tilted people toward lower-end options. For example, it’s like people choosing to eat at fast-food places, or standing-only soba shops even when they could, realistically, eat at proper restaurants.”

Unless Japanese people see real progress in solving fundamental problems, such as lack of wage growth, a shrinking manufacturing base, and an unsustainable welfare system, many might prefer the problem they know to the one Kuroda hopes will replace it. Classical economics would argue that consumers should welcome deflation, because it increases their purchasing power, an argument some consumers echo. “Deflation reflects the underlying economy. Our population is decreasing, production is low and we’re not seeing innovation. We are losing power compared with other countries,” said Yohei Tanaka, 33, an accountant in Tokyo. “I don’t think this is the time to drive the economy to inflation. I don’t think inflation is the end solution. Deflation, in a certain way, is good.”

The yen will be reduced to something resembling a penny stock.

• Yen’s Worst Yet to Come in Options After Kuroda Shocks (Bloomberg)

The worst is yet to come for the yen after Japan’s two-pronged attack on deflation sent the currency tumbling to its weakest level in almost seven years. Option prices show traders see a 6%chance the yen, which has already slumped 6.8% this year, will drop an additional 1.8% to 115 per dollar in the next three months, according to data compiled by Bloomberg. That’s up from 18% on Oct. 30, the day before authorities surprised investors by saying the government pension fund will invest more of its money overseas and Bank of Japan Governor Haruhiko Kuroda will expand currency depreciating stimulus.

“The BOJ has dropped another stimulus bombshell,” Daisaku Ueno, the chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, said by phone on Oct. 31. “It’s quite possible the yen will drop to 112 or 113 per dollar by the end of the year, or even 115.” That level – last reached in November 2007 – is already starting to become the consensus. Companies from Nomura Holdings Inc., Japan’s biggest brokerage, to JPMorgan Chase & Co. cut their year-end forecast to 115 per dollar on Friday, while Goldman Sachs said the day’s announcements made its estimate for the yen to reach that level in 12 months suddenly seem “conservative.”

“… the markets are pouncing on the yen because they are forward-looking: the BoJ is monetizing ever more government debt and this is expected to continue, because the public debtberg has become too large to be funded by any other means. In spite of the relatively low money supply growth this debt monetization has produced so far, it also creates the perverse situation that an ever greater portion of the government’s outstanding stock of debt consists actually of debt the government literally “owes to itself”.

• The Experiment that Will Blow Up the World (Tenebrarum)

In order to explain why the pursuit of Kuroda’s policy is edging ever closer to a catastrophic outcome, we have to delve a bit into the details of Japan’s monetary data. In spite of the BoJ’s “QE” reaching record highs, it mainly creates bank reserves and furthers carry trades. The economy sees no private credit growth so far. Commercial banks in Japan continue to shrink the stock of fiduciary media – this is to say, they are reducing outstanding credit, which makes more and more unbacked deposit money disappear. Hence, Japan’s money supply growth has recently decline to a mere 4.3% year-on-year, as the rate of contraction in outstanding fiduciary media (i.e., uncovered money substitutes) has accelerated to 9.4% annualized in spite of the BoJ’s pumping. The reason is a technical one: contrary to the Fed, the BoJ buys most of the securities it acquires in terms of its “QE” operations directly from banks – this creates new bank reserves at the BoJ, but no new deposit money.

By contrast, the Fed buys only from primary dealers, which are legally non-banks (even though most of them belong to banks). This creates both bank reserves and deposit money concurrently. The BoJ’s actions can only directly inflate the money supply to the extent it buys securities from non-banks, e.g. when it buys stocks in REITs to prop up the Nikkei. In short, the effectiveness of the BoJ’s pumping depends on the extent to which commercial banks are prepared to employ additional bank reserves to pyramid new credit atop them and thereby create additional fiduciary media. Japan’s banks are doing the exact opposite, mainly because there simply isn’t sufficient demand for credit. Why would anyone borrow more money, given Japan’s demographic situation?

However, one result of this is that an ever larger portion of Japan’s money supply actually consists of covered money substitutes – deposit money that is “backed” by standard money. Covered money substitutes have grown by more than 77% over the past year. Bank reserves can be transformed into currency when customers withdraw cash from their deposits, hence to the extent that deposit money is “backed” by bank reserves, it ceases to be a form of circulation credit. The narrow money supply in total now amounts to roughly 595 trillion yen; of this, roughly 139 trillion yen consist covered money substitutes and 83.4 trillion yen consist of currency (outstanding banknotes in circulation). Thus the stock of fiduciary media has shrunk to 372.6 trillion yen. It is well known that Japan has a very high public-debt-to GDP ratio. Even with the recent economic upswing, its budget deficit for the current year is projected to clock in at more than 7% of GDP – the latest in a string of huge annual deficits. What is less well known is the ratio of public debt to tax revenues, which is actually the more relevant datum.

We conclude from this that the markets are pouncing on the yen because they are forward-looking: the BoJ is monetizing ever more government debt and this is expected to continue, because the public debtberg has become too large to be funded by any other means. In spite of the relatively low money supply growth this debt monetization has produced so far, it also creates the perverse situation that an ever greater portion of the government’s outstanding stock of debt consists actually of debt the government literally “owes to itself”. On the surface, this monetarist wizardry suggests that one can indeed “get something for nothing” – but that just isn’t true. Deep down, market participants know that it isn’t true – so even though they are celebrating the promise of more liquidity by sending Japanese stocks soaring, they are also creating a fault line – and that fault line is the external value of the yen.

” … central banks, even the desperate ones like BoJ, are and remain one-trick-pony institutions”

• Boj’s Desperate QE Move To Hurt Japanese Spending Power (Steen Jakobsen)

The Bank of Japan has increased the targeted monetary base from JPY 60-70 trillion to JPY 80 trillion an increase of 25-35% and an almost desperate move to keep the Abenomics’ wheels going. The decision is quite controversial as the vote was a narrow 5/4. This is extremely unusual as big decisions like these are generally only done with full consensus, but it clearly shows Abenomics is running out of time and room as core-inflation, excluding tax, was at 1.1% vs. the 2.0% target. The International Monetary Fund has been critical of Abenomics recently telling Japan that is falling short of helping the economy. From a market perspective the move [Friday] was almost perfectly timed coming on the heels of a Federal Open Market Committee meeting which ended quantitative easing and expose the big difference on future monetary paths between the BoJ and the Fed.

There is, however, a dark side to this big move. Prime Minister Shinzo Abe needs and needs to decide soon on whether to increase sales tax, VAT, again or disappoint on his third arrow. Abenomics has not deserved its name as a new approach. it has been all about printing money and making the state take a bigger and bigger role. It is hardly a new policy but more a reflection on an inability to change a conservative society with poor demographics. Tactical and trading wise, the USDJPY has reached a new high and it’s hard to fade a central so desperate is very likely as US dollar strength the name of the game through Mid-November. The easier monetary policy will force USDJPY and NIKKEI higher as it’s a one-way street, but it will more importantly force Japanese banks to lend out and overseas. I see/hear desperate Japanese bankers trolling the world to find things to finance and it seems they are in desperate need of US dollar funding (I.e: they have not hedged proportionally).

This could make USDJPY test 125/135 over coming months but the “risk” remains China, which even prior to this action was upset at the ‘beggar thy neighbour’ policy of Japan. Overall, tactically, it confirms the world is again moving towards lower yields in G10. A new low remains my only and main call and furthermore as big a move as this is, it also tells a story of how central banks, even the desperate ones like BoJ, are and remain one-trick-pony institutions. Personally I see this as the final round – Japan was ALWAYS going to give it one more shot – now it happened.

They have no money left to spend. And you want to tell me your economy is doing well?

• US Consumers Resisting Enticements To Increase Spending (MarketWatch)

The U.S. is adding jobs at the fastest rate since the end of the Great Recession and another strong month of hiring is expected in October, but Americans still aren’t spending like good times are here to stay. The lackluster pace of consumer spending — outlays fell in September for the first time in eight months — largely explains why the U.S. is only growing at a post-recession annual average of 2.2%. Yet most economists think that could change in the near future. The reason: wages finally appear to be moving higher as the unemployment rate falls and companies find it harder to attracted talented workers. Employment costs jump for second straight quarter.

Even more jobs and higher pay for the average worker, however, might not be enough to get consumers to sharply boost spending, other economists say. Despite rising consumer confidence, they point out, many Americans still aren’t sharing in the spoils of a healing economy. And many bear psychological scars from the Great Recession that impel them to save more than they used to in order to protect themselves against another downturn. The U.S. savings rate, for example, rose to 5.6% in September to match a two-year peak, putting it twice as high as it was in the last year before the recession. “The economy is doing well for some people but very poorly for many others,” said Joshua Shapiro, chief economist at MFR Inc. in New York. “People understand that things are improving slowly, but until they see it in their paychecks it’s hard to truly believe that.”

