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Key swing states such as Nevada, North Carolina and Florida have seen some of the weakest income growth in the country since the last non-incumbent presidential contest in 2008, new census figures show. A Wall Street Journal analysis of state-by-state income data set for release on Thursday shows that more than half of the 13 states where the presidential race appears closely contested have seen below-average income growth since 2008. Among the eight laggards, three states saw the lowest wage growth in the U.S. during that time—Nevada, Georgia and Arizona. The new data show how America’s uneven economic recovery is adding another layer of unpredictability to an already volatile electoral map.

The traditional realm of battleground states has expanded, putting into play states such as Arizona and Georgia, which haven’t gone to a Democratic presidential candidate in at least 20 years. The Census Bureau also said income inequality across the country increased in 2015. The recovery’s income gains have been concentrated in central cities, with suburbs and rural areas largely lagging behind for years. “You actually see the bottom and the top pulling apart a little bit more in some of these keys states,” said David Damore, professor of political science at the University of Nevada Las Vegas. On a national basis, most states still haven’t seen income recover to pre-recession levels. Americans’ median household income in 2015 was 2.6% lower than in 2008, census figures show.

“Much of the run-up over the past few years has been primarily about multiple expansions. And the scary thing about multiple expansions is that they are reliably mean-reverting—if they run too far, the market always takes it back, sometimes with a vengeance. And we are currently almost 70% too far.”

• Mediocre Fundamentals Mean Meteoric Markets Are 70% Overvalued (GMO)

While all eyes were on Federal Reserve Chair Janet Yellen in Jackson Hole, we were watching something else. In August, the Shiller P/E, a well-regarded metric for measuring the valuation of U.S. equities, breached 27. Given that its normal range is something a bit above 16, valuations are looking rather stretched. Further, the last time the Shiller P/E was above 27 was in October … 2007. And we all know how that movie ended. While nobody here at GMO is saying that a crash is imminent (and there’s no law that says stocks cannot become even more expensive), we continue to maintain our bias against U.S. stocks. We will also take this end-of-summer moment to point out the yawning disconnect between fundamentals (of the U.S. economy and even corporate America) and their stocks. It really is a tale of two cities, one of mediocre fundamentals versus a meteoric rise in markets (see the chart below).

We pulled together some meaningful metrics on the health of the economy and some top-line/bottom-line numbers on the S&P 500 Index: GDP growth, productivity, and household income, as well as a few others, including revenue and earnings for U.S. stocks, for good measure. It is a tale of mediocrity, at best. Then, we contrasted those with the actual market returns of the S&P 500 Index over the past five years. Truly meteoric. (As an aside, we at GMO have always been leery of drawing too many investment conclusions from staring at economic data—we are more valuation-oriented, after all—but even we are struck by the divergence.) Which brings us back to the Shiller P/E. Much of the run-up over the past few years has been primarily about multiple expansions. And the scary thing about multiple expansions is that they are reliably mean-reverting—if they run too far, the market always takes it back, sometimes with a vengeance. And we are currently almost 70% too far.

“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited..” “..the bank is aiming for an amount between $2 billion and $3 billion..”

• US Seeks $14 Billion From Deutsche Bank Over Mortgage Securities Fraud (AFP)

Authorities in the US are seeking as much as $14 billion from Deutsche Bank to resolve allegations stemming from the sale of mortgage securities in the 2008 crisis, the German financial giant confirmed Thursday. The payout would be the largest ever inflicted on a foreign bank in the United States, easily surpassing the $8.9 billion that French bank BNP Paribas paid in 2014 for sanctions violations. But in a quick reaction, Deutsche Bank rejected the $14 billion figure, which the bank said was an opening proposal in settlement talks with US prosecutors. “Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the statement said. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”

The US investment bank Goldman Sachs in April agreed to pay more than $5 billion to settle similar allegations. US authorities have accused major banks of misleading investors about the values and quality of complex mortgage-backed securities sold before the 2008 financial crisis. Much of the underlying lending was worthless or fraudulent, delivering billions of dollars in losses to holders of the mortgage bonds when the housing market collapsed, bringing down numerous banks and touching off the country’s worst recession since the 1930s. According to securities filings, Deutsche Bank as of June 30 had set aside $5.5 billion to resolve pending legal matters. In the mortgage-backed securities matter, the bank is aiming for an amount between $2 billion and $3 billion, according to knowledgeable sources.

“They have declined about 46% this year.”

• Deutsche Bank Shares Plunge After Rebuffing $14 Billion US Fine (BBG)

Deutsche Bank shares slumped after receiving a $14 billion claim from the U.S. Justice Department to settle an investigation into the firm’s sale of residential mortgage-backed securities, a figure the German lender said it won’t pay. “Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement early Friday in Frankfurt. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.” Bank of America paid $17 billion to reach a settlement in a similar case in 2014, the biggest such accord to date.

Goldman Sachs agreed to a $5.1 billion settlement with the U.S. earlier this year, including a $2.4 billion civil penalty and $875 million in cash payments, to resolve U.S. allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt. The settlement included an admission of wrongdoing. “Overall it’s very negative for the share price if you look at the Justice Department figure but you don’t know where it will end up,” said Andreas Plaesier at Warburg Research with a hold recommendation on the shares. “If you come down to the Goldman amount they may not need to do much in terms of reserves.” The shares dropped as much as 8.2% and were down 7.8% at 12.08 euros at 9:04 a.m. in Frankfurt. They have declined about 46% this year.

“..we project global corporate credit demand (flow) of $62 trillion over 2016-2020, with new debt representing two-fifths and refinancing the rest.”

• Observations About US Corporate Debt (ZH/Kestel)

Extraordinary low interest rates around the world have delivered a monumental blow to many investors. Falling interest rates have translated into rising liabilities for (defined benefit) pension plans and, secondly, millions of retirees, who depend on income from savings to take them through retirement, are struggling to make a decent living. Consequently, investors take risks that they weren’t previously prepared to take. Take US corporate high yield bonds. The prevailing view seems to be that US corporates (ex. energy) are in very good shape with loads of cash on their balance sheet, and that they therefore offer a relatively attractive, and a comparatively safe, investment opportunity. I beg to disagree. Firstly, we are late in the economic cycle, and it is usually a bad idea to buy corporate high yield bonds late in an economic upturn. Secondly, let me share some facts with you that undermine the perception outlined above:

The 1% most cash-rich of all US companies control over 50% of all US corporate cash.

The five most cash-rich US companies (Apple, Microsoft, Google, Cisco and Oracle) control 30% of all US corporate cash.

Total US corporate debt (the other side of the balance sheet) was $5.03 trillion at the end of 2015- up from $2.62 trillion at the end of 2007.

Net debt (i.e. debt ex. cash) amongst US corporates was $3.39 trillion at the end of 2015 vs. $1.88 trillion at the end of 2007.

US corporate debt has risen by $2.8 trillion over the last five years, while corporate cash has only risen by $600 billion.

If you back out the top 1% referred to in (1) above, the cash holdings of the remaining 99% fell 6% in 2015 to stand at just $900 billion by the end of December vs. $6.6 trillion of debt.

Based on those numbers, I think it is fair to say that, with the exception of a few extremely cash-rich companies, corporate America is increasingly indebted and not at all as cash-rich as widely perceived. This also explains why corporate investments in the US are at a 60-year low.

Governments globally are persisting with monetary expansion to support economic growth and prop up inflation, to the detriment of credit quality, particularly for over-indebted Chinese corporates and U.S.leveraged borrowers. In our base-case scenario, we project global corporate credit demand (flow) of $62 trillion over 2016-2020, with new debt representing two-fifths and refinancing the rest. Outstanding debt would expand by half to $75 trillion, with China’s share rising to 43% from 35%.

We estimate that two-fifths (43%) to half (47%) of nonfinancial corporates (unrated and rated) are highly leveraged-of which 2% to 5% face negative earnings or cash flows, based on a sample of about 14,400 corporates. With weakened borrower credit quality, a credit correction is inevitable. Our base case is for an orderly credit slowdown stretching over several years (‘slow burn’ scenario), but a series of major economic or political shocks, such as the recent Brexit vote in the U.K., could trigger a more system-wide credit contraction (‘Crexit’ scenario).

I see big protests in the offing as public pensions get bailed out by taxpayers who see their private plans left to die.

• This is How You Will Bail Out Municipal Pension Funds (WS)

[..] the beneficiaries are voters and employees of the government, and politicians of all stripes bought their votes with promises of low contributions and rising benefits. They got away with it for decades because no one cares about “underfunded pensions.” Even the term makes people’s eyes glaze over. But someone is going to pay. And it’s not going to be the politicians. This is how they will pay for it in Chicago – the city whose credit rating Moody’s cut by two notches to junk in April last year, and whose interest payments, despite historically low interest rates, have continued to skyrocket as it borrows more and skids deeper into the sinkhole of its own making.

On Wednesday, the City Council approved Mayor Rahm Emanuel’s scheme to bail out its largest and worst-off pension fund, the Municipal Employees’ Annuity and Benefit fund, which would otherwise be insolvent within ten years – and a lot quicker if markets have a hissy fit. Despite seven years of rampant asset price inflation, and asset bubbles nearly everywhere, the fund’s obligations are only 20% funded. It forms part of Chicago’s $34 billion in retirement debt, accumulated over the decades by politicians making promises to buy votes and support from special interest groups. But neither the beneficiaries nor taxpayers via the city contributed enough to pay for those promises.

To save this one pension fund out of its four pension funds from insolvency, the city is jacking up water and sewer levies by 33%, phased in over a few years. Property owners in Chicago will pay, one way or the other, $3 billion into the fund by 2022, up from $1 billion under the prior scheme. Despite these billions of dollars involved, the fund covers only 77,000 workers and retirees.

“A 100-city index compiled by SouFun surged by a worrisome 14% in the last year.”

• The Next Bubble: China’s Housing Gets Scarily Expensive (Balding)

For many years, China’s authorities took a Goldilocks approach to housing prices: They wanted a market that was neither too hot nor too cold, and took measures as needed to control prices. Although an explicit asset-price target was never announced, it was widely assumed that the government wanted home prices to grow in line with the rate of economic growth. To accomplish this, technocrats in Beijing deployed a combination of monetary stimulus and regulatory measures. When prices overheated, they put the brakes on credit growth, required higher down payments for mortgages and placed administrative restrictions on who could buy in which cities. When prices started to drop, they tried loosening credit and boosting the number of units people could own.

But in the past few years, with economic growth sluggish, the planners became much more tolerant of rising prices, even as signs of a bubble emerged. Official data shows the price-to income-ratio hitting 9.2 at the end of 2015; housing prices have continued to rise significantly since. All this has led to some widespread distortions. China’s homeowners have come to see near double-digit real-estate returns as a birthright, a bet on par with death and taxes. According to one study, more than 70% of Chinese household wealth is in housing. Investors believe there’s an implicit guarantee that the government won’t let home prices drop, even as many buildings sit empty.

Meanwhile, banks have gone on a lending spree: Total outstanding mortgage loans rose more than 30% and new mortgage growth clocked in at 111% in the past year. Since June 2012, outstanding mortgage loans have grown at an annualized rate of 30%. Predictably, that’s pushed prices higher and higher. In urban China, the average price per square foot of a home has risen to $171, compared to $132 in the U.S. In first-tier cities such as Beijing and Shenzhen, prices have increased by about 25% in the past year. A 100-city index compiled by SouFun surged by a worrisome 14% in the last year. Developers are buying up land in some prime areas that would need to sell for $15,000 per square meter just to break even.