Three-quarters of young people make less than a living wage. And you want to tell me your economy is doing well?

• More Than One Fifth Of UK Workers Earn Less Than Living Wage (Guardian)

More than a fifth of UK workers earn less than the living wage, with bar staff and shop assistants among the most likely to live “hand to mouth” because of low pay, a report warns on Monday. Published to mark living wage week, the research also finds that younger workers, women and part-timers are more likely to be paid less than the living wage, a voluntary threshold calculated to provide a basic but decent standard of living. New living wage rates will be announced on Monday, with the current rate at £8.80 per hour in London and £7.65 elsewhere. The report by consultancy firm KPMG adds to evidence of low pay remaining prevalent in Britain, despite the economic recovery. The proportion of employees on less than the living wage is now 22%, up from 21% last year, the study found. In real terms, that was a rise of 147,000 people to 5.28 million.

The Trades Union Congress (TUC) urged more employers to adopt the pay benchmark, following news that more than 1,000 companies representing around 60,000 employees are now committed to the wage and will adopt the new rate on Monday. Frances O’Grady, the TUC general secretary, said: “Low pay is blighting the lives of millions of families. And it’s adding to the deficit because it means more spent on tax credits and less collected in tax. We have the wrong kind of recovery with the wrong kind of jobs – we need to create far more living wage jobs, with decent hours and permanent contracts.” Alan Milburn, the government’s social mobility tsar, said both employers and government must do more to make Britain a living wage country. “This research is further proof that more workers are getting stuck in low paid work with little opportunity for progression,” said the former Labour cabinet minister, now chair of the government’s Commission on Social Mobility.

“It is welcome that the number of accredited living wage firms has increased. But far more needs to be done to help millions of people move from low pay to living pay.” The research, conducted by Markit for KPMG, shows 43% of part-time workers earn less than the living wage, compared with 13% of full-time employees. It found 72% of 18-21 year olds were earning less than the living wage, compared with just 15% of those aged 30-39. One in four women earn less than the benchmark, compared to 16% of men. “Far too many UK employees are stuck in the spiral of low pay,” said Mike Kelly, head of living wage at KPMG. “With the cost of living still high, the squeeze on household finances remains acute, meaning that the reality for many is that they are forced to live hand to mouth,” added Kelly, also chair of the Living Wage Foundation.

All the wrong people do a job the ECB should never have been assigned. They can only make things worse.

• ECB Skips Fireworks for Day One of New Role as Banking Supervisor (Bloomberg)

The European Central Bank is about to achieve its biggest expansion of powers since the start of the euro. No celebrations are planned. As the Single Supervisory Mechanism takes charge of the euro area’s 120 biggest institutions tomorrow, officials aren’t in the mood for fanfare. Instead, staff at the ECB’s new overseer are preparing to monitor capital issuance by banks, and processing the results of a year-long asset review that revealed a stash of soured loans in the bloc now amounts to almost €900 billion ($1.1 trillion). Led by France’s Daniele Nouy, the SSM in Frankfurt will immediately set about trying to blend 18 sets of national supervisory habits into pan-European consistency, and prod banks to take more precautions against crises. While the ECB will have the status of a new heavyweight among global regulators, that role carries with it the burden of restoring confidence in a battered banking system vulnerable to renewed economic shocks. “They have an awful lot on their plate from day one,” said Guntram Wolff, Director of the Bruegel institute in Brussels.

“There’s a very big pile of bad loans, profitability in this environment is going to be difficult, and the banking system itself probably needs to be restructured. The question is how the new supervisor can address that.” [..] While the ECB found an overall shortfall of €9.47 billion euros, that becomes €6.35 billion when discounting five failing lenders that have agreed restructuring plans or are in resolution. The outstanding sum “doesn’t seem insurmountable,” Mathias Dewatripont, a Belgian member of the new SSM board, said last week in Berlin. “I would still be happier if we had more capital in the system.” Soon to be in charge of that system is a new corps of almost 1,000 bank supervisors drawn from all over Europe, including existing authorities and the private sector. Notables among senior management include Stefan Walter, a former official of the Federal Reserve Bank of New York who will lead oversight of the biggest lenders including Deutsche Bank, and Finland’s Jukka Vesala, who oversaw the Comprehensive Assessment.

They inherit a banking industry loaded with unpaid debt. While the ECB says credit standards eased for a second quarter in the three months through September, an extra €136 billion in bad loans identified by the Comprehensive Assessment could hamper a return to growth. The path towards managing that legacy will be trodden by both the ECB’s new cadres and 5,000 national supervisors who remain in charge of the thousands of smaller banks in the euro region. The Frankfurt hub will make its presence felt by having its say on everything from bank licensing to merger approval, imposing fines and influencing international regulation.

is it really that crazy to tax what cost us all those trillions? Bloomberg’s ed. staff is not its brightest segment.

• Europe’s Crazy Finance Tax (Bloomberg)

Wrangling among the 11 euro-region nations planning to tax financial transactions is further evidence, if any were needed, that the levy is a bad idea that should be abandoned. The European Commission acknowledges that the latest version of its planned financial transactions tax (or Tobin tax, or Robin Hood tax, if you prefer) isn’t the best option. That, it says, would be a globally coordinated toll on trading – which is laughably unlikely. The narrower the tax’s coverage, the less sense it makes. That’s why Europe’s proposed transactions tax isn’t even second-best: An earlier effort to apply it across all 27 European Union members failed. In its current diluted form, the tax would charge 0.1% for nonderivative securities such as government bonds or company shares, and 0.01% on the notional value of derivatives trades. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain are the willing 11 countries; but they can’t agree on how to divvy up the proceeds.

They’re struggling to meet a self-imposed deadline for an agreement by the end of the year, with the duty scheduled to be imposed by the end of 2015. The most fundamental question about the tax still hasn’t been answered – what’s it for? If the aim is to reduce volatility and speculation in the securities markets, it’s far from clear that the tax would work, according to a study by the consulting firm PricewaterhouseCoopers. If the idea is to strengthen the economy, the tax is a failure at the planning stage. Depending on how the proceeds were spent, the commission itself estimates the transactions tax would raise the cost of capital and could cut as much as 0.28% from gross domestic product — a little more than it would raise in extra revenue. With the bloc threatening to slide back into recession, you’d think any policy that risked hurting growth would be rejected out of hand. The chief motivation for the tax is populist politics: It’s mostly about vengeance for the financial crisis. Bashing bankers, regardless of the collateral damage, remains popular with European politicians.

Get out of the EU!

• Vicious Circle of Bad Loans Ensnaring Italian Companies (Bloomberg)

Italian borrowers are becoming trapped in a vicious circle. As bank loans turn sour at the rate of about €2 billion ($2.5 billion) a month, corporate lending is dwindling to the least in more than a decade. Lenders are sitting on a total €174 billion of non-performing loans, an increase of 62% from three years ago, according to the latest data from Bank of Italy. New corporate lending dropped in August to €21 billion, the lowest since at least 2003, the data show. With public debt of more than €2 trillion, Italy is battling the longest economic slump since World War II that has thrown millions of people out of work. The scarcity of lending is spurring the European Central Bank’s asset purchase program with President Mario Draghi seeking to boost economic growth by freeing up bank balance sheets.

“Banks’ failure to deal with the soured loans is partly to blame for Italy’s worsening recession,” said Riccardo Serrini, chief executive officer at Prelios Credit Servicing, a Milan-based adviser for debt sales. “Without the debt burden, they could be helping to boost the economy.” Unlike lenders from Spain to the U.K., Italian banks are proving unable, or unwilling, to offload bad debts and free up their balance sheets. About €11 billion of loans where borrowers have fallen behind on payments were sold by Italian institutions since 2011, compared with €189 billion for all European lenders, according to PricewaterhouseCoopers.

Our world today: China prints $25 trillion and buys up Europe’s oldest civilizations with it.

• Portugal Sees Chinese Do 90% of Bids at Property Auction (Bloomberg)

As bargain-hunters waited in a packed room at a property auction in Lisbon last month, one language dominated their chat: Mandarin. About 90% of the bidders for the government-owned apartments and stores on offer were Chinese, according to Jorge Oliveira, the official overseeing the asset sale. They ended up acquiring more than two-thirds of the 45 properties, he said. “A Portuguese investor bought a store to start a bakery and coffee shop, but most of the properties went to the Chinese,” Oliveira said in an interview after the sale.

Portugal is the latest target for Chinese investors who have been acquiring buildings around the world as China allows freer movement of funds in and out of the country. The Chinese accounted for almost one in five foreign property purchases in Portugal during the first nine months, according to the Lisbon-based Portuguese Real Estate Professionals and Brokers Association. Bing Wong, a 52-year-old store-owner from Shanghai who attended the Oct. 24 auction, has been buying properties in Lisbon to create a network of outlets to serve the biggest concentration of Chinese residents in Portugal. “Lisbon is cheap if you compare it with other cities,” he said. “The economy is improving and there are some good deals to be done here.”

Expect major swings. Like everywhere else.

• Gold Bulls Retreat With $1.3 Billion Pulled From Funds (Bloomberg)

Speculators cut their bullish gold bets before prices tumbled to the lowest since 2010 as demand for a hedge against inflation diminished. The net-long position in New York futures and options declined for the first time in three weeks, U.S. government data show. Gains for the American economy have eroded the appeal of bullion as a haven and helped boost the dollar to a four-year high. The Federal Reserve said last week it saw enough improvement to end its bond-buying stimulus program. More than $1.3 billion was pulled from U.S. exchange-traded products tracking precious metals in October, the biggest monthly decline this year, data compiled by Bloomberg show.

Societe Generale’s Michael Haigh, the analyst who correctly predicted gold’s slump into a bear market last year, said the crash in oil prices underscores why inflation is unlikely to accelerate and adds “ammunition” to the pressure on bullion. “We are betting on lower gold prices and telling our clients that they should have zero allocation in gold,” Atul Lele, who helps oversee $5.1 billion as the chief investment officer at Deltec International Group, said Oct. 31. “The dollar will continue to strengthen as other nations are printing money at a time when the U.S. has taken stimulus off the table. U.S. growth is another reason why people will stay away from gold.” [..] Gold climbed 70% from December 2008 to June 2011 as the U.S. central bank bought debt and held borrowing costs near 0% in a bid to shore up growth. Prices slumped 28% last year, the most in three decades. The Fed’s $4 trillion of bond purchases since 2008 have yet to generate the runaway inflation that some gold buyers expected.

That’s the very essence of globalization.

• Globalisation Is Turning In On Itself And It Is Each Man For Himself (Pal)

A few things are also appearing on my radar screen – future visions if you like – that I want to share with you. These are not conclusive, but rather a stream of unfiltered thoughts, which will develop over time. I virtually never use geopolitics to assess asset markets. I have learned the hard way over time that it is the way to the poor house. Economies run financial markets, not wars. But I do note that at the margin, the world’s geopolitics is changing. Gone are the fluffy days of Putin shaking hands with George Bush agreeing to keep the world supplied with oil, gone are the days of China helping US firms make profits using their cheap labour, gone are open-for-business days of Europe, gone is the Japanese military neutrality, gone are the Saudis as an unshakeable ally, gone is Israel also a steadfast ally, etc. What is happening is something deeply concerning. Globalisation is turning in on itself and it is each man for himself. This was always going to be the outcome of an imbalanced, debt-drowning world.

Everyone wants a cheap currency and since that doesn’t work then everyone wants to find some way to get the upper hand on their own terms. I have had recent conversations with a long-term strategy group within the Pentagon about economic threats to the US and the risk of global collapse, and the potential for it to turn into a military outcome. It seems that the Department of Defence’s deep thinkers are mulling over the kinds of issues we all are – is the inevitable outcome a military one? They don’t know either but they give it a probability and thus need to understand it and plan for it. My issue has been for a long time that the true threat to the world is not the Muslim nations we so like to beat as a scapegoat (gotta have an enemy, right?) but China. The Pentagon’s think-tank also agrees. If China has an economic collapse, which again is a high probability event, then what are the odds of massive civil unrest?

And would a military conflict put the people back on the side of the government (i.e. how the Nazis came to power)? I agree. I think this is the risk somewhere down the road. I also, along with this defence strategy group, think that there is a risk that the Western powers meddling in the time of bad economic crisis will form strong alliances between let’s say Russia and China. In direct opposition to the government, many people inside the Pentagon are saying, “Please don’t fuck with Russia, they are not threatening us militarily but securing their own borders, we cannot control the outcomes, and most of them are bad, probably not militarily but economically, and economic instability causes outcomes we can’t forecast – even seizing the assets of powerful Russians has unintended consequences”. Here, here. The law of unintended circumstances is a bitch.

That’s great news!

• Wanted: 500,000 New Pilots In China By 2035 (Reuters)

China’s national civil aviation authority says the country will need to train about half a million civilian pilots by 2035, up from just a few thousand now, as wannabe flyers chase dreams of landing lucrative jobs at new air service operators. The aviation boom comes as China allows private planes to fly below 1,000 meters from next year without military approval, seeking to boost its transport infrastructure. Commercial airlines aren’t affected, but more than 200 new firms have applied for general aviation operating licences, while China’s high-rollers are also eager for permits to fly their own planes.

The civil aviation authority’s own training unit can only handle up to 100 students a year. With the rest of China’s 12 or so existing pilot schools bursting at the seams, foreign players are joining local firms in laying the groundwork for new courses that can run to hundreds of thousands of dollars per trainee. “The first batch of students we enrolled in 2010 were mostly business owners interested in getting a private license,” said Sun Fengwei, deputy chief of the Civil Aviation Administration of China’s (CAAC) pilot school. “But now more and more young people also want to learn flying so that they can get a job at general aviation companies.”

Reasonable historic view.

• 25 Years Ago, As The Berlin Wall Fell, Checks On Capitalism Crumbled (Guardian)

It was 25 years ago this month that communism ceased to be a threat to the west and to the free market. When sledgehammers started to dismantle the Berlin Wall in November 1989, an experiment with the command economy begun in St Petersburg more than 70 years before was in effect over, even before the Soviet Union fell apart. The immediate cause for the collapse of communism was that Moscow could not keep pace with Washington in the arms race of the 1980s. Higher defence spending put pressure on an ossifying Soviet economy. Consumer goods were scarce. Living standards suffered. But the problems went deeper. The Soviet Union came to grief because of a lack of trust. The economy delivered only for a small, privileged elite who had access to imported western goods. What started with the best of intentions in 1917 ended tarnished by corruption. The Soviet Union was eaten away from within. As it turned out, the end of the cold war was not unbridled good news for the citizens of the west.

For a large part of the postwar era, the Soviet Union was seen as a real threat and even in the 1980s there was little inkling that it would disappear so quickly. A powerful country with a rival ideology and a strong military acted as a restraint on the west. The fear that workers could “go red” meant they had to be kept happy. The proceeds of growth were shared. Welfare benefits were generous. Investment in public infrastructure was high. There was no need to be so generous once the Soviet Union was no more. What was known as neoliberal economics was born in the 1970s, but it was not until the 1990s that market forces reigned supreme. The free market spread to poorer parts of the world where it had previously been off limits, expanding the global workforce. That meant cheaper goods but it also put downward pressure on wages. What’s more, there was no longer any need to be inhibited. Those running companies could take a bigger slice of profits because there was nowhere else for workers to go. If citizens did not like “reform” of welfare states, they just had to lump it.

And, despite some grumbles, that’s pretty much what they did until the global financial crisis of 2008. This was a blow to the prevailing free-market orthodoxy for three reasons. First, it was the crash that should never have happened. Economists had constructed models that showed markets were always rational and self-correcting. It was quite a shock to find that they weren’t. Second, the financial crash made countries poorer. Deep recessions have been followed by historically weak recoveries characterised by falling real wages and cuts in benefits. Finally, the crisis and its aftermath have revealed the dark side of the post-cold war model. Instead of trickle down, there has been trickle up. Instead of the triumph of democracy, there has been the triumph of the elites.

A local supermarket had them on the menu just last week.

• Insects Could Be On Your Dinner Menu, Soon (CNBC)

Feeding the world’s growing population is a major issue for global policy makers, and Euromonitor thinks it has the answer: insects. The thought of eating insects may turn the stomachs in the western world, but an estimated 2 billion people worldwide eat insects, Euromonitor said in a report. Eating insects for their taste and nutritional value is popular in many developing regions of central and South America, Africa and Asia. Insects contain high levels of protein, minerals and vitamins, and are considered a healthier alternative to meat. Insects could therefore provide a viable solution to food shortages and the increasing demand for meat, the Euromonitor report said. Consumer expenditure on meat will rise by 87.9% in emerging and developing countries in 2014-2030, more than three times higher than the equivalent 25.3% growth in developed economies, according to Euromonitor’s forecasts.

At the same time, global food supply issues have become a more prominent concern. Extreme weather cycles have played havoc with harvests and crops leading to extreme spikes in food prices, protectionist policies and crop hoarding. In the past three years, Australia, Canada, China, Russia and the U.S. have all suffered huge harvest losses from floods and droughts, Reuters reported. Earlier this year, the United Nations Food and Agriculture Organization warned that global food production needed to increase by 60% by mid-century or risk food shortages that could bring social unrest and civil wars. “The most obvious challenge to insects becoming a viable food source for the future is that negative attitudes in Western cultures towards insects as food need to change,” said Media Eghbal, head of countries’ analysis at Euromonitor. Eghbal pointed out that as a result of the western world’s more squeamish palate, a more realistic solution could be using more insects in animal feed, demand for which is bound to increase as global demand for meat rises.