Break their power!

• Europe, Japan Banking Sectors Threaten Revolt Over Basel Rules (BBG)

Europeans told the world’s top banking regulator that they’ve had enough. In two heated meetings in the past week, regulators from countries including Germany and Italy told the Basel Committee on Banking Supervision that proposed changes to how banks assess credit, market and operational risks must be scaled back and slowed down, according to two people with knowledge of the matter. Some European officials went so far as to say they wouldn’t adopt the proposals on the table, according to the people, who asked not to be identified because the deliberations were private. If the EU – home to nearly half of the world’s most systemically important banks – balks at implementing the Basel Committee’s rules, it could undermine the global regulator’s authority and contribute to fragmentation of the industry.

The Basel Committee is racing to finish work on the post-crisis capital framework known as Basel III by the end of the year, and it’s under instructions not to increase capital requirements significantly in the process. The debate in Basel pits bank regulators from Tokyo to Frankfurt against a U.S.-backed push for stiffer standards, which take effect when they’re implemented by national governments. The industry says the proposed revisions to risk-assessment rules and limits on banks’ use of their own models to make these calculations would send capital requirements spiraling. Key policy makers have heeded their message. German FinMin Schaeuble last week insisted that the Basel Committee not only keep any overall increase in capital requirements to a minimum, but also ensure the rules have no “particularly negative consequences for specific regions,” such as Europe.

Shunsuke Shirakawa, vice commissioner for international affairs at Japan’s Financial Services Agency, has said the regulator needs to “make adjustments” to bring the new rules in on target. The Basel Committee’s members include Japan’s FSA, Germany’s Bundesbank and the U.S. Federal Reserve. Large European banks may be more vulnerable than their global peers to the changes under discussion. The biggest European banks had an average common equity Tier 1 capital ratio – a key measure of financial strength – higher than their global peers at end-2015, according to data from the European Banking Authority and the Basel Committee.

“..mass failure of many Chinese buyers to settle on apartment contracts..”

• It’s A Long Way Down In Australia’s Looming Apartment Fall (Aus.com.au)

While Australia debates its interest rate policy, the mass failure of many Chinese buyers to settle on apartment contracts is looming as a much bigger catastrophe than markets are expecting. This emerged from the comments of a reader to my commentary yesterday on the Sydney and Melbourne apartment markets. One of my readers who did not allow his full name to be published but used the name “James” complained that I had grossly understated the problem. James revealed that he owned and ran a debt and equity funding business that is on the frontline of the apartment settlement problem. His business deals with the developers of the apartment complexes rather than rather than the investors. James describes what is ahead this way:

“The problem is much worse than what you have described. Our analysis of every development in the country suggests that settlement failures will be between $1 billion and $1.5bn every month for the next 12 months. This is from the Chinese alone, but when settlement prices start coming more than 10% under purchase prices, we will also start to see local buyers attempting to walk away from settling. As Julius Caesar famously said: ‘the die is cast.’” To understand the implication of what James’ analysis reveals we need to step back and see how the apartment boom was funded. Most developers of apartments in Australia collect their Chinese off-the-plan deposits and then use them to gain security for a bank loan. Those bank loans can constitute 40, 50 or even 60% of the cost of the apartment complex.

The developers obtain the rest of their funding from businesses like those operated by James. This is an area of finance which we know very little about because it is hidden from public view. The banks feel they are safe in their loans to developers because there is a big difference between their loans and the cost of the buildings. But the banks are often funding other players in the apartment development. Apart from the developer, the people at risk include unsecured suppliers and the enterprises that are providing the second mortgage funding. If the Chinese fail to settle on the scale that Harry Triguboff is warning about, then there will be a deep problem. But if James’ study is correct that deep problem will develop into an economic catastrophe.

It’s over. Wind it down peacefully please.

• EU Leaders Search For Way Out Of ‘Existential Crisis’ (R.)

Shaken by Britain’s decision to leave the European Union, the leaders of its other 27 countries meet on Friday to try to inject new momentum into their ailing communal project amid deep-seated divisions over migration and economic policy. The Brexit vote in June ended more than half a century of EU enlargement and closer integration. Long seen as a guarantor of peace and prosperity, the bloc is now struggling to convince its citizens that it remains a force for good. Years of economic and financial crisis have pushed up unemployment in many member states, while a spate of attacks by Islamist militants and a record influx of refugees from the Middle East and Africa have unsettled voters, who are turning increasingly to populist, anti-EU parties.

“After the vote in the UK the only thing that makes sense is to have a sober and brutally honest assessment of the situation,” European Council President Donald Tusk told reporters in Bratislava on the eve of the meeting. “We must not let this crisis go to waste.” European Commission President Jean-Claude Juncker said earlier this week the EU was in an “existential crisis”. Despite the pressure to lay out a new vision, leaders have played down expectations of real breakthroughs in the Slovak capital, in part because of intractable differences on the biggest issues, notably how to handle the influx of migrants.

Instead they are expected to focus on areas where there is common ground, pledging closer defence cooperation, bolstering security at the EU’s external borders and boosting the capacity of an EU investment fund meant to generate growth and jobs. The aim is to present more concrete proposals at a summit in March of next year that coincides with the 60th anniversary of the bloc’s founding Rome Treaty. But some officials admit in private that major initiatives may not be possible until elections in the Netherlands, France and Germany are out of the way by late 2017.

Many Greeks accuse Stournaras of exaggerating deficits in order to bring in the Troika.

• Greece Raids Home Of Central Bank Head (ZH)

While the US the media lashes out at Trump every time he dares to tell the truth that the central bank is a biased, engaged, political member of the decision-making landscape, other “developed” countries are happily willing to demonstrate just how apolitical the central bank truly is. Take Greece, for example, where today the chief prosecutor ordered a raid of the home of the governor of the Greek central bank, Yannis Stournaras and the company office of his wife, Lina. The searches were part of a probe conducted by the Financial Police in connection to the alleged mismanagement of more than €1 million in state funding by the Hellenic Center for Disease Control and Prevention, KEELPNO.

The investigation related to funds that KEELPNO allegedly received through a company owned by Nikolopoulou as well as complaints regarding the disappearance of documents tied to the case. According to the WSJ, the raid was part of a continuing investigation into business Stournaras’ wife has done with a state entity, officials said, in a probe that may heighten tension between the top bank official and the left-wing government. Lina Nikolopoulou-Stournaras, the wife of central bank Governor Yannis Stournaras and owner of an communications company specializing in the medical sector, is under investigation from Greek authorities for business she has done with the Hellenic Center for Disease Control and Prevention, or Keelpno.

Any and all wars declared on nouns are epic fails. But follow the money.

• Jay Z: ‘The War on Drugs Is an Epic Fail’ (NYT)

This short film, narrated by Jay Z (Shawn Carter) and featuring the artwork of Molly Crabapple, is part history lesson about the war on drugs and part vision statement. As Ms. Crabapple’s haunting images flash by, the film takes us from the Nixon administration and the Rockefeller drug laws – the draconian 1973 statutes enacted in New York that exploded the state’s prison population and ushered in a period of similar sentencing schemes for other states – through the extraordinary growth in our nation’s prison population to the emerging aboveground marijuana market of today. We learn how African-Americans can make up around 13% of the United States population – yet 31% of those arrested for drug law violations, even though they use and sell drugs at the same rate as whites.

Quite a statement for the Wall Street Journal to publish.

• Les Déplorables (WSJ)

To repeat: “racist, sexist, homophobic, xenophobic, Islamophobic.” Those are all potent words. Or once were. The racism of the Jim Crow era was ugly, physically cruel and murderous. Today, progressives output these words as reflexively as a burp. What’s more, the left enjoys calling people Islamophobic or homophobic. It’s bullying without personal risk. Donald Trump’s appeal, in part, is that he cracks back at progressive cultural condescension in utterly crude terms. Nativists exist, and the sky is still blue. But the overwhelming majority of these people aren’t phobic about a modernizing America. They’re fed up with the relentless, moral superciliousness of Hillary, the Obamas, progressive pundits and 19-year-old campus activists.

Evangelicals at last week’s Values Voter Summit said they’d look past Mr. Trump’s personal résumé. This is the reason. It’s not about him. The moral clarity that drove the original civil-rights movement or the women’s movement has degenerated into a confused moral narcissism. One wonders if even some of the people in Mrs. Clinton’s Streisandian audience didn’t feel discomfort at the ease with which the presidential candidate slapped isms and phobias on so many people. Presidential politics has become hyper-focused on individual personalities because the media rubs them in our face nonstop. It is a mistake, though, to blame Hillary alone for that derisive remark. It’s not just her.

Hillary Clinton is the logical result of the Democratic Party’s new, progressive algorithm—a set of strict social rules that drives politics and the culture to one point of view. A Clinton victory would enable and entrench the forces her comment represents. Her supporters say it’s Donald Trump’s rhetoric that is “divisive.” Just so. But it’s rich to hear them claim that their words and politics are “inclusive.” So is the town dump. They have chopped American society into so many offendable identities that only a Yale freshman can name them all. If the Democrats lose behind Hillary Clinton, it will be in part because America’s les déplorables decided enough of this is enough.

Lovely piece.

• The Cold War Is Over (Hitchens)

Perhaps we would understand Russia’s situation better if we imagined that NATO has been dissolved and that the Confederate States and the territories conquered in the Mexican-American War have declared independence. The U.S. retains a precarious hold on the naval station at San Diego, sharing it with the Mexican Navy on an expensive lease that Mexico regularly threatens to cancel. Americans still living in San Diego are compelled to adopt Spanish names on their drivers’ licenses, and movie theaters are instructed to show films only in Spanish. Schools teach anti-American history. Quebec has seceded from Canada, and is being wooed by a Russo-Chinese economic union, with a pact including military and political clauses.

Russian politicians are in the streets of Montreal, urging on a violent anti-American mob, which eventually succeeds in overthrowing Quebec’s pro-American president and replacing him with a pro-Russian one—violating Quebec’s constitution in the process. This brings military forces aligned with Russia right up to the border with New York, Maine, New Hampshire, and Vermont. In such a case, I cannot see the U.S. sitting about doing nothing, especially if it had repeatedly warned in major diplomatic forums against this expansion of Russian power on its frontiers, and been repeatedly ignored over fifteen years or so. If a Marxist takeover in Grenada was considered good enough reason for military action, what would these circumstances provoke?

Mikhail Gorbachev’s feline spokesman, Gennadi Gerasimov, once teased suspicious Western correspondents by sneering at them in the early days of the great perestroika and glasnost experiment, “We have done the cruelest thing to you that we could possibly have done. We have deprived you of an enemy.” He was laughing at us, but he was dead right. The Cold War was a period of moral clarity when the other side really was an evil empire, and when armed resolve for once succeeded in defeating the expansion of evil in the world. It allowed my own poor country to feel more important than it really was, and it suppressed the seething impulses and rivalries of the European continent.