The report also highlighted other benefits of using insects as a source of food. Farming insects is better for the environment than traditional livestock farming as the process requires less land and water, it said, and produces less greenhouse gas emissions. It’s also cheaper. Consumers would pay less for these food products, which could help reduce poverty and boost economic growth. Insects are a popular source of food in countries including Thailand, Vietnam, Cambodia, China, Africa, Mexico, Columbia and New Guinea. The most popular delicacies include crickets, grasshoppers, ants, scorpions, tarantulas and various species of caterpillar, according to www.insectsarefood.com.

In human history, that’s a very long time.

• Greenhouse Gas Levels At Highest Point In 800,000 Years (ABC.au)

The world’s top scientists have given their clearest warning yet of the severe and irreversible impacts of climate change. The United Nations Intergovernmental Panel on Climate Change (IPCC) has released its synthesis report, a summary of its last three reports. It warns greenhouse gas levels are at their highest they have been in 800,000 years, with recent increases mostly due to the burning of fossil fuels. “Continued emission of greenhouse gases will cause further warming and long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems,” the report said. “Limiting climate change would require substantial and sustained reductions in greenhouse gas emissions which, together with adaptation, can limit climate change risks.”

IPCC chairman Rajendra Pachauri said the comprehensive report brings together “all the pieces of the puzzle” in climate research and predictions. “It’s not discrete, and [highlights] distinct elements of climate change that people have to deal with, but [also] how you might be able to deal with this problem on a comprehensive basis by understanding how these pieces of the puzzle actually come together,” Dr Pachauri said. The report reiterates that the planet is unequivocally warming, that burning fossil fuels is significantly increasing greenhouse gas emissions and the effects of climate change – like sea level rises – are already being felt.It also said most of the world’s electricity should be produced from low carbon sources by 2050 and that fossil fuel burning for power should be virtually stopped by the end of the century.

” … it doesn’t mean we have to sacrifice economic growth”. What if it did? Why does an Institute for Climate Impact Research have a chief economist in the first place?

• UN Sees Irreversible Damage to Planet From Fossil Fuels (Bloomberg)

Humans are causing irreversible damage to the planet from burning fossil fuels, the biggest ever study of the available science concluded in a report designed to spur the fight against climate change. There’s a high risk of widespread harm from rising global temperatures, including floods, drought, extinction of species and ocean acidification, if the trend for increasing carbon emissions continues, a panel convened by a United Nations body said today in Copenhagen. Humans can avoid the worst if they significantly cut emissions and do so swiftly, it said. “We must act quickly and decisively if we want to avoid increasingly disruptive outcomes,” UN Secretary-General Ban Ki-moon told reporters in Copenhagen. “If we continue business-as-usual, our opportunity to keep temperature rises below” the internationally agreed target of 2 degrees Celsius, “will slip away within the next decades,” he said.

The report is designed to guide policy makers around the world in writing laws and regulations that will curb greenhouse gases and protect nations most at risk from climate change. It will also feed into talks among 195 nations working on an international agreement to rein in emissions that envoys aim to reach in Paris in December 2015. “We need to get to zero emissions by the end of this century” to keep global warming below dangerous levels, Ottmar Edenhofer, chief economist at the Potsdam Institute for Climate Impact Research, outside Berlin, and a co-author of the report, said in a telephone interview. “This requires a huge transformation, but it doesn’t mean we have to sacrifice economic growth.”

Debt Rattle October 23 2014

Oct 232014

October 23, 2014 Posted by Raúl Ilargi Meijer at 10:38 am Finance Tagged with: bonds, CO2, debt, ebola, ECB, financialization, Germany, inequality, Russia, Shale, tobacco, Treasuries 6 Responses »

DPC Bromfield Street in Boston 1908

• Bond Funds Stock Up On Treasuries In Prep For Market Shock (Reuters)

• Investors Pull Shale Money, Put Brakes on Wall Street-Funded Boom (Bloomberg)

• Solid Majority In US Says Country ‘Out Of Control’ (CNBC)

• It Will Take 398,879,561 Years To Pay Off The US Government Debt (Black)

• Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams (Bloomberg)

• Why It’s Now Too Late For Germany To Rescue The Eurozone Alone (Telegraph)

• Why ‘Italy Doesn’t Need Germany’s Help’ (CNBC)

• Europe Can Learn From US And Make Each State Liable For Its Own Debt (Sinn)

• ‘Poets and Alchemists’: Berlin and Paris Undermine Euro Stability (Spiegel)

• S&P Warns Crisis Not Over As France Output Tumbles (CNBC)

• Central Banker Admits QE Leads To Wealth Inequality (Zero Hedge)

• French Envoy To US Says ‘Poker Player’ Putin Bluffed and Won (Bloomberg)

• Canada’s Biggest Banks Say Worst to Come for Loonie (Bloomberg)

• The Financialization of Life (Real News Network)

• Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union (AEP)

• Big Tobacco Puts Countries On Trial As Concerns Over TTIP Mount (Independent)

• Tesco’s Profits Black Hole Bigger Than Expected (Guardian)

• EU Braces for Battle to Set Energy, CO2 Goals for Next Decade (Bloomberg)

• Several Factors Conspire To Increase Fossil Fuel Use (FT)

• Water Crisis Seen Worsening as Sao Paulo Nears ‘Collapse’ (Bloomberg)

• Some US Hospitals Weigh Withholding Care To Ebola Patients (Reuters)

Too many kinds of bonds carry too much risk going forward.

• Bond Funds Stock Up On Treasuries In Prep For Market Shock (Reuters)

U.S. corporate bond funds this year are adding Treasuries to their holdings at more than twice the rate of corporate debt amid concern that the struggling European economy and potential changes in Federal Reserve policy will drag down profits at U.S. corporations. Through September, corporate bond portfolios boosted their holdings of U.S. government debt by 15%, compared with a 6.5% increase in corporate bonds during the same period, according to Lipper Inc data. The funds now hold about $13 billion in Treasuries, 15% more than the $11.3 billion they held at the end of 2013. Corporate bond funds typically invest in a range of debt that includes mortgage-backed securities, U.S. Treasuries and bonds backed by student loans, credit cards and auto loans. Some corporate junk bond funds have guidelines that allow them to buy individual stocks. The move to buy Treasuries, which are more easily traded than most corporate bonds, show that managers anticipate market turmoil that could lead to redemption demands from investors.

Matt Toms, head of fixed income at New York-based Voya Investment Management, said he has cut exposure to corporate bonds in favor of mortgage-backed securities, for example. In particular, he has reduced corporate debt issued by U.S. financial companies because of their exposure to the weak European economy. He sees mortgage-backed bonds as more U.S.-centric because they are backed by the ability of American homeowners to make good on their monthly mortgage payments. “The volatility in Europe could translate more quickly through the corporate debt issued by U.S. banks,” Toms said. A year ago, the Voya Intermediate Bond Fund’s top 10 holdings included debt issued by Morgan Stanley, JPMorgan and Goldman Sachs. But more recently, none of those banks’ debt cracked the top 10 holdings of the fund, disclosures show. Toms, who runs the $1.9 billion Voya Intermediate Bond Fund, said nearly two-thirds of the portfolio’s assets are in government bonds or government-related securities. “That’s a highly liquid pool,” he said.

“The drop wiped $158.6 billion off the market value of 75 shale producers since the end of August.” Most of it borrowed money. That’s a lot of mullah.

• Investors Pull Shale Money, Put Brakes on Wall Street-Funded Boom (Bloomberg)

Falling oil prices are testing investors’ commitment to the Wall Street-funded shale boom. Energy stocks led the plunge earlier this month in U.S. equities and the cost of borrowing rose. The Energy Select Sector Index is down 14% since the end of August, compared with 3.8% for the Standard & Poor’s 500 Index. The yield for 190 bonds issued by U.S. shale companies increased by an average of 1.16 percentage points. Investors’ sentiment toward the oil and gas industry has “certainly changed in the last 30 days,” said Ron Ormand, managing director of investment banking for New York-based MLV & Co. with more than 30 years of experience in energy. “I don’t think the boom is over but I do think we’re in a period now where people are going to start evaluating their budgets.” What distinguishes this U.S. energy boom from the way the industry operated in the past is the involvement of outside investors. In 1994, drillers funded 42% of their own capital spending, according to an Independent Petroleum Association of America member survey.

Today, shale companies are outspending their cash flow by 50% thanks to borrowed money, according to the IPAA. They’re selling more than twice as much equity to the public as they did 10 years ago, according to Tudor Pickering Holt, a Houston investment bank. “After the tech bubble and then the real estate bubble, Wall Street had to put its money somewhere, and it looks like they put a lot of it into domestic onshore oil and gas production,” said Michael Webber, the deputy director of the Energy Institute at the University of Texas at Austin, who advises private investors. West Texas Intermediate, the benchmark U.S. oil price, has fallen 25% since its recent peak on June 20. Between the S&P 500’s record high on Sept. 18 and its five-month low on Oct. 15, energy companies led the index down 14%, more than any other industry, data compiled by Bloomberg show. When the market rebounded on Oct. 16, energy again took the lead, gaining 1.7%. The drop wiped $158.6 billion off the market value of 75 shale producers since the end of August.

“Such an environment would tend to favor Republicans, but their advantage is limited by the fact that people don’t like them, either.”

• Solid Majority In US Says Country ‘Out Of Control’ (CNBC)

With just two weeks to go until Election Day, a clear picture of the American electorate is emerging, and it is not pretty, for either party. The country is anxious about the economy, Ebola and Islamic extremists, and does not really feel Republicans or Democrats have solutions to any of these vexing problems. The latest Politico Battleground Poll of likely voters in key House and Senate races finds that 50% say the nation is “off on the wrong track” while just 20% say things are “generally headed in the right direction.” A remarkable 64% say things in the U.S. are “out of control” while just 36% say the U.S. is in “good position to meet its economic and national security challenges.” The economy continues to dominant the issue landscape with 40% rating it the top issue, to 20% for national security. President Barack Obama remains mired in negative territory, with 47% approving of his job performance and 53% disapproving.

Such an environment would tend to favor Republicans, but their advantage is limited by the fact that people don’t like them, either. In total, 38% approve of Democrats in Congress, while just 30% approve of Republicans. On the generic ballot questions, Democrats enjoy 41% support (including the independent Senate candidate in Kansas) while Republicans get 36%. That’s hardly the backdrop for a massive GOP wave, though the polls suggest Republicans are still significant favorites to pick up the six seats they need to control the Senate next year. The Ebola outbreak has clearly helped shape the final weeks in several Senate races, emerging as a significant wild card issue. In the Politico poll, only 22% of respondents said they had “a lot of confidence” that the federal government is doing all it can to contain the deadly disease. And the poll finished on Oct. 11, before the hospitalization of a second Dallas nurse.

Work-years, that is. Not a bad concept.

• It Will Take 398,879,561 Years To Pay Off The US Government Debt (Black)

The US government’s debt is getting close to reaching another round number – $18 trillion. It currently stands at more than $17.9 trillion. But what does that really mean? It’s such an abstract number that it’s hard to imagine it. Can you genuinely understand it beyond just being a ridiculously large number? Just like humans find it really hard to comprehend the vastness of the universe. We know it’s huge, but what does that mean? It’s so many times greater than anything we know or have experienced. German astronomer and mathematician Friedrich Bessel managed to successfully measure the distance from Earth to a star other than our sun in the 19th century. But he realized that his measurements meant nothing to people as they were. They were too abstract. So he came up with the idea of a “light-year” to help people get a better understanding of just how far it really is. And rather than using a measurement of distance, he chose to use one of time.

The idea was that since we—or at least scientists—know what the speed of light is, by representing the distance in terms of how long it would take for light to travel that distance, we might be able to comprehend that distance. Ultimately using a metric we are familiar with to understand one with which we aren’t. Why don’t we try to do the same with another thing in the universe that’s incomprehensibly large today—the debt of the US government? Even more incredible than the debt owed right now is what’s owed down the line from all the promises politicians have been making decade after decade. These unfunded liabilities come to an astonishing $116.2 trillion. These numbers are so big in fact, I think we might need to follow Bessel’s lead and come up with an entire new measurement to grasp them. Like light-years, we could try to understand these amounts in terms of how long it would take to pay them off. We can even call them “work-years”.

So let’s see—the Social Security Administration just released data for the average yearly salary in the US in fiscal year that just ended. It stands at $44,888.16. The current debt level of over $17.9 trillion would thus take more than 398 million years of working at the average wage to pay off. This means that even if every man, woman and child in the United States would work for one year just to help pay off the debt the government has piled on in their name, it still wouldn’t be enough. Mind you that this means contributing everything you earn, without taking anything for your basic needs—which equates to slavery.

The numbers get scary.

• Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams (Bloomberg)

For investors, the European Central Bank’s yearlong evaluation of the region’s banks isn’t just about who passes and who fails. The bigger question will be how much the ECB marks down lenders’ capital during its balance sheet inspection known as the asset quality review. The central bank and national regulators will publish their findings on Oct. 26. “The focus will be on how the asset quality review influences the development of capital ratios and non-performing loans,” said Michael Huenseler at Assenagon Asset Management SA in Munich. The largest impact may be on Italian lenders led by Banca Monte dei Paschi di Siena, Unione di Banche Italiane and Banco Popolare, according to a report last month from Mediobanca analysts. They foresee a gap of more than 3 percentage points between the capital ratios published by the companies and the results of the ECB’s asset quality review. Deutsche Bankmay see its capital fall by €6.7 billion, cutting its ratio by 1.9 percentage points, the analysts said.

The biggest lenders may see their combined capital eroded by about €85 billion in the asset quality review because of extra provisioning requirements, according to the Mediobanca analysts, led by Antonio Guglielmi. That’s equivalent to a reduction of 1.05 percentage points in their average common equity Tier 1 ratio, the capital measure the ECB is using to gauge the health of the banks under study, the analysts said. The AQR evaluates lenders’ health by scrutinizing the value of their loan books, provisioning and collateral, using standardized definitions set by European regulators. To pass, a bank must have capital amounting to at least 8% of its assets, when weighted by risk. The bigger the hit to their capital, the more likely lenders will need to take steps to increase it. Banks the ECB will supervise directly already bolstered their balance sheets by almost €203 billion since mid-2013, ECB President Mario Draghi said this month, by selling stock, holding onto earnings, disposing of assets, and issuing bonds that turn into equity when capital falls too low, among other measures.

It was always just a mirage.

• Why It’s Now Too Late For Germany To Rescue The Eurozone Alone (Telegraph)

The eurozone is yet again in a nasty state. As it suffers from low growth and low inflation, the two combine to make a nasty cocktail. Without much of either, unemployment remains stuck at an eye wateringly high 11.5pc, and government debt burdens are likely to feel increasingly heavy. The European Central Bank (ECB) has announced a variety of acronyms – CBPP3, TLTROs, and an ABS purchase scheme – all stimulus measures designed to combat the euro area’s low inflation crisis. Yet so far, they’ve been insufficient to raise expectations of future inflation, implying that the firepower just isn’t strong enough. Economists are hoping that the ECB will deploy outright quantitative easing, and start buying up the sovereign bonds of eurozone governments. Without it, analysts have warned that both the eurozone as a whole, and even Germany – its former powerhouse economy – could now enter their third technical recession since 2008. Yet hopes of a monetary bazooka have so far been quashed by political concerns.

Some corners are hoping for Germany to launch its own form of stimulus. But a new report from ratings agency Standard & Poor’s suggests that such a move would be too little, too late, and “alone would have little effect on the rest of the eurozone”. “On the fiscal side … the margin for manoeuvre available to most eurozone members is still very limited”, the report states. “This is why the focus has unavoidably turned to Germany, the only large eurozone country with both a current surplus and a balanced budget”. According to S&P’s analysis, a stimulus package worth as much as 1pc of German GDP would provide just a 0.3pc boost to eurozone GDP, while creating 210,000 new jobs. The report states that the numbers: “put Germany’s potential contribution to higher growth in the eurozone into perspective, with the conclusion being that a stimulus package in that country alone would have a modest effect on its neighbours”.

In any case, it shouldn’t. But Italy’s debt is so high (133% of GDP) that the only way out leads out of the EU.

• Why ‘Italy Doesn’t Need Germany’s Help’ (CNBC)

Despite Italy slipping back into recession amid a stagnant economic environment, the president of one of the country’s richest regions said the country doesn’t need Germany — or anybody else’s — help to recover. “I don’t want to be helped by the Germans or by anybody else, I want to be strong enough to grow and to sort my own problems. Can we do this as Italians? Yes, we can. We just have to work harder and do the right things,” Roberto Maroni, the President of the Lombardy region in northern Italy, told CNBC on Tuesday. “In Italy, it’s more difficult than elsewhere in the world because we are Italians. It’s a good thing to be Italian but it’s more difficult to do the same thing in Italy than in Germany or in France. But I think that we will have to do it.” Maroni’s comments come at a time of economic woe for Italy. The country slipped back into recession in the second quarter of 2014, according to data released by Italy’s statistics agency ISTAT, in August.