Debt Rattle February 14 2015

Feb 142015

February 14, 2015 Posted by Raúl Ilargi Meijer at 10:49 am Finance Tagged with: cease-fire, cold war, deal, ECB, nuclear war, Syriza, Ukraine, Varoufakis 2 Responses »

William Henry Jackson Camp wagon on a Texas roundup 1901

• Nuclear Specter Redux: ‘Threat of War Is Higher than in the Cold War’ (Spiegel)

• Ukraine Right Sector Leader Rejects Peace Deal, Vows ‘To Continue War’ (RT)

• Yes, Yellen Can Have It All as She Gets Ready to Raise Rates (Bloomberg)

• One Hundred Years of Austerity (Bloomberg)

• Greek Government Doesn’t Hold Out Much Hope For A Deal On Monday (Kathimerini)

• Hopes Of Greek Debt Deal Rise (Guardian)

• Dijsselbloem ‘Pessimistic’ About A Quick Deal With Greece (AFP)

• GDP Growth Masks A Broken Eurozone (Guardian)

• White House Warns Europe On Greek Showdown (AEP)

• Don’t Make Us Do It: ECB Wants a Political Deal on Greece (Bloomberg)

• Rising Deposit Outflows Behind Extra Greek Bank ELA Access (Reuters)

• Most Of Greek Deposit Outflows To Return If A Deal Is Made (Kathimerini)

• Band-Aids for Greece, Ukraine and Global Economy (El-Erian)

• Inside The Germans’ Debt Psyche – What Makes Them Tick? (BBC)

• Yanis Varoufakis: ‘If I Weren’t Scared, I’d Be Awfully Dangerous’ (Guardian)

• Yanis Varoufakis, Greek Bailout Foe (BBC)

• US Will Not Become Energy Independent: Total CEO (CNBC)

• Russian Gas To Europe Can Be 35% Cheaper: Ministry (RT)

• Falling Oil Prices Don’t Scare Russian Energy Firms (CNBC)

• German Coal Imports From Russia Highest Since 2006 (RT)

• Argentina President Fernandez Charged in Probe of Alleged Cover-Up (Bloomberg)

• Farmland Values in Parts of Midwest Fall for First Time in Decades (WSJ)

• The Super-Rich Don’t Care About Us. It Will Be Their Downfall (Guardian)

Trust has been eroded to the point of almost being destroyed,” said Nunn. “You got a war going on right in the middle of Europe.”

• Nuclear Specter Redux: ‘Threat of War Is Higher than in the Cold War’ (Spiegel)

Deep mistrust has developed between the West and Russia, and it is having a massive effect on cooperation on security matters. In November 2014, the Russians announced that they would boycott the 2016 Nuclear Security Summit in the United States. In December, the US Congress voted, for the first time in 25 years, not to approve funding to safeguard nuclear materials in the Russian Federation. A few days later, the Russians terminated cooperation in almost all aspects of nuclear security. The two sides had cooperated successfully for almost two decades. But that is now a thing of the past. Instead, Russia and the United States are investing giant sums of money to modernize their nuclear arsenals, and NATO recently announced that it was rethinking its nuclear strategy.

At the same time, risky encounters between Eastern and Western troops, especially in the air, are becoming more and more common, a report by the European Leadership Network (ELN) recently concluded. “Civilian pilots don’t know how to deal with this,” explains ELN Chair Des Browne, a former British defense minister. “One of these incidents could easily escalate. We need to find a mechanism in which we can talk at the highest level.” Brown, together with Ivanov and former US Senator Sam Nunn, the grandfather of international disarmament policy, published an analysis last week. The trio recommends “that reliable communication channels exist in the event of serious incidents.” In other words, these channels currently do not exist.

Recently Philip Breedlove, the head of NATO Allied Command Operations in Europe, even called for a new “red telephone,” alluding to the direct teletype connection established in 1963 between the United States and the Soviet Union after the Cuban missile crisis. A direct line had been set up between NATO and the Russian military’s general staff in February 2013, but it was cut as a result of the Ukraine crisis. “Trust has been eroded to the point of almost being destroyed,” said Nunn. “You got a war going on right in the middle of Europe. You got a breakdown of the conventional forces treaty, you got the INF (Intermediate-Range Nuclear Forces) treaty under great strain, you got tactical nuclear weapons all over Europe. It’s a very dangerous situation.”

The narrative that will allow Kiev to keep fighting despote the ceasefire deal. And then claim innocence.

• Ukraine Right Sector Leader Rejects Peace Deal, Vows ‘To Continue War’ (RT)

Ukraine’s Right Sector leader Dmitry Yarosh said his radical movement rejects the Minsk peace deal and that their paramilitary units in eastern Ukraine will continue “active fighting” according to their “own plans.” The notorious ultranationalist leader published a statement on his Facebook page Friday, saying that his radical Right Sector movement doesn’t recognize the peace deal, signed by the so-called ‘contact group’ on Thursday and agreed upon by Ukraine, France, Germany and Russia after epic 16-hour talks. Yarosh claimed that any agreement with the eastern militia, whom he calls “terrorists,” has no legal force. In his statement, Yarosh claimed that that the Minsk deal is contrary to Ukraine’s constitution, so Ukrainian citizens are not obliged to abide by it.

Thus if the army receives orders to cease military activity and withdraw heavy weaponry from the eastern regions, the Right Sector paramilitaries, who are also fighting there “reserve the right” to continue the war, he said. The Right Sector paramilitary organization continues to deploy its combat and reserve units, to train and logistically support personnel, while coordinating its activities with the military command of the Ukrainian army, paramilitary units of the Defense Ministry and the Interior Ministry, he said. The breakthrough Minsk agreement was reached on Thursday following marathon overnight negotiations between Ukraine, France, Germany and Russia, and offer hope the fighting in Eastern Ukraine may come to an end. The talks were part of a Franco-German initiative. President Hollande and Chancellor Merkel visited Kiev and Moscow before meeting the Russian and Ukrainian leaders at the negotiating table in Minsk.

Bluntly rejecting the German and French initiative, Yarosh said President Petro Poroshenko should have turned to the US or UK which “observe a consistent anti-Kremlin policy.” “This could be devastating for the whole agreement,” Lode Vanoost, a former OSCE security consultant, told RT. “It could destroy it before it even starts. Now the fact that they announced it already one day ahead could of course mean that they sort of tried to force some kind of provocation so that the other side would react giving them an excuse to go on. But nevertheless this is indeed a very dangerous situation, yes.” [..] In July last year Interpol put Right Sector leader Yarosh on its wanted list.

Anyone still thinking she won’t do it?

• Yes, Yellen Can Have It All as She Gets Ready to Raise Rates (Bloomberg)

As the job market gains steam, Federal Reserve Chair Janet Yellen faces a massive challenge to adjust her monetary levers just right: She wants to keep the recovery going without stoking a bubble or spurring inflation. It’s a delicate balance that has bedeviled many central bank chiefs in the past. A dramatic drop in U.S. bond yields over the past year might be just what Yellen needs to strike that balance, according to two International Monetary Fund economists. “Having long-term rates at relatively low levels may actually give the Fed more degrees of freedom,” Nigel Chalk and Jarkko Turunen wrote in a blog post Thursday. That’s because low long-term government bond yields would act as a cushion to the Fed raising short-term rates (specifically, by supporting the housing sector). In other words, Yellen would be able to start tightening without having to worry as much about hobbling the economic recovery.

The IMF economists’ point runs counter to some of the prevailing wisdom. The depression of long-term yields was a well-known source of concern for former Fed Chairman Alan Greenspan, who called it a “conundrum” in testimony to Congress in 2005. Many say borrowing costs got too low in the mid-2000s, prompting people and businesses to take on too much debt. That all came crashing down in the form of the 2008 global financial meltdown. Credit is, once again, strikingly cheap. By the end of January, the yield on 10-year Treasury notes had fallen to the lowest since May 2013 (since the end of last month, the gauge has ticked slightly ticked back up). It’s strange because the U.S. economy has regained its status as the main engine of the world economy and analysts expect the Fed to soon start raising rates. The IMF economists note that the so-called term premium – the extra yield investors demand for holding long-term debt over short-term paper – has actually turned negative.

What’s driving this demand for long-term bonds? Chalk and Turunen offer several explanations. It’s possible that low inflation expectations are causing bondholders to require less compensation in the form of higher yields. With major risks ranging from instability in Ukraine to Greece and the Middle East, investors might be running to the safety of U.S. debt. Other reasons could include the recent strength of the U.S. dollar, according to the authors. The real risk is what happens when long-term yields head in the other direction – as occurred in 2013, when then-Fed Chairman Ben S. Bernanke mused about ending bond purchases sooner than investors expected. The resulting surge in mortgage rates and capital flight from emerging markets came to be known as the “taper tantrum.” “What we should be watching out for is the economic and financial stability fallout that could unfold if U.S. yields snap back upwards in a sudden and unexpected manner,” according to the IMF staff members.

“”If every similar state saves at the same time by cutting spending, the result is the shrinkage of everyone’s economy since they are one another’s trading partners..”

• One Hundred Years of Austerity (Bloomberg)

People have been preaching austerity for a very long time. Ancient Greek philosophers, Jesus’s disciples, Benjamin Franklin—they’re all part of a chorus of voices over the centuries who’ve warned us against the dangers of debt and profligate spending. Fiscal austerity, though, is a modern invention. It wasn’t until after World War I that governments started making serious efforts to address debt and other problems by cutting their spending. One reason is that, until the early 20th century, most countries had such small budgets that there wasn’t much to cut. (The U.S. federal budget on the eve of World War I equalled about 2.5% of the national economy; now, it’s around 20%, and that in turn is much lower than the figure in some other countries.)

Nowadays, fiscal austerity is often associated with the IMF, which has required budget cutting as a condition for bailouts in scores of troubled economies. In other cases, though, governments have embraced austerity for reasons of their own, such as fighting inflation or repaying foreign debt. Some of these efforts—such as Germany’s and Japan’s in the 1930s and Romania’s in the 1980s—were catastrophic failures. Elsewhere, the record has been less clear-cut. The British are still debating the impact of Prime Minister Margaret Thatcher’s budget cuts in the early 1980s. Some countries have recovered fairly quickly after taking IMF-prescribed austerity medicine, while others suffered prolonged economic misery.

Muddying the picture still further, the IMF usually requires structural economic reforms, such as deregulating industries and labor markets, in addition to budget austerity. That, along with such other factors as interest-rate changes and currency devaluations, makes it harder to gauge the effect of austerity. The euro zone debt crisis adds a new wrinkle to the story. Countries pursuing austerity programs frequently have devalued their currencies, which can help spur growth as exports become more competitive. But Greece and other bailed-out European economies can’t devalue, because they’re part of a shared currency.

Mark Blyth, a Brown University professor who has written a book on the history of austerity, warns that it is a “dangerous idea.” The biggest danger, he writes, comes “when everyone tries it at once,” as happened when Japan and Germany cut spending during a global depression. Europe’s recent debt crisis is another example, Blyth contends. “If every similar state saves at the same time by cutting spending, the result is the shrinkage of everyone’s economy since they are one another’s trading partners and sources of income. Perversely, their debt goes up, not down, relative to their shrinking GDP.”

“Some members, such as Energy Minister Panayiotis Lafazanis have been adamant that the government should stick to its pre-election pledges.”

• Greek Government Doesn’t Hold Out Much Hope For A Deal On Monday (Kathimerini)

Prime Minister Alexis Tsipras chaired a meeting of his cabinet on Friday night to brief ministers on the state of talks with the eurozone but also to assess his own room for maneuver ahead of Monday’s Eurogroup. With the possibility of the government having to make a compromise with the eurozone over the way forward in the next few days, Tsipras was eager to assess the mood of his cabinet. Some members, such as Energy Minister Panayiotis Lafazanis have been adamant that the government should stick to its pre-election pledges. Overall, the government is not holding out much hope for a solution in Brussels on Monday.