In an attempt to boost growth, Prime Minister Matteo Renzi unveiled a budget-busting program of tax cuts and additional borrowing in order to resuscitate the economy. He has also proposed sweeping reforms to the labor market to encourage hiring as the unemployment rate topped 12.3% in August. The 2015 budget has put Italy on a collision course with Europe, however, as it pushes the country’s public deficit right up to the 3% limit set by the European Commission. Maroni, a senior member and former leader of the opposition right-wing party Northern League, said the proposals were not enough on their own. “I think that he is doing maybe the right things but in the wrong way. He wants to reform the labor market but…it only works if you have economic growth. That is the way you can create new jobs, not simply changing the laws.” “We’re in a moment when economic growth is far away from coming to Italy,” he added. “Before making these reforms you need to boost economic growth and that’s not what Matteo Renzi is doing now.”

Perhaps true, but certainly too late.

• Europe Can Learn From US And Make Each State Liable For Its Own Debt (Sinn)

The French prime minister, Manuel Valls, and his Italian counterpart, Matteo Renzi, have declared – or at least insinuated – that they will not comply with the fiscal compact to which all of the eurozone’s member countries agreed in 2012; instead, they intend to run up fresh debts. Their stance highlights a fundamental flaw in the structure of the European Monetary Union – one that Europe’s leaders must recognise and address before it is too late. The fiscal compact – formally the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union [PDF] – was the quid pro quo for Germany to approve the European Stability Mechanism (ESM), which was essentially a collective bailout package. The compact sets a strict ceiling for a country’s structural budget deficit and stipulates that public-debt ratios in excess of 60% of GDP must be reduced yearly by one-twentieth of the difference between the current ratio and the target.

Yet France’s debt/GDP ratio will rise to 96% by the end of this year, from 91% in 2012, while Italy’s will reach 135%, up from 127% in 2012. The effective renunciation of the fiscal compact by Valls and Renzi suggests that these ratios will rise even further in the coming years. In this context, eurozone leaders must ask themselves tough questions about the sustainability of the current system for managing debt in the EMU. They should begin by considering the two possible models for ensuring stability and debt sustainability in a monetary union: the mutualization model and the liability model.

Europe has so far stuck to the mutualisation model, in which individual states’ debts are underwritten by a common central bank or fiscal bailout system, ensuring security for investors and largely eliminating interest-rate spreads among countries, regardless of their level of indebtedness. In order to prevent the artificial reduction of interest rates from encouraging countries to borrow excessively, political debt brakes are instituted. In the eurozone, mutualisation was realised through generous ESM bailouts and €1tn ($1.27tn) worth of TARGET2 credit from national printing presses for the crisis-stricken countries. Moreover, the European Central Bank pledged to protect these countries from default free of charge through its “outright monetary transactions” (OMT) scheme – that is, by promising to purchase their sovereign debt on secondary markets – which functions roughly as Eurobonds would. The supposed hardening of the debt ceiling in 2012 adhered to this model.

” … as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset. That time is now.”

• ‘Poets and Alchemists’: Berlin and Paris Undermine Euro Stability (Spiegel)

Market uncertainty over the future of the euro has returned, but that hasn’t stopped France from flouting European Union deficit rules. Berlin is already busy hashing out a dubious compromise. Following three hours of questioning at European Parliament, a visibly exhausted Pierre Moscovici switched to German in a final effort to assuage skepticism from certain members of European Parliament. “As commisioner, I will fully respect the pact,” he said. Moscovici was French finance minister from 2012 until this April and will become European commissioner for economic and financial affairs when the new Commission takes office next month. But can he be taken at his word? There is room for doubt. In response to the unprecedented euro-zone debt crisis, the European Union agreed to strengthen its Stability and Growth Pact in recent years. Member states gave the European Commission in Brussels greater leeway to monitor national budgets and also bestowed it with rights to levy stiffer fines for countries that violate those rules.

Smaller member states have already been forced to comply. Still, as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset. That time is now. And the big EU member state in question is France. The development is creating a dilemma for Merkel. The issue is far greater than a few tenths of a percentage point in the French budget deficit. At stake are France’s national pride and sovereignty — and the question as to whether the lessons of the crisis can actually be applied in practice. Also at stake is the euro-zone’s trustworthiness, and whether member states will once again fritter away global faith in the common currency by not abiding by their own internal rules. “The markets are watching us,” says one member of the German government — and he doesn’t sound particularly confident that the world will be impressed.

The markets are indeed jittery. The German economy is growing more sluggishly than expected and is no longer strong enough to buoy the rest of the euro zone. Interest rates for Greek government bonds have suddenly surged, likely because of domestic political instability, rising close to the levels that threatened to push the country into bankruptcy in early 2010. Meanwhile, the European Central Bank has already used up a good deal of the instruments it might have used to combat a new crisis.

What, did anyone suggest the crisis was over?

• S&P Warns Crisis Not Over As France Output Tumbles (CNBC)

Ratings agency Standard & Poor’s warned on Thursday that the euro zone crisis was entering a “stubborn phase of subdued growth” in what it says is a new stage in the region’s economic crisis. The warning comes as new data showed a deepening downturn in France’s private sector economy during October. Markit’s Flash Composite Output Index (PMI) for France slipped to 48.0, from 48.4 in September. That was its lowest reading since February. A reading below 50 marks a contraction in private sector activity. “We believe that the euro zone’s problems are still unresolved,” said Standard & Poor’s credit analyst Moritz Kraemer in a statement. Further data released by Markit showed the private sector in Germany grew, offering some hope after a series of disappointing data for the euro zone’s largest economy. The flash composite PMI for October climbed to 54.3 from 54.1 last month.

Well, obviously. That’s the whole idea.

• Central Banker Admits QE Leads To Wealth Inequality (Zero Hedge)

Six years after QE started, and just about the time when we for the first time said that the primary consequence of QE would be unprecedented wealth and class inequality (in addition to fiat collapse, even if that particular bridge has not yet been crossed), even the central banks themselves – the very institutions that unleashed QE – are now admitting that the record wealth disparity in the world – surpassing that of the Great Depression and even pre-French revolution France – is caused by “monetary policy”, i.e., QE. Case in point, during the Keynote speech by Yves Mersch, ECB executive board member, in Zurich on 17 October 2014 titled “Monetary policy and economic inequality” he said:

More generally, inequality is of interest to central banking discussions because monetary policy itself has distributional consequences which in turn influence the monetary transmission mechanism. For example, the impact of changes in interest rates on the consumer spending of an individual household depend crucially on that household’s overall financial position – whether it is a net debtor or a net creditor; and whether the interest rates on its assets and liabilities are fixed or variable.

Such differences have macroeconomic implications, as the economy’s overall response to policy changes will depend on the distribution of assets, debt and income across households – especially in times of crisis, when economic shocks are large and unevenly distributed. For example, by boosting – first – aggregate demand and – second – employment, monetary easing could reduce economic disparities; at the same time, if low interest rates boost the prices of financial assets while punishing savings deposits, they could lead to widening inequality.

Alas, in the past 6 years, low interest rates have not only boosted financial asset prices but have resulted in the biggest artificial asset bubble ever conceived. As for reducing unemployment, don’t ask Europe – and its unprecedented record unemployment, especially among the youth – how that is going. As for the US where unemployment is “dropping”, ask the 93.5 million Americans who have dropped out of the labor force, those whose real wages haven’t risen in the past 20 years, or the soaring part-time workers just how effective monetary policy has been in the US.

Weird ideas some people have. But I’m sure they go down well at a Bloomberg Government breakfast in Washington.

• French Envoy To US Says ‘Poker Player’ Putin Bluffed and Won (Bloomberg)

Vladimir Putin has outmaneuvered his opponents and humiliated Ukraine by continuing to back pro-Russian separatists and flouting a cease-fire, making it crucial that sanctions on Russia remain firm, France’s ambassador to the U.S. said. The Russian president “has won because we were not ready to die for Ukraine, while apparently he was,” Ambassador Gerard Araud said yesterday at a Bloomberg Government breakfast in Washington, in remarks he said represented his personal opinion. Echoing the view of other European envoys in Washington, Araud expressed concern that the Ukraine conflict has hit an impasse, leaving Putin the winner by default.

While many observers have called Putin a geopolitical chess player, he said, the Russian leader is more a “poker player really, putting all the money on the table, saying, ‘Do the same,’ and of course we blink. We don’t do the same.” The economic sanctions against Russia must stay in place to prevent Putin from going further, said Araud, who moved to Washington in September after serving as the French ambassador to the United Nations. “The question is there on the table: When is Putin going to stop?” Araud said. “That’s the reason that we need to keep the sanctions” because, “let’s be frank, it’s more or less the only weapon that we have. We are not going to send our soldiers in Ukraine. It does not make sense to send weapons to the Ukrainians, because the Ukrainians would be defeated real easily, so it will only prolong the war” and lead to a “still bigger Russian victory.”

And for them. And for Canadians.

• Canada’s Biggest Banks Say Worst to Come for Loonie (Bloomberg)

The oil boom that powered Canada’s recovery from its 2009 recession is turning into a bust for the nation’s dollar. Canada’s currency tumbled this month to a five-year low of C$1.1385 per U.S. dollar as the price of oil, the country’s biggest export, fell 30% from a June peak. Without a sustained increase in crude, the local dollar will weaken at least another 4% to C$1.18, according to Toronto-Dominion Bank and Royal Bank of Canada, the nation’s two biggest lenders. “The risk is, a sustained push lower in oil prices cuts Canadian growth,” Shaun Osborne, the chief currency strategist at Toronto-Dominion, Canada’s largest bank, said by phone on Oct. 15. “Any sort of setback for growth and investment in the energy sector is likely to have a fairly significant knock-on effect for the rest of the economy.”

The slide in oil, caused by a combination of oversupply and falling global demand, is a setback for Canada. Since the recession, most new business investment and jobs have come from the oil-rich province of Alberta. The nation’s trade surplus turned into a deficit in August, and economic growth stalled the previous month. Money managers are boosting bets the Canadian dollar will keep weakening. Hedge funds and other large speculators pushed net-bearish wagers on the currency to 16,167 contracts in the week ending Oct. 17, the most since June, according to the Commodity Futures Trading Commission in Washington. Investors held net-long positions as recently as Sept. 26.

Interesting view.

• The Financialization of Life (Real News Network)

Costas Lapavitsas, Economics Professor, Univ. of London: I will present to you some ideas that I have dealt with in my new book, Profiting without Producing, which has just come out, which discuss finance and the rise of finance. I can’t tell you very much about Baltimore because I don’t know about it, but I will tell you quite a few things about what I call the financialization of capitalism, which impacts on Baltimore and on many other places. So, getting on with it, and very quickly because time is short, I think it’s fair to say and all of us would agree that finance has an extraordinary presence in contemporary mature economies. It’s very clear in the case of the U.S., but equally clear in the case of the United Kingdom, where I live, Japan, about which I know quite a bit, Germany, and so on. There’s no question at all about it.

Finance is a sector of the economy in mature countries which has grown enormously in terms of size relative to the rest of the economy, in terms of penetration into everyday lives of ordinary people, but also small and medium businesses and just about everybody. And in terms of policy influence, finance clearly influences economic policy on a national level in country after country. The interests of finance are paramount in forming economic policy. So that is clear. Finance has become extraordinarily powerful. And that, in a sense, is the first immediate way in which we can understand financialization. Something has happened there, and modern mature capitalism appears to have financialized. Now, what is this financialization? The best I can do right now is to give you the gist of this argument of mine in my book. And I will come clean immediately and tell you that I think financialization is basically a profound historical transformation of modern capitalism.

Ambrose has it in for Russia.

• Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union (AEP)

It took two years for crumbling oil prices to bring the Soviet Union to its knees in the mid-1980s, and another two years of stagnation to break the Bolshevik empire altogether. Russian ex-premier Yegor Gaidar famously dated the moment to September 1985, when Saudi Arabia stopped trying to defend the crude market, cranking up output instead. “The Soviet Union lost $20bn per year, money without which the country simply could not survive,” he wrote. The Soviet economy had run out of cash for food imports. Unwilling to impose war-time rationing, its leaders sold gold, down to the pre-1917 imperial bars in the vaults. They then had to beg for “political credits” from the West. That made it unthinkable for Moscow to hold down eastern Europe’s captive nations by force, and the Poles, Czechs and Hungarians knew it. “The collapse of the USSR should serve as a lesson to those who construct policy based on the assumption that oil prices will remain perpetually high. A seemingly stable superpower disintegrated in only a few short years,” he wrote.

Lest we engage in false historicism, it is worth remembering just how strong the USSR still seemed. It knew how to make things. It had an industrial core, with formidable scientists and engineers. Vladimir Putin’s Russia is a weaker animal in key respects, a remarkable indictment of his 15-year reign. He presides over a rentier economy, addicted to oil, gas and metals, a textbook case of the Dutch Disease. The IMF says the real effective exchange rate (REER) rose 130pc from 2000 to 2013 during the commodity super-cycle, smothering everything else. Non-oil exports fell from 21pc to 8pc of GDP. “Russia is already in a perfect storm,” said Lubomir Mitov, Moscow chief for the Institute of International Finance. “Rich Russians are converting as many roubles as they can into foreign currencies and storing the money in vaults. There is chronic capital flight of 4pc to 5pc of GDP each year but this is no longer covered by the current account surplus, and now sanctions have caused foreign capital to turn negative, too.”

“The financing gap has reached 3pc of GDP, and they have to repay $150bn in principal to foreign creditors over the next 12 months. It will be very dangerous if reserves fall below $330bn,” he said. “The benign outcome is a return to the stagnation of the Brezhnev era in the early 1980s, without a financial collapse. The bad outcome could be a lot worse,” he said. Mr Mitov said Russia is fundamentally crippled. “They have outsourced their brains and lost their technology. The best Russian engineers go to work for Boeing. The Russian railways are run on German technology. It looked as if Russia was strong during the oil boom but it was an illusion and now they are in an even worse position than the Soviet Union,” he said.

The TTIP is a real evil, that’s why it’s being discussed in secret.

• Big Tobacco Puts Countries On Trial As Concerns Over TTIP Mount (Independent)

Tiny Uruguay may not seem a likely front line in the war of the quit smoking brigade against Big Tobacco. But the Latin American country has unwittingly found itself not just in the thick of that battle, but in the middle of an even bigger fight – that of the rising opposition to international free trade deals. Philip Morris is suing Uruguay for increasing the size of the health warnings on cigarette packs, and for clamping down on tobacco companies’ use of sub-brands like Malboro Red, Gold, Blue or Green which could give the impression some cigarettes are safe to smoke. The tobacco behemoth is taking its legal action under the terms of a bilateral trade agreement between Switzerland – where it relatively recently moved from the US – and Uruguay. The trade deal has at its heart a provision allowing Swiss multinationals the right to sue the Uruguayan people if they bring in legislation that will damage their profits.

The litigation is allowed to be done in tribunals known as international-state dispute settlements (ISDS), ruled upon by lawyers under the auspices of the World Trade Organisation. Such an ISDS agreement is also core to the EU’s planned Transatlantic Trade and Investment Partnership (TTIP) treaty being negotiated with the US. The critics of TTIP fear the tribunals will see US multinationals sue European governments in such areas as regulating tobacco, health and safety, and quality controls. In the UK, critics have been particularly vocal about fears US healthcare companies now running parts of the NHS might use ISDS tribunals to sue future British governments wanting to reverse the accelerating privatisation of parts of the health service. The British Government argues that such worries are “misguided” and says TTIP will create jobs and be good for the economy. ISDS agreements are necessary to give companies the confidence to invest, it says, particularly in more politically unstable countries.

Getting worse all the time.

• Tesco’s Profits Black Hole Bigger Than Expected (Guardian)

Tesco has revealed that the hole in its first half profits is bigger than previously thought and runs back into previous financial years, plunging the embattled supermarket into fresh turmoil. Confidence in what was once one of the most respected companies in the FTSE 100 was also dealt a fresh blow by the admission that it was unable to provide any guidance on full-year profits because of a number of uncertainties, sending its shares down 6% to 170p.25p when the stock market opened. The company’s shares have almost halved in value since the start of this year. It also revealed that its under fire chairman Sir Richard Broadbent is to be replaced, after a disastrous three year tenure. Tesco said the month-long investigation by forensic accountants from Deloitte had established that its first half profits had been artificially inflated by £263m rather than the £250m the company had originally estimated.

The problem relates to when the retailer books payments received from suppliers who pay the big grocery chains to run in-store promotions on their behalf. Deloitte said £118m of the figure related to the first six months of the current financial year but that £145m related to previous years. Chief executive Dave Lewis said the Deloitte report would be passed to the FCA and that from the company’s perspective this “drew a line” under the issue. With that out of the way he outlined three immediate priorities: to restore the competitiveness of the core UK business, to protect and strengthen its balance sheet and to begin “the long journey of rebuilding trust and transparency in the business and the brand”. The investigation, prompted by information from a whistleblower, has resulted in the suspension of eight senior executives, including Chris Bush, the head of the UK food business.

The costs of cleaner energy, or the cost of political incompetence?

• EU Braces for Battle to Set Energy, CO2 Goals for Next Decade (Bloomberg)

European Union leaders face heated negotiations today on a deal to toughen emission-reduction policies in the next decade and boost the security of energy supplies amid a natural-gas dispute between Russia and Ukraine. The main challenge for the 28 heads of government will be to iron out differences on a strategy that ensures cheaper and safer energy while stepping up climate-protection measures. The agenda of the two-day Brussels summit, the final one to be chaired by EU President Herman Van Rompuy, also features a debate on the European economy and on measures to prevent the spread of the Ebola virus. Countries including Poland, Portugal, Spain, France and the U.K. have signaled that the outstanding issues that leaders will need to resolve at the gathering include sharing the burden of carbon cuts, the nature of energy targets and plans for power and gas interconnectors.