“There have been some positive steps but there is a lot of ground that has to be covered,” said a government source. Sources also insisted that the Greek government would not be willing to back down from its position on certain issues such as labor regulations, privatizations and the lowering of the primary surplus target. Athens believes that the two sides can find common ground on issues like public administration reform, improving tax collection and tackling corruption.

I don’t think so.

• Hopes Of Greek Debt Deal Rise (Guardian)

Greek stock markets have rallied on growing confidence that Athens will reach a deal with its international creditors next week. In the runup to a meeting of eurozone finance ministers on Monday, the new Greek prime minister’s office vowed to do “whatever we can” to come to an agreement over a new support programme for the bailed-out country. Talks between eurozone ministers this week failed to make progress in resolving a standoff over the desire by Greece’s new leftist government to ditch the strict terms of its €240bn bailout programme and the insistence from other eurozone countries, most notably Germany, that the old framework should continue. But on Friday, the new prime minister, Alexis Tsipras, appeared to soften his stance. He agreed that Greek officials would meet representatives of the troika of lenders who supplied the bailout money and imposed and policed the terms that came with it.

Previously, Greece’s finance minister, Yanis Varoufakis, said the new government would refuse to engage with representatives of troika, made up of the ECB, the EC and the IMF. A government spokesman said Greece was straining to get the pieces in place for a deal on Monday, but he also sought to play down fears time was running out to avert a fresh crisis in the eurozone that would see Greece defaulting on the bailout programme and being forced to leave the single currency. “We will do whatever we can so that a deal is found on Monday,” Gabriel Sakellaridis told Greece’s Skai TV. “If we don’t have an agreement on Monday, we believe that there is always time so that there won’t be a problem.”

Dijsselbloem has been the worst factor in all this. Expect him to be ousted soon.

• Dijsselbloem ‘Pessimistic’ About A Quick Deal With Greece (AFP)

Eurogroup president Jeroen Dijsselbloem said Friday he was pessimistic about making progress on resolving a bitter row over extending Greeces bailout at an upcoming meeting of eurozone finance ministers. “At this stage I’m very pessimistic about it,” Dijsselbloem told the NOS public broadcaster when asked whether he thought concrete steps will be taken on Monday at the talks between Greece and its fellow single currency countries in the Eurogroup. “The Greeks have sky-high ambitions. The possibilities, given the state of the Greek economy, are limited,” said Dijsselbloem, who is the Dutch finance minister, ahead of a cabinet meeting on Friday. “I don’t know if we’ll get there by Monday.” Dijsselbloem and Greek PM Alexis Tsipras agreed on Thursday to renew efforts to find a solution on extending Greeces current bailout after talks overnight Wednesday collapsed acrimoniously.

An agreement however was reached to ask “institutions to engage with Greek authorities to start work on a technical assessment of the common ground between the current programme and the Greek government’s plans,” Dijsselbloem tweeted after the meeting. The agreement was made to help discussions set to take place Monday, seen by many as the last chance to seal a deal before Greeces current bailout programme expires at the end of the month. Dijsselbloem however on Friday blasted Greece, saying Athens “for a number of months now has received no loans from Europe, because nothing’s happening.” “We only lend out money when theres real progress and when new reforms are being carried through. For months this has not been the case,” Dijsselbloem said.

“It really is up to the Greek government to take the firsts steps,” he said. Failure to reach a deal on an extension of the bailout or a credit line for Greece by the end of the month means Athens would quickly default and almost inevitably crash out of the eurozone. European sources who spoke on the condition of anonymity said Wednesday’s eurozone ministers’ meeting had descended into a “total mess”, making a reconciliation between Dijsselbloem and Tsipras necessary to prepare the talks for Monday. Dijsselbloem said: “The Greek government has made it clear that they don’t want to carry on with the programme as it currently stands.” “The Eurogroup has made it clear that there are only possibilities for change as long as the programme remains on the rails.”

Too much difference between Gernamy and Greece: “Look beyond the figures and the chatter of ivory tower policymakers..”

• GDP Growth Masks A Broken Eurozone (Guardian)

Frankfurt’s stock market has reached a new high, topping 11,000 for the first time. According to the latest eurozone GDP figures, Germany enjoyed strong GDP growth in the last three months of the year and helped push expansion across the currency bloc to 0.3% for the quarter and 0.9% for the year. In Portugal and Spain, the headline growth figures improved. Even Italy beat analysts’ expectations after it avoided a decline. So the recovery is real. In fact, say the eurozone’s top policymakers, it’s all going so well the new Greek government should open its eyes and see the warm, golden glow of sunshine appearing on the horizon. Jens Weidmann, the head of the German central bank, was in London on Thursday evening and joined the chorus of top officials bemoaning those who believe the eurozone is entering a long period of Japan-like stagnation.

He urged the Greeks to stop opposing the austerity measures imposed by Brussels and accept wage cuts that have already brought an increase in competitiveness. No doubt the 0.2% fall in Greek GDP in the fourth quarter will be cast as a temporary blip and a lesson that political uncertainty has unhelpful economic consequences. Investors also believe the upbeat story, hence the soaring Frankfurt stock market. The promise of a huge stimulus package from the ECB (which Weidmann believes is unnecessary, such is his confidence) and the fall in value of the euro it has precipitated, when combined with the vast European bailouts funds now available, have convinced global investment funds that Europe is a one-way bet. Look beyond the figures and the chatter of ivory tower policymakers and you will find the story is radically different. Yes, Spain is growing. But its GDP growth in 2014 has made up only around half of its losses in 2013.

It is still an economy in need of major investment to get back on its feet. Unemployment remains at disturbingly high levels and the state is held in contempt in many quarters. Why else would the radical anti-austerity Podemos party be polling ahead of all the established parties at the moment, and its leader be writing in praise of Tsipras (and the Catalonia independence movement still be in full swing)? Weidmann said the policies of austerity he supported would work slowly but staying the course was important. To him, a lost generation of young workers, who were denied skilled training and out of work for several years, is a matter for individual countries. He cannot see that sovereign states under the current arrangements are denied the funds to invest and improve productivity over the longer term. He cannot see that austerity, if only for this reason, is self-defeating.

“They have asymmetric rules. They need to make it socially fairer..”

• White House Warns Europe On Greek Showdown (AEP)

Washington blames Europe for the lack of global recovery and is losing its patience with EMU creditor states that fail to pull their weight The Obama administration has leapt to the defence of Greece, warning Germany and Europe’s creditor powers that they must meet Athens half-way to avert a potentially dangerous rupture and a euro break-up. Caroline Atkinson, the US deputy-national security adviser, said the eurozone authorities had imposed the main burden of adjustment on the weaker deficit states and should do more to accept their share of responsibility for the euro crisis. “They have asymmetric rules. They need to make it socially fairer,” she said. “It is important for creditors to take into account that Greece has had a very sharp drop in incomes, real wages, and output as well as a big rise in unemployment,” she told a gathering at Chatham House in London.

“Greece has moved into primary surplus. How much more fiscal consolidation is necessary?” she said. The comment will be music to the ears of Greek finance minister Yanis Varoufakis, who wants a cut in the EU-IMF Troika target for the primary surplus to 1.5pc of GDP from 3pc this year and 4.5pc next year. Mrs Atkinson said the White House is relieved that “both sides” are starting to pull back from the brink, a clear warning that Washington is just as exasperated with the high-handed approach of eurozone creditors as it is with the leftist Syriza government in Athens. “We believe it is strongly in the interests of the Greek people and Europe more generally that Greece and its creditors work out a compromise for Greece to stay in the euro and thrive in the euro,” she said.

The two sides have toned down the rhetoric slightly and agreed to start technical talks but each is in a different cognitive universe on the core dispute over austerity and debt relief. The US administration does not share the widespread view in Europe that there is little risk of contagion if the European Central Bank cuts off liquidity support for the Greek banking system and forces the country out of the euro. President Barack Obama has seized on the Greek crisis to push for a broader reflation strategy in Europe. “You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts,” he said earlier this month.

Draghi doesn’t like being accused of taking political decisions. Even though he’s taken many already.

• Don’t Make Us Do It: ECB Wants a Political Deal on Greece (Bloomberg)

The European Central Bank is sending a message to the euro-area’s leaders: don’t make us pull the trigger on Greece’s banks. After the Frankfurt-based ECB blessed the expansion of so-called Emergency Liquidity Assistance to the debt-stricken country’s lenders by about €5 billion euros on Thursday, officials are insisting that continued support is contingent on political talks over Greece’s bailout. Greek stocks and bonds rallied Friday, after PM Alexis Tsipras hinted at progress. The ECB does not want to be pushed into a position where it is making decisions on the future of the Greek banking system – and the country’s membership of the euro – without political cover from European capitals.

If talks on a “bridge” financing deal for Greece break down again, ECB President Mario Draghi will have to weigh whether to ration funds further or threaten a veto, just as he did in Cyprus two years ago. “Ending ELA would be a very last-resort type of intervention, paramount to a nuclear option,” said Henrik Enderlein at the Hertie School of Governance in Berlin. “The ECB would never really want to use it, as it is basically the same as pushing Greece out of the euro area.” ELA is funding provided by national central banks at their own risk, and is extended against lower-quality collateral than the ECB itself will accept.

Greece’s lenders now have access to about €65 billion in such funds, according to a euro-area central bank official. The expansion from €60 billion euros was reported Thursday by German newspaper FAZ. Tsipras said yesterday that his government aims to reach a six-month bridge agreement leading to a “new contract” with international creditors. In 2012, as Greece stumbled toward its second international rescue and a debt-writedown, banks ran up a tab of as much as €158 billion euros in local central bank and ECB funding. That suggests the ECB will allow a much greater extension of the emergency line, as long as politicians are seen as being on the path to agreement.

More political decisions by an allegedly ‘neutral’ central bank. First cut them off, then feed them bite-sized carrots.

• Rising Deposit Outflows Behind Extra Greek Bank ELA Access (Reuters)

The ECB allowed Greek banks access to extra emergency financing from the Bank of Greece because deposit outflows have picked up and to make sure they have liquidity while tense talks take place in Brussels next week, Greek banking sources said on Friday. The ECB on Thursday raised the cap on what Greek banks can get from the Bank of Greece through the Emergency Liquidity Assistance (ELA) window by about €5 billion to €65 billion. The extension will run until Feb. 18 when the ECB Governing Council will reappraise the situation. One banking source said that there was a mix of reasons for the action. “Some banks likely needed to tap more ELA,” said the senior banker at one of the country’s four top banks. “(But) I believe the ECB wanted to allow some headroom, liquidity comfort until Feb. 18.”

He said recent daily outflows were in the region of €300 million to €500 million on average. Another executive at a big bank cited a similar figure. “Outflows continued this week, the situation showed a deterioration in the last days,” he said. “When you see €400-500 million of outflows a day, this shows a developing trend.” He added that outflows may have gone as high €1 billion on some days. Euro zone finance ministers will meet in Brussels on Monday in an attempt to forge a deal which will allow for Greek funding over a period in which Greece’s large debt will be renegotiated. Failure to reach a deal before the end of February, when Greece’s current bailout ends, could lead to Greece being ejected from the euro zone – hence the nervousness of Greek banks and depositors.