“It will not be easy to reach an accord, many countries have energy problems, and some have re-opened coal mines,” French energy minister Segolene Royale told lawmakers in Paris yesterday. “But I think we will have the wisdom, the strength, and the sense of responsibility to reach an accord.” EU leaders plan to back a binding target to cut greenhouse gases by 40% by 2030 from 1990 levels, accelerating the pace of reduction from 20% set for 2020, according to draft conclusions for the meeting obtained by Bloomberg News. An agreement would ensure the bloc remains the leader in the fight against global warming before a United Nations climate summit in Lima in December and a worldwide deal expected to be clinched in 2015 in Paris, according to the European Commission, the EU’s executive arm. While differences among member states on the carbon target are narrowing down, leaders still need to resolve issues including emissions burden-sharing, which pits richer countries in western Europe against mostly ex-communist east and central European nations led by Poland.

“Coal is at a crossroads in Europe. For some, the fuel is too polluting to keep burning in such high quantities. But for others, it is too cheap, too abundant and too politically strategic to abandon.” Germany invests heavily in brown coal.

• Several Factors Conspire To Increase Fossil Fuel Use (FT)

Under slate-grey skies one chilly October morning in Warsaw, Ewa Kopacz, Poland’s new prime minister, saw first-hand the front line in Europe’s high-stakes battle over the future of coal. Outside parliament, where she was to make her maiden speech as the country’s leader, hundreds of helmeted miners sounded foghorns, chanted slogans and waved banners in a protest calling for action to save their industry. Coal is at a crossroads in Europe. For some, the fuel is too polluting to keep burning in such high quantities. But for others, it is too cheap, too abundant and too politically strategic to abandon. The midterm future of Europe’s energy mix, and that of coal, may well be decided in Poland, the EU’s second-largest producer and consumer of the black stuff. Coal is the dirtiest of all fossil fuels. Historically, its use in environmentally aware Europe has been falling. But consumption has ticked up since the US shale gas boom sent coal prices tumbling, and countries such as Poland are resisting calls to switch to lower-emission alternatives.

“It will be extremely difficult politically and economically for us just to end our dependence on coal,” says Oktawian Zajac, head of the coal practice at Boston Consulting Group in Warsaw. “In the medium term, the top priority is not to switch away from coal, but to produce coal that is economically justifiable.” That is not the view in Brussels, where diplomats are trying to hammer out an EU deal to curb the bloc’s carbon emissions by 2030. That deal is likely to revolve around whether countries are willing to pay for the environmental benefits of reducing their fossil fuel usage given the costlier alternatives. The biggest impediment to agreement is coal-hungry Poland, and the angry miners who won support in Ms Kopacz’s speech. “I realise how important environmental concerns are … but my government will not accept increases in the costs of energy in Poland and the impact on the economy,” the prime minister said, adding that the fuel was of strategic national importance.

Sao Paulois sinking into disaster.

• Water Crisis Seen Worsening as Sao Paulo Nears ‘Collapse’ (Bloomberg)

Sao Paulo residents were warned by a top government regulator today to brace for more severe water shortages as President Dilma Rousseff makes the crisis a key campaign issue ahead of this weekend’s runoff vote. “If the drought continues, residents will face more dramatic water shortages in the short term,” Vicente Andreu, president of Brazil’s National Water Agency and a member of Rousseff’s Workers’ Party, told reporters in Sao Paulo. “If it doesn’t rain, we run the risk that the region will have a collapse like we’ve never seen before,” he later told state lawmakers. The worst drought in eight decades is threatening drinking supplies in South America’s biggest metropolis, with 60% of respondents in a Datafolha poll published yesterday saying their water supplies were restricted at least once in the past 30 days. Three-quarters of those people said the cut lasted at least six hours.

Rousseff, who is seeking re-election in the Oct. 26 election against opposition candidate Aecio Neves, is stepping up her attacks of Sao Paulo state’s handling of the water crisis, saying in a radio campaign ad yesterday that Governor Geraldo Alckmin was offered federal support and refused. Neves, who polls show is statistically tied with Rousseff, and Alckmin are both members of the Social Democracy Party, known as PSDB. Neves said yesterday on his website that ANA is being used by the PT for it’s own purposes. “The agency could have been a much better partner to Governor Alckmin,” he said.

How about some solid policies?

• Some US Hospitals Weigh Withholding Care To Ebola Patients (Reuters)

The Ebola crisis is forcing the American healthcare system to consider the previously unthinkable: withholding some medical interventions because they are too dangerous to doctors and nurses and unlikely to help a patient. U.S. hospitals have over the years come under criticism for undertaking measures that prolong dying rather than improve patients’ quality of life. But the care of the first Ebola patient diagnosed in the United States, who received dialysis and intubation and infected two nurses caring for him, is spurring hospitals and medical associations to develop the first guidelines for what can reasonably be done and what should be withheld. Officials from at least three hospital systems interviewed by Reuters said they were considering whether to withhold individual procedures or leave it up to individual doctors to determine whether an intervention would be performed. Ethics experts say they are also fielding more calls from doctors asking what their professional obligations are to patients if healthcare workers could be at risk.

U.S. health officials meanwhile are trying to establish a network of about 20 hospitals nationwide that would be fully equipped to handle all aspects of Ebola care. Their concern is that poorly trained or poorly equipped hospitals that perform invasive procedures will expose staff to bodily fluids of a patient when they are most infectious. The U.S. Centers for Disease Control and Prevention is working with kidney specialists on clinical guidelines for delivering dialysis to Ebola patients. The recommendations could come as early as this week. The possibility of withholding care represents a departure from the “do everything” philosophy in most American hospitals and a return to a view that held sway a century ago, when doctors were at greater risk of becoming infected by treating dying patients. “This is another example of how this 21st century viral threat has pulled us back into the 19th century,” said medical historian Dr. Howard Markel of the University of Michigan.

First Time In 800,000 Years: April CO2 Levels Above 400 ppm

May 072014

May 7, 2014 Posted by Raúl Ilargi Meijer at 7:54 am Finance Tagged with: CO2 16 Responses »

Gottscho-Schleisner New York City view from Central Park February 12, 1933

This just in from, of all sources, CBS. It’s quite a milestone we’ve passed here. Time for some contemplation perhaps. Time to wonder if enough people will care enough soon enough. Doesn’t look like it. Looks like we’re too busy drilling in the ever scarcer remaining pristine locations we haven’t yet exploited, and too busy preparing to go to war over access to the very resources that lifted us all the way up over 400ppm in what’s really no more than the blink of an eye in the 800,000 year timeframe. We’ll all just get into our cars again this morning and tell ourselves we’re looking out for number one. Maybe we need to be reminded what number one really is.

First time in 800,000 years: April’s CO2 levels above 400 ppm (CBS)

Less than a year after scientists first warned that the amount of carbon dioxide in the atmosphere could rise above 400 parts per million and stay there, it has finally happened. For the first time in recorded history, the average level of CO2 has topped 400 ppm for an entire month. The high levels of carbon dioxide is largely considered by scientists a key factor in global warming, according to the National Oceanic and Atmospheric Administration’s (NOAA) Earth System Research Lab. The Scripps Institution of Oceanography, a part of the University of California, San Diego, reported that April’s average amount of CO2 was 401.33 ppm, with each day reading above 400 ppm.

Scientists, using the Keeling Curve, show the increase of CO2 levels over the course of 800,000 years. Scripps Institution Of Oceanography

According to the Institute, CO2 levels have not surpassed 300 ppm in 800,000 years. It is estimated that during Earth’s ice ages, the C02 levels were around 200 ppm, with warmer periods — as well as prior to the Industrial Revolution — having carbon dioxide levels of 280 ppm. Past levels of CO2 are found in old air samples preserved as bubbles in the Atlantic ice sheet, according to Scripps. Throughout the year, there are changes in CO2 levels that occur naturally from the growth of plants and trees. Carbon dioxide levels often peak in the spring due to plant growth, and decrease in the fall when plants die, according to NOAA. However, human CO2 production has exacerbated the effects, causing global warming and climate change.

Scientists have been measuring the levels of carbon dioxide over the past fifty years. Since 1958, the Keeling Curve – named after developer Charles Keeling – has been used to monitor the levels of greenhouse gasses atop Hawaii’s Mauna Loa. When Keeling first started monitoring CO2 levels, the amount of carbon dioxide present in the atmosphere was 313 ppm. After Keeling’s death in 2005, his son Ralph, a professor of geochemistry and director of the Scripps CO2 Program, continued the measurements. In a statement last year, he warned that CO2 levels would “hit 450-ppm within a few decades.”

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