The outflow problem isn’t all that bad.

• Most Of Greek Deposit Outflows To Return If A Deal Is Made (Kathimerini)

The bulk of deposits withdrawn from Greek bank accounts in the last two-and-a-half months due to political and financial uncertainty has stayed inside the country, stashed away in safe deposit boxes, mattresses and investment products. Banks estimate that only a small part, about 20%, of the funds that came out of depositors’ accounts has been sent to banks abroad. As banks sources have stressed, if the government agrees terms with its creditors next week, confirming the European course of the country and putting an end to uncertainty, most of the €20 billion that has left local banks since end-November could return, and quickly.

Bankers believe that some 50% of the deposit outflows, i.e. some €10 billion, has stayed in the country in the form of disposable cash and can be found in safe deposit boxes, mattresses etc, as many households have chosen to keep their cash at hand due to the ongoing uncertainty. Another 30%, or €6 billion, has been deposited in investment products. The 20% of deposit outflows that has gone abroad, amounting to some €4 billion, mostly concerns corporate funds and some of it has gone to subsidiaries of Greek banks in other countries, such as in Cyprus, Great Britain, Luxembourg, Malta, etc.

The purpose behind all this is more centralization, and that will cause ever stronger reactions.

• Band-Aids for Greece, Ukraine and Global Economy (El-Erian)

This week, three sets of meetings sought to defuse three distinct threats to the global economy. All of the gatherings featured suspenseful atmospheres, dramatic posturing and some public tantrums. And their outcomes were similar, too: The participants ended up just buying time, without doing much, if anything, to begin to address the underlying causes of the unfolding crises. In the first instance, President Francois Hollande of France and Chancellor Angela Merkel of Germany traveled to Minsk on Wednesday to compel the Russian and Ukrainian presidents to stem the escalating violence in eastern Ukraine that has claimed about 5,000 lives. After a tough all-night negotiation session, they agreed Thursday to a cease-fire to take effect this weekend.

Earlier Wednesday, the finance ministers of the euro zone countries gathered in Brussels to try to find common ground on Greece. After seven hours of discussions, they weren’t even able to settle on a road map for future negotiations. But with both their finance ministers playing tough and signaling seemingly unbridgeable negotiating positions, Merkel and the newly elected prime minister of Greece, Alexis Tsipras, were subsequently able to show leadership and be “presidential.” On Thursday, both declared themselves willing to compromise, providing much needed political cover for the finance ministers’ negotiations that are set to resume Monday (preceded by technical preparations starting today).

Earlier in the week, some of those ministers had joined their central bank colleagues in Istanbul for a meeting of the Group of 20. The agenda included policy actions to strengthen a global economy that, with the exception of the U.S., has been losing steam. In their communiques, they reaffirmed prior commitments and renewed their encouragement of central banks to continue pursuing unconventional monetary policies. Yes, some progress was made in all three meetings, but they mainly just kicked the can down the road. At best, they were holding operations that risk resulting in failure if they aren’t quickly supplemented by more comprehensive agreements.

It’s not the 1920’s.

• Inside The Germans’ Debt Psyche – What Makes Them Tick? (BBC)

Germany is the world’s fourth largest economy, the beating heart of the eurozone and guardian of financial discipline. So when it comes to money – and especially debt – what makes Germans tick? The election of Greece’s left-wing government on a promise to reduce the country’s mountain of debt has created a standoff with Europe’s economic powerhouse. And it has thrown Germany’s ultra-conservative attitude to debt into sharp focus. Germany’s extreme debt aversion is even rooted in the German language itself, says Prof Marcel Fratzscher, head of Germany’s leading Economic Research Institute. “The German word for debt – ‘schuld’ – is the same as the German word for ‘guilt’,” he explains. “To get into debt you have done something bad and that describes the German people’s attitude quite well.”

The German way is to “save now, have later” rather than “have now, pay later” – and that is not just the older generation talking. On the streets of Berlin young Germans told us what they would do if they won a million euros. A new car, a holiday, a new outfit? “I would save it for when I need it,” came a typical reply. That habit of saving money is the key to understanding another characteristic of Germans – fear of inflation. Popular wisdom says that this is due to the scars left by hyperinflation in the 1920s, when the exchange rate escalated out of control. One US dollar went from being worth four Deutschmarks to four trillion. There may be some residual echoes of that period but it is nearly 90 years ago now and Germans have moved on. The real reason is to be found in the German love of saving.

Inflation is the enemy of savers. So for a nation full of them, the idea of lowering interest rates and printing money holds a double threat – it reduces the rate you get on your savings, while any potential future inflation would mean that those same savings allow you to buy less. The good news for Germany is that inflation hasn’t arrived and, although interest rates are low, the related weakness of the euro has kept German exports like cars and machinery competitively priced. Indeed education, engineering and exporting success is the source of considerable German pride. Economists credit the post-war economic miracle – or “Wirtschaftswunder” – to a set of crucial, interlocking principles[..]

“We constantly hear, ‘if you don’t sign on the dotted line there is going to be Armageddon’. My answer is ‘let it happen!’

• Yanis Varoufakis: ‘If I Weren’t Scared, I’d Be Awfully Dangerous’ (Guardian)

In the space of three short weeks, he’s been christened Europe’s man of the moment, compared to heroes great and small, likened to a rock star, hailed as a sex icon, feted by fashionistas, and in Germany, no less, portrayed as the greatest action man to bestride planet earth since Bruce Willis set Hollywood alight in Die Hard 6. Few have had their demeanour and dress code so dissected; when he posed with George Osborne in Downing Street, his tieless, leather-jacketed look standing in stark contrast to the Chancellor’s, the press was as breathless as if a supermodel had blown in. “Britain,” declared no less venerable an authority than the Daily Telegraph, “is crying out for a politician who looks like Yanis Varoufakis. It’s quite a change in lifestyle. Has it gone to his head? The response is immediate. “I can assure you, Helena, I did not engineer it in any way. I am not promoting it. They go on about me riding a bike, but I have been riding a bike since I was 15. I just am who I am.” [..]

Even by the standards of those who have occupied the sixth floor of the finance ministry before, Varoufakis’ tenure comes at an unusually onerous time. With the country’s €240bn bailout – the biggest in global history – set to expire at the end of February, and the Greek electorate having overwhelmingly rejected austerity, Greece is at a crossroads. In a climate of high-octane pressure – though her language was more emollient, the German chancellor Angela Merkel showed little sign this week of giving in anytime soon – the possibility of political blunder, or accident, grows with each day. Athens owes some €25bn in repayments, this year alone, and what is certain is that it does not have that kind of money. When I ask Varoufakis if he has a plan B, for all negotiators surely have a credible alternative, he looks at me wide-eyed. “We constantly hear, ‘if you don’t sign on the dotted line there is going to be Armageddon’. My answer is ‘let it happen!’ There is no fall-back plan. That is my plan B. ”

What if it does happen, I ask, as images of the chaos bankruptcy would surely entail flicker across my mind. “Well, that is like asking me what happens if a comet strikes planet Earth. I have no idea. None!” he shoots back. Varoufakis is the first to say that no one should grow too fond of power. He has no desire to be on the sixth floor of the finance ministry longer than necessary. He has dispensed with the policemen assigned to protect him, the army of advisers that come with the job (let go to make way for the rehiring of the ministry’s sacked women cleaners), and each of the three cars deployed to him. If he lost the job, he says, he wouldn’t mind. “When interlocutors threaten me with the fall of this government, because they do, I say: ‘Make my day,’” he smiles. “I mean, I really don’t want to be in this office … I will go back to my book about Europe, which is half-finished. It’s very difficult to find an ending when I am still in this job.”

“Simple logic dictates that if you cannot even conceive the possibility of leaving a negotiation, then it is preferable never to enter one..”

• Yanis Varoufakis, Greek Bailout Foe (BBC)

Greece’s left-wing Finance Minister Yanis Varoufakis is leading the offensive to persuade the nation’s creditors to end austerity and forgive part of its debt. Mr Varoufakis, 53, is not only a well-respected political economist, but a charismatic man and natural charmer. A few weeks after his appointment, he has become something of a global celebrity. That is hardly surprising for Greeks – after all, Mr Varoufakis got more votes than any other candidate in the 25 January general election that swept the leftist Syriza party into power. In the wake of victory he immediately embarked on a European tour that took him to London, Paris, Rome and Berlin. The sight of a shaven-headed, athletic minister refusing to tuck his shirt into his trousers or wear a tie – even while visiting 11 Downing Street – fascinated business reporters, fashion editors and gossip columnists.

Even the German media – among Greece’s sternest critics – seemed impressed. ZDF television anchor Marietta Slomka said “he is someone you could imagine starring in a film like Die Hard 6”, and conservative daily Die Welt ran the headline “What makes Yanis Varoufakis a sex icon”. In his home country, a new word was coined – “Varoufitses” – to describe women who idolise Mr Varoufakis. At the time of writing, Mr Varoufakis had 128,000 Twitter followers, a number of devoted fan pages on Facebook, and he has inspired a video game “Syrizaman Vs Troika”. His eurozone colleagues may not find him quite so charming. In his first meeting with them on 11 February he refused to approve a common statement by the Eurogroup that implied Athens would seek an extension of its bailout. “Simple logic dictates that if you cannot even conceive the possibility of leaving a negotiation, then it is preferable never to enter one,” he wrote in a blog entry back in May 2010.

Mr Varoufakis showed signs of defiance and non-conformism from a very early age. That includes deliberately misspelling his name Yanis, writing it with only one “n” since elementary school. “I had an aesthetic problem with the double “n”,” he said. “So I decided to write my name with one. My teacher gave me a bad grade, which made me very angry and I’ve kept writing my name with one “n” ever since.” Mr Varoufakis was born on 24 March 1961 in Athens. He is a graduate of the Moraitis private school, which has nurtured many members of Greece’s political and economic elite. His father, 89-year-old Giorgos Varoufakis, is chairman of Halyvourgiki, a Greek industrial giant. This background of relative privilege did not prevent Mr Varoufakis from becoming a libertarian Marxist, who has said that “Karl Marx was responsible for framing my perspective of the world we live in, from my childhood to this day”.

So let’s put that myth to rest.

• US Will Not Become Energy Independent: Total CEO (CNBC)

Despite the so-called U.S. shale revolution and American aspirations for energy independence, the CEO of major oil giant Total told CNBC he was not convinced it would happen any time soon. “The U.S. is still relying on oil from the Middle East. It is not true the U.S. will be independent in oil – they continue to import,” Patrick Pouyanne, the new chief executive of French oil giant Total, told CNBC this week. He stressed that the U.S. “will not get” energy independence because it still consumes far more oil than it produces. “For me, the world today is interdependent. This idea that you could be (energy) independent – especially when you are the U.S., where you have many world companies; a country that is probably benefiting the most from the globalization of the world – is just something that is strange to me, I don’t believe in that,” Pouyanne added.

Oil prices have fallen dramatically in recent months – and at one point were down around 60% from highs in June 2014, on the back of a glut in supply and lack of global demand. Brent crude is currently trading around $59 a barrel and U.S. crude is at $51. OPEC has been blamed for the volatility in prices after it refused to cut production to support the cost of oil. Many saw its inaction as a bid to retain market share in the face of increased competition from U.S. shale oil producers. American oil production has grown steadily from 5 million barrels per day in 2005 to 8.6 million last year, according to the U.S. Energy information Administration.

If OPEC was hoping a low oil price would put the brakes on U.S. oil production, it might have worked. Some 87 rigs were deactivated in the week ending February 6, according to oilfield services company Baker Hughes, after a drop of 90 rigs over the previous seven days. It marks the largest absolute reduction in a single week since Baker Hughes started keeping records in 1987. But Pouyanne said that, despite anger from some at OPEC’s “game of chicken,” the U.S. was still a major oil importer and its economy was benefitting from a lower oil price.

“The average price of Russian gas supplied abroad will be $222 per 1,000 cubic meters in 2015. It could mean a 35% price cut for Gazprom supplied gas to Europe..”

• Russian Gas To Europe Can Be 35% Cheaper: Ministry (RT)

The average price of Russian gas supplied abroad will be $222 per 1,000 cubic meters in 2015. It could mean a 35% price cut for Gazprom supplied gas to Europe, the Russian Ministry of Economic Development has forecast. The price for Russian gas started to decline last year, as the contract price for Gazprom supplies are directly linked to falling oil prices, according to Vedomosti. Gas prices respond to the dynamics of oil prices with a lag of 6-9 months. In summer 2014 the company expected $350 per 1,000 cubic meters, in the end the average turned out to be $341, while the price of Brent in the second half of 2014 lost more than 50%. Next week, the management of Gazprom plans to present to the board of directors stress tests of a financial plan with an oil price of $40 and $50 per barrel based on the Ministry’s forecast.

Gazprom is expected to increase supplies to Europe to 160 billion cubic meters compared to 146.6 billion in 2015. At the same time revenue will decrease by $14.3 billion to $35.5 billion if the ministry’s prediction comes true. However, the figures may change in a planned outlook revision in April and September; Vedomosti say citing the ministry. Gazprom’s sales to Europe accounted for almost 70% of company revenues in 2014. In recent years, the average price in the EU, according to calculations by Vedomosti, was 5 to 14% higher than the overall average sales price. However, $222 per 1,000 cubic meters may be unprofitable for Gazprom in view of growing production costs, said Michael Krutikhin a partner at RusEnergy, as quoted by Vedomosti.

“..at $110 oil and 33 rubles to the U.S. dollar, Russian upstream free cash flow for the companies his group covered was roughly the same as now, with oil near $60 and 60 rubles per U.S. dollar.”

• Falling Oil Prices Don’t Scare Russian Energy Firms (CNBC)

Low oil prices are hurting the Russian state as tax revenue tumbles along with crude. But Russia’s energy firms aren’t feeling the same pain, and they may in fact weather the cheap oil storm better than their international peers. Experts point to two major factors helping the companies in a low-price environment: Moscow’s tax rate on producers shifts lower as the price of oil falls (meaning the cost is mostly borne by the state), and most of the oil companies’ expenses are denominated in rubles. Together, those factors largely offset any negative impact from oil prices, Goldman Sachs energy analyst Geydar Mamedov wrote in a recent note.

The currency point is key: Russian energy companies’ expenditures are largely conducted in rubles because there is a strong local oilfield services sector, and their revenues are dollar-denominated. So as the Russian currency has fallen against the dollar, the firms have been nearly totally insulated from oil’s price decline. “In the short term, there is definitely a natural buffer built into the system through the ruble,” Ildar Davletshin, Renaissance Capital oil and gas analyst, told CNBC. “The ruble has halved over the past 12 months; that’s a natural hedge against weak oil prices.” Mamedov noted that at $110 oil and 33 rubles to the U.S. dollar, Russian upstream free cash flow for the companies his group covered was roughly the same as now, with oil near $60 and 60 rubles per U.S. dollar.

Meanwhile, while many international oil companies outside Russia are cutting back on production, Mamedov wrote that he does not expect to see a slowdown in Russian upstream activity. (Russian refiners, on the other hand, could take a hit because of how the tax scheme works). In fact, Goldman predicts that Russian production will increase to 532 million tonnes in 2015 from 527 million tonnes in 2014. Despite those short-term positives, Davletshin said he “wouldn’t be too optimistic” in the medium or long term. Local costs may catch up with the currency differentials as inflation accelerates, and sanctions are hurting the companies by depriving them of international technology-sharing opportunities, he explained. “I’m not saying Russia cannot move on its own, but it will take longer,” he said.

Germany only plays green.

• German Coal Imports From Russia Highest Since 2006 (RT)

Germany imported more than 12 million tons of coal from Russia in 2014 – the biggest volume in 9 years, despite calls for energy independence and a switch to renewables. Coal imports from Russia increased 6.6% in 2014, at 12.6 million metric tons, Germany’s Federal Statistics Office reported Friday. This is about a third of the country s total coal imports. At a time when geopolitical relations between the two countries are strained, Germany continues to pump money into a country that the US and other European countries are bent on economically isolating. Poland, also a Moscow naysayer, is Russia’s second biggest coal importer in the EU. Another country that had sworn off Russian coal, but ended up buying the cheap energy to heat homes and factories, was Ukraine. Kiev bought some 50,000 metric tons in December.

Russian coal has become even more attractive to Europeans since the ruble depreciated more than 50%, which means importers spend less dollars and euro. The devaluation of the ruble and the decline in oil prices has placed Russian thermal coal exporters among the most competitive suppliers to both the Atlantic and Pacific markets, says Diana Bacila, a coal analyst at Oslo-based Nena, an independent energy analysis firm. About 50% of German electricity comes from coal, with the rest coming from natural gas and nuclear energy. Germany is also Russia’s biggest gas client, importing over 25 billion cubic meters per year. The recently completed Nord Stream pipeline, which feeds directly from Russia to Germany, has a capacity to deliver 55 billion cubic meters of natural gas.

This is serious.

• Argentina President Fernandez Charged in Probe of Alleged Cover-Up (Bloomberg)

Argentine President Cristina Fernandez de Kirchner was formally accused by a prosecutor of trying to cover up the alleged involvement of Iranian officials in the bombing of a Jewish center that killed 85 people. In a document filed to a federal court, Prosecutor Gerardo Pollicita said Fernandez, Foreign Minister Hector Timerman, lawmaker Andres Larroque and other government supporters tried to remove Iranian officials from Interpol lists in exchange for trade preferences with the Islamic republic. Pollicita’s 62-page statement was posted on the prosecutor general’s website. The charges will overshadow Fernandez’s last 10 months in office as she struggles to revive growth in South America’s second-biggest economy and repair relations with investors after last year’s default.

The accusations come one month after former prosecutor in the case, Alberto Nisman, was found dead in his apartment with a bullet to the head. Investigators have yet to determine if it was suicide or murder. “This could be a seismic change for Argentina’s political environment,” said Carl Meacham, Americas program director at the Center for Strategic and International Studies in Washington. “You have an economic crisis on the horizon and you marry that with a political crisis, it could be a disaster for Argentina.” Fernandez, 61, has denied the accusations against her and said last month that Nisman may have been murdered in order to sully the image of her government.

Judge Daniel Rafecas must now decide whether the evidence of a cover-up is admissible and whether to pursue the case, said Hernan Munilla Lacasa, a professor in criminal law at the Universidad Catolica Argentina in Buenos Aires. Fernandez can be called on to testify, though as president she has the right to do so in writing and not in person. Cabinet Chief Jorge Capitanich early Friday said the accusations and a march planned for Feb. 18 to commemorate Nisman’s death were part of a “judicial coup” against the president. “The Argentine people should know that we’re talking about a vulgar lie, of an enormous media operation, of a strategy of political destabilization and the biggest judicial coup d’etat in the history of Argentina to cover up for the real perpetrators of the crime,” Capitanich said at his daily press conference.

Asset prices cannot hold.

• Farmland Values in Parts of Midwest Fall for First Time in Decades (WSJ)

Farmland values declined in parts of the Midwest for the first time in decades last year, reflecting a cooling in the market driven by two years of bumper crops and sharply lower grain prices, according to Federal Reserve reports on Thursday. The average price of farmland in the Federal Reserve Bank of Chicago’s district, which includes Illinois, Iowa and other big farm states, fell 3% in 2014, marking the first annual decline since 1986, the Chicago Fed said. Prices for cropland during the fourth quarter remained steady compared with the previous quarter, according to the bank’s survey of agricultural lenders, though half of all respondents said they expect farmland values to decline further in the current quarter.

In the St. Louis Fed’s district, which includes parts of Illinois, Kentucky and Arkansas, prices for “quality” farmland gained 0.8% in the fourth quarter compared with year-ago levels, despite lower crop prices and farm incomes in the region. A majority of lenders in the district expect values to cool in the current quarter compared with the first quarter of last year, reflecting reduced demand for land amid tighter profit margins for farmers. The reports spotlight an overall slowdown in the U.S. farm economy and in the appreciation of farmland prices. Crop prices had soared for much of the past decade, fueled by drought and rising demand for corn from ethanol processors and foreign importers. The gains pushed agricultural land values so high that some analysts warned of a bubble.

On Tuesday, the U.S. Department of Agriculture projected net U.S. farm income this year would fall to $73.6 billion, the lowest since 2009, from $108 billion in 2014. Prices for corn, the biggest U.S. crop by value, have tumbled more than 50% since the summer of 2012, when they soared to record highs amid a severe U.S. drought. Growers produced the nation’s largest corn and soybeans harvests ever last autumn, helped by nearly flawless weather over much of the growing season. In the Chicago Fed district, farmland values in the latest quarter dropped in major corn-producing states like Illinois, Iowa and Indiana compared with year-ago levels, while land values in Wisconsin increased slightly and were unchanged in Michigan.

Marie Antoinette all over again.

• The Super-Rich Don’t Care About Us. It Will Be Their Downfall (Guardian)

The news this week that a bank helped wealthy customers to dodge taxes should not come as a surprise to many. The super-rich have long held some profoundly distorted ideas about the world. They are more than averagely likely to believe their achievements are the product of their superior brains and hard work. They may believe the Selfish Gene rhetoric that those with the best genes rise to the top of the pond, and at the bottom is genetic sludge. They are oblivious to any evidence to the contrary. They have no idea that had they been born on a sink estate they too would have sunk. This is partly because the super-rich are no longer exposed to data and experiences that contradict their worldview. Flitting between their various homes around the world, they know nothing of our lives.

They have never, ever had to sit on the phone waiting for the next available customer support agent – “your call really matters to us” – to not fix their phone/internet/energy bill issue. Of particular concern is that they only consume media that support their worldview. Recently, an Oxbridge-educated CEO in all seriousness told me that there has been no increase in inequality in this country. My jaw was slack with amazement when another told me that “inner London secondary pupils have the best exam results of any in the world”. They are living in the la-la land that Polly Toynbee and David Walker painstakingly exposed in their book Unjust Rewards. Consider your response to the following information. About 15,700 under-two-year-olds live in a family that is classed as homeless, according to a new report.

Homelessness adversely affects parental responsiveness, and early responsiveness has been proved to affect the capacity of the brain to process positive experiences. My response to this would be: “Since early care profoundly affects the size and content of our brains and subsequent mental health, government should act to eradicate involuntary homelessness. If Thatcher had not sold off the council housing stock this problem would be far less. A Labour government should reverse that policy.” When I put that to a super-rich man whom I know, he said: “It’s a shame there are so many babies with homeless parents but it is not the role of the state to house them. My charity does not directly address this issue but I am sure there are others that do. The role of government is to leave people like me free to create jobs which will enable those parents to earn enough to pay rent and live in decent accommodation.”

Friedman and Kennan? ‘Fraid So

Aug 022014

August 2, 2014 Posted by Raúl Ilargi Meijer at 2:58 pm Finance Tagged with: cold war, Kennan, NATO, Russia, Ukraine, US 15 Responses »

Harris & Ewing The Fall of Washington: Smokestacks on the Mall Sep 17 1935

And now for something completely different. Occasionally, I go through analytical stats for The Automatic Earth, to see who links to us. A few days ago, there were a bunch of links to my July 27 article US and EU Lose Major Energy Battle in Ukraine (I find it hard to believe nobody else has jumped on the ‘heart’ of that article: the Ukraine parliament voting down the sale of Naftogaz to western interests; if that’s not big enough for you, what is?).

The links were from a site that I think is Ukrainian, though I don’t know which ‘side’ in Ukraine, since I can’t read either the Cyrillic or the Roman contents. I do have an idea, though, of the ‘side’: in the same thread as the link to my article, someone posted an article from May 2, 1998, written by Thomas Friedman (or, as he calls him: Tomasa Fridmana) for the New York Times. The article is an interview with George Kennan, with Friedman comments.

I don’t want to waste words on Friedman, we all -should – know – of – his love of globalization and a few other hobby horses that would just lead me too far off track at this point. Suffice it to say, Tomasa thinks ‘The World is Flat’, and I totally believe his personal world indeed is. In my view, Glenn Greenwald’s description of Friedman a few years ago is pretty much all you need to know (see Wikipedia for sources):

“His status among American elites is the single most potent fact for understanding the nation’s imperial decline.”

George Kennan deserves a few more words. Once described by Foreign Policy as “the most influential diplomat of the 20th century”, Kennan was instrumental in defining US post WWII policy with regards to Russia. Born in 1904, he joined the US State Dept. in 1926(!), first began working in the US embassy in Moscow in 1933, and became America’s no 1. expert on Russia, though there were always, throughout his career, many voices who contested this, simple because they didn’t like what he said.

Kennan was instrumental in establishing the principle of “containment”, the Truman Doctrine and the Marshall Plan. In 1947, he anonymously, as “X”, wrote “The Sources of Soviet Conduct” in Foreign Affairs magazine, in which he said the Soviet regime was inherently expansionist and its influence had to be “contained”.

But while according to Kennan, this containment should be primarily political and economic, others ran away with his ideas and turned them into the military principles that started the Cold War. Kennan was now famous, but because he strongly opposed this ‘erosion’ of his ideas in the late 1940s, his career became a bumpy roller coaster. He ran in and out of favor with various administrations.

He did not at all like what he saw inside Russia between 1933 and the end of WWII, but he thought the subsequent arms race was preposterous, since Russia had lost up to 30 million people in the war and was flat on its back in 1945. Later, he said: “the general effect of Cold War extremism was to delay rather than hasten the great change that overtook the Soviet Union”.

He didn’t like the establishment of NATO (though he played a role in it), and later turned against Clinton and W. for the invasions of Kosovo and Iraq. And he was fiercely opposed to NATO expansion after 1990, which he labeled a “strategic blunder of potentially epic proportions”. He summed up his views this way:

Anyone who has ever studied the history of American diplomacy, especially military diplomacy, knows that you might start in a war with certain things on your mind as a purpose of what you are doing, but in the end, you found yourself fighting for entirely different things that you had never thought of before …

In other words, war has a momentum of its own and it carries you away from all thoughtful intentions when you get into it. Today, if we went into Iraq, like the president would like us to do, you know where you begin. You never know where you are going to end.

Kennan died in 2005, 101 years old. What a life. And what a man.

Here’s Friedman’s 1998 article on him. I’m sure you’ll see why I wanted to bring it up.

Foreign Affairs; Now a Word From X

His voice is a bit frail now, but the mind, even at age 94, is as sharp as ever. So when I reached George Kennan by phone to get his reaction to the Senate’s ratification of NATO expansion it was no surprise to find that the man who was the architect of America’s successful containment of the Soviet Union and one of the great American statesmen of the 20th century was ready with an answer.

”I think it is the beginning of a new cold war,” said Mr. Kennan from his Princeton home. ”I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else.

This expansion would make the Founding Fathers of this country turn over in their graves. We have signed up to protect a whole series of countries, even though we have neither the resources nor the intention to do so in any serious way. [NATO expansion] was simply a light-hearted action by a Senate that has no real interest in foreign affairs.”

”What bothers me is how superficial and ill informed the whole Senate debate was,” added Mr. Kennan, who was present at the creation of NATO and whose anonymous 1947 article in the journal Foreign Affairs, signed ”X,” defined America’s cold-war containment policy for 40 years.

”I was particularly bothered by the references to Russia as a country dying to attack Western Europe. Don’t people understand?

Our differences in the cold war were with the Soviet Communist regime. And now we are turning our backs on the very people who mounted the greatest bloodless revolution in history to remove that Soviet regime.

”And Russia’s democracy is as far advanced, if not farther, as any of these countries we’ve just signed up to defend from Russia,” said Mr. Kennan, who joined the State Department in 1926 and was U.S. Ambassador to Moscow in 1952. ”It shows so little understanding of Russian history and Soviet history.

Of course there is going to be a bad reaction from Russia, and then [the NATO expanders] will say that we always told you that is how the Russians are – but this is just wrong.”

One only wonders what future historians will say. If we are lucky they will say that NATO expansion to Poland, Hungary and the Czech Republic simply didn’t matter, because the vacuum it was supposed to fill had already been filled, only the Clinton team couldn’t see it.

They will say that the forces of globalization integrating Europe, coupled with the new arms control agreements, proved to be so powerful that Russia, despite NATO expansion, moved ahead with democratization and Westernization, and was gradually drawn into a loosely unified Europe. If we are unlucky they will say, as Mr. Kennan predicts, that NATO expansion set up a situation in which NATO now has to either expand all the way to Russia’s border, triggering a new cold war, or stop expanding after these three new countries and create a new dividing line through Europe.

But there is one thing future historians will surely remark upon, and that is the utter poverty of imagination that characterized U.S. foreign policy in the late 1990’s. They will note that one of the seminal events of this century took place between 1989 and 1992 — the collapse of the Soviet Empire, which had the capability, imperial intentions and ideology to truly threaten the entire free world. Thanks to Western resolve and the courage of Russian democrats, that Soviet Empire collapsed without a shot, spawning a democratic Russia, setting free the former Soviet republics and leading to unprecedented arms control agreements with the U.S.

And what was America’s response? It was to expand the NATO cold-war alliance against Russia and bring it closer to Russia’s borders.

Yes, tell your children, and your children’s children, that you lived in the age of Bill Clinton and William Cohen, the age of Madeleine Albright and Sandy Berger, the age of Trent Lott and Joe Lieberman, and you too were present at the creation of the post-cold-war order, when these foreign policy Titans put their heads together and produced . . . a mouse.

We are in the age of midgets. The only good news is that we got here in one piece because there was another age – one of great statesmen who had both imagination and courage.

As he said goodbye to me on the phone, Mr. Kennan added just one more thing: ”This has been my life, and it pains me to see it so screwed up in the end.”

One last thing. I’m pretty sure I know what George Kennan would have thought of the role the US plays in Ukraine. But I’m not sure about Tom Friedman.

• S&P 500 Suffers Largest Weekly Loss In 2 Years (MarketWatch)

U.S. stocks on Friday built on the week’s losses, leaving the S&P 500 with its biggest weekly drop in two years. Friday’s flurry of economic data only briefly lifted the stock market. Instead, Thursday’s selloff, sparked in part by signs of rising wages, continued as investors remained fearful that the Federal Reserve might raise interest rates sooner than expected. The S&P 500 fell 5.52 points, or 0.3% to end at 1,925.15, though it finished off its session low. The benchmark endured a weekly loss of 2.7%, its largest percentage drop since the week ended June 1, 2012. It’s now off 3.2% from its July 24 record close.

The Dow dropped 69.93 points, or 0.4%, to finish at 16,493.37 on Friday. The blue-chip gauge recorded a weekly tumble of 2.8%, its biggest decline since the week ended Jan. 24. Friday’s generally positive economic data keeps pressure on the Federal Reserve to reduce its stimulus measures that have helped stock prices, said Colin Cieszynski, chief market strategist at CMC Markets. “Good news for the economy is bad news for the market, because it means they’ll have to take way the liquidity that’s boosted stocks eventually,” Cieszynski told MarketWatch.

Ambrose is on a prolific roll.

• World Is At Inflexion Point As Fed Tightening Looms (AEP)

The Third Taper Tantrum has been postponed, perhaps. It has not been averted. The US Federal Reserve is preparing to tighten. Dallas Fed chief Richard Fisher said today that rates may rise early next year: “we are closer to lift-off than the market assumed we were, sometime late in 2015. I believe we moved that forward significantly,” he told CNBC. Nomura, Morgan Stanley and HSBC all think the dollar is poised for a long secular rally. This will expose which EMU crisis states have really recovered, and which emerging markets have genuinely progressed beyond boom-bust credit cycles. This is the most important development in global finance today. All else depends on it, including China’s post-bubble denouement, and Russia’s hopes of muddling through under sanctions. A powerful dollar rally threatens to turn the world upside down.

[..] When the Fed finally decides that it cannot create more jobs without stoking inflation – when the Phillips Curve trade-off turns malign – it will not show much mercy for markets. The Board is longing to prove that it is not a captive of Wall Street. It may well be especially tough to demonstrate central banking purity. Nor does the Fed pay as much attention as it should to the interlocking forces of world finance. It has a closed economy macro-model. The IMF is afraid that it may tighten stubbornly into an emerging market storm, precipitating a brutal dollar squeeze. Data from the Bank for International Settlements shows that 70% of global cross-border lending is still in dollars, whether or not the banks are American. Emerging markets have raised a further $2 trillion on the global bond markets in foreign currencies – mostly dollars – lately at a real rate of just 1%.

Dollar loans to Chinese companies through Hong Kong may have reached $1.2 trillion, a carry trade to match the subprime and Alt-A bubble in the US before Lehman blew up. It is this that will be tested. As the BIS has been warning, global debt ratios are at record levels both in emerging markets (175% of GDP) and in the rich countries (275%). They are therefore more sensitive than ever before to any rise in borrowing costs. Suddenly the world we have all know for the last five years is swivelling into reverse. The US will soon stop leaking emergency liquidity into the world economy, stoking asset bubbles everywhere.

US car sales? What a cheatin’ mess. Subprime loans, uber-creative accounting, and then a crash.

• Who Really Bought a Car in July? (Bloomberg)

July was another hot month for car sales, with today’s data releases showing the market remains on track to set a new post-recession high of almost 17 million units this year. Longer loan terms, lower lending standards and growing lease rates have the new car market racing toward its redline, and there’s talk of a bubble forming in car sales. That concern is well-founded. Like a well-tuned engine, the car market’s performance upgrade must be matched with better safeguards against overheating and misfiring. Unfortunately, the quality of car sales data in the U.S. has not been improved to meet the specifications of our hopped-up market. Even to those who regularly cover it, the U.S. auto-sales reporting system remains dauntingly, and unnecessarily, complex and opaque (note the major correction on this “insider’s guide to auto sales reporting”).

Here’s what U.S. car sales are not: registration numbers. In other mature auto markets such as Europe and Japan, every new car “sale” reported monthly is backed by a registration. Not so in the U.S., where a gap of almost 1 percent between the sales reported by dealers and the number of new vehicles registered is tolerated as normal. Last year, more than 140,000 new cars were officially sold to U.S. retail customers but never entered the fleet. This became an issue when Mercedes accused BMW of inflating its 2012 sales, running up a gap between sales and registration by including cars sold to dealers for loaner fleets. BMW’s defenses only highlighted the depth of the problem. In response to discussion of cash discounts dealers received in July 2012 to purchase vehicles for loaner fleets, the CEO of BMW North America argued, “everyone does it.” The subtext: These data discrepancies are in the short-term interest of every executive who occasionally finds himself a few hundred (or thousand) units short of a bonus at month’s end.

Only in the high-stakes, hyper-image-conscious luxury car game does self-policing of these volume-dumping tactics actually take place. Perhaps even more troublesome was a defense that BMW’s spokesman gave by e-mail in February 2013: “State-provided registration data, as reported by Polk, can lag 60 or even 90 days after an especially strong sales month. Throw in a holiday and the delay is inevitable. That’s what is playing out here.” [..] Short-term incentives for dealers and manufacturers to squeeze extra volume through various loopholes in the auto-sales reporting system are enormous, but the law of supply and demand can only be evaded for so long. With the size of the U.S. fleet failing to keep pace with gaudy sales numbers and the average vehicle age rising to more than 11 years, the market fundamentals don’t suggest endless growth beyond the approximately 800 car per 1,000 people level.

And you thought Fannie Mae and Freddie Mac were dead. Or contained. Or civilized.

• Mortgage-Bond Price Tumble Signals New Risks in Markets (Bloomberg)

Prices of a new type of U.S. mortgage bonds are plunging this month, teaching investors a lesson on the risks to markets wrought by the growing constraints on Wall Street banks. The $8.2 billion of risk-sharing securities sold in the last year by government-controlled Fannie Mae and Freddie Mac can shift their losses from homeowner defaults to bond buyers. One slice of a deal issued in May traded at 95.7 cents on the dollar yesterday, down from 99.7 cents at the end of last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

While JPMorgan Chase & Co. analysts say they fail to see “any fundamental reason” for the tumble, investors from CQS U.K. LLP to Calvert Investment Management Inc. are speculating that the drop is mainly about the growing amount of the debt running into limits created by new regulations on bond dealers’ ability to smooth trading by building up their inventories. “It could be symbolic of what could happen more broadly in a real ‘risk-off’ environment,” Bill Murray, a New York-based money manager at $14 billion hedge-fund firm CQS, said in an interview.

Too big to fail.

• Portugal May Be About To Bail Out Esperito Santo (CNBC)

After a devastating day in the stock markets for Portugal’s troubled lender Banco Espirito Santo (BES), analysts are weighing up whether the country’s central bank could step in and bail out the bank. Turmoil at the group which owns BES has embroiled the lender for months with top officials being suspended this week over suspected “harmful management.” BES shares lost around 40% on Thursday after Portugal’s largest listed lender by assets posted a first-half net loss of €3.58 billion ($4.8 billion). This effectively wiped out the €2.1 billion capital buffer it previously stated it had available. Then Friday came news from Reuters that Espirito Santo Financial Group, which owns BES, had announced that its Luxembourg-based division, ESFIL, had filed for creditor protection in Luxembourg.

Bill Blain, a senior fixed income strategist at Mint Partners believes that a state bailout of BES would convince him that “too-big-to-fail” lives on, adding that the whole issue of the unholy incestuous relationship between states and banking would reignite. “BES is not a one-off. There will be others equally mismanaged,” he said in a morning note. “If Portugal bites the bullet and leaves the bank unsupported, it at least demonstrates some credibility about restoring the bank/sovereign divide and separating the problem components.”

If Elliott is found to have lied in court about its swaps holdings, this could take a nice turn. By the way, ISDA decides whether there’s a default or not. And who’s in ISDA? “The 15-member group includes representatives from Bank of America, Elliott, Morgan Stanley and JPMorgan”.

• Argentine Bonds Decline as Default Triggers $1 Billion of Swaps (Bloomberg)

Argentine bonds posted the biggest two-day loss since 2012 as a committee ruled that the failure to pay interest will trigger $1 billion of credit-default swaps. The International Swaps & Derivatives Association’s determinations committee made the ruling on the contracts in response to a question posed by Swiss bank UBS AG after the government missed a July 30 payment deadline on $539 million of notes. Argentina is the first nation to trigger the insurance since Greece restructured its debt in 2012. While Argentina says there was no default since it made the payment to the trustee for the bond, a U.S. judge’s ruling bars it from passing the money to holders without a resolution of the nation’s dispute with hedge funds led by Elliott Management Corp., which won an order for full repayment on defaulted debt from 2001.

“It’s a clear default, despite the rhetoric of the Argentine authorities,” Juan Carlos Rodado, the head of Latin America research at Natixis, said in an e-mail. Following the credit event ruling, the trades will be settled at an auction, ISDA said in a statement. The process sets a value for the defaulted bonds and then creators of the contracts pay buyers face value in exchange for the underlying securities or the cash equivalent determined at the auction administered by Markit Group Ltd. and Creditex Group. [..] Many bond buyers own credit swaps as protection against losses. The dual roles can skew incentives because creditors will sometimes stand to profit more from a swaps payout than an issuer actually meeting its debt obligations.

Argentina will investigate whether the holdouts’ failure to reach agreement on the debt case was part of a “maneuver” to profit from payouts on the credit-default swaps, the Economy Ministry said in an e-mailed statement on Aug. 1. Local regulators will ask the U.S. Securities and Exchange Commission to help the country establish if hedge funds, either by themselves or through third parties, benefited from the triggering of CDS, according to the statement. Elliott last year denied in a U.S. court that it owned default swaps for Argentina. [..] ISDA’s determinations committee was formed in 2009 and makes binding decisions for the market on whether contracts can be triggered. The 15-member group includes representatives from Bank of America, Elliott, Morgan Stanley and JPMorgan.

The gist: India refuses to stop feeding its poor. The west won’t let them.

• WTO’s Future In Doubt After India Blocks Trade Deal (Guardian)

The future of the World Trade Organisation has been thrown into doubt after eleventh-hour attempts to salvage a global trade deal collapsed. Talks broke down after India’s refusal to back a deal unless it included concessions allowing developing countries freedom to subsidise and stockpile food. An agreement on the deal, centred on loosening global customs rules, had been reached in Bali in December, with a deadline of midnight on Thursday to ratify it. But it was scuppered after the WTO’s 160 members failed to reach agreement over India’s demands. It would have been the first global trade deal reached by the Geneva-based institution since it was founded almost two decades ago. The last-minute failure to reach agreement prompted questions over the very existence of the WTO and how it will survive the deadlock.

Admitting defeat, Roberto Azevêdo, the director general, was candid about the challenges facing WTO. Despite intense negotiations, disagreement between members had not been resolved, he said. “We have not been able to find a solution that would allow us to bridge that gap. We tried everything we could. But it has not proved possible,” he said. “The fact we do not have a conclusion means that we are entering a new phase in our work – a phase which strikes me as being full of uncertainties.” Speaking about the future of the organisation, Azevêdo said: “What this means for the WTO will be in the hands of the members. I think we should take the time to reflect and come back in September.”

‘Lies, hypocrisy and propaganda.’

• Russia Says US Creating “Wall Of Information Noise” (RT)

Moscow has upped the ante in its growing confrontation with Washington after releasing an incendiary statement, accusing the US of spinning and distorting facts to allege that Russia is testing a new cruise missile, banned by a landmark Cold War treaty. “Once again the US is trying (and again rather clumsily) to act as a mentor, for some reason pretending to possess the truth in the last instance and have the right to judge others. Claims are made with little to no evidence and based on warped logic, in other words presented not with further experts’ analyses in mind,” opens the lengthy tirade by the Russian Foreign Ministry, in response to the allegations detailed in the State Department report released on Tuesday. “The purpose seems to be to create a wall of information noise to incite other countries, and to boil up a propagandist brew for the media. Or does the US administration still sincerely deceive itself that the world can take Washington’s word?”

The US report never specified how exactly Russia violated the treaty, instead offering a vague finding that: “The United States has determined that the Russian Federation is in violation of its obligations under the INF Treaty not to possess, produce, or flight-test a ground-launched cruise missile (GLCM) with a range capability of 500 km to 5,500 km, or to possess or produce launchers of such missiles.” This would be a direct violation of the Intermediate-Range Nuclear Forces Treaty (INF) signed by Ronald Reagan and Mikhail Gorbachev in 1987, which banned missiles that could carry nuclear warheads in the range of 500-5,500 km. The White House described the supposed transgression as a “very serious matter” of which it has been aware since 2008, again not naming the suspect. The media in the meantime were quick to allege the missile in question was the R-500 cruise missile with an officially stated range of 500km, which some believe can be easily modified for greater ranges.

Russia previously issued a brief response to the allegations that was dismissive, but called for further dialogue. The latest diatribe, however, makes no attempt to seek common ground, and takes pot shots at the entirety of the US approach to international treaties – repeatedly accusing Washington of duplicity and bad faith. “American officials cite classified intelligence, when questioned about their findings. The value of such intelligence has been amply proven by the ‘Iraqi weapons of mass destruction’ myth. Such undercover research becomes even less trustworthy, with regular leaks of obviously untrue and provocative pieces of information about the conflict in eastern Ukraine, while data coming from sources beyond US control gets ignored. Years pass, but the Americans have learned nothing.”

How long till they revolt?

• Russian Sanctions Crushing German Business (RT)

The West is tightening the financial screws on Moscow, but German companies are already feeling the kickback of a slowing Russian economy and weakening ruble. Russia is Europe’s third-largest trading partner, so a spluttering Russian economy, exacerbated by the Ukraine crisis, is seriously affecting German companies. In 2013, Germany exported €36 billion worth of goods to Russia. A higher value ruble and inflation risk consumer spending in the region, and are cutting German involvement in the market accordingly. German sports retailer Adidas lowered financial targets for the next two years, citing conditions in Russia as a major stumbling block. “The recent trend change in the Russian ruble as well as increasing risks to consumer sentiment and consumer spending from current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” the company’s financial outlook said.

In response, Adidas says it will speed-up efforts to close stores in the Russian and CIS markets in 2014 and 2015, as well as reduce inventory in the marketplace. A shrinking car market in Russia is dragging down demand for Renault, Peugeot Citroen, GM, and Ford, which all produce cars locally. Europe’s largest carmaker, Volkswagen, reported an 8% decline in Russian sales in the first two quarters compared to last year, citing emerging market volatility. The company is facing tougher trading conditions in other developing markets such as Brazil, China, and India, where currency fluctuations sway buyers away from European manufacturers. Inflated currencies in emerging markets dissuade buyers from expensive European imports, and have the potential to strengthen demand for local products.

Seems fine in summer, but that’s over in 2 months time.

• Saving Up Gas For Winter: Ukraine Cuts Consumption by 30% (RT)

As natural gas supplies are tightly squeezed, from Friday, manufacturing and municipalities in Ukraine are officially getting 30% less gas. This reduction is expected to help the country live through the winter without imported Russian gas. The savings plan was announced by the deputy head of Naftogaz Alexander Todiichuk on Ukrainian TV in mid–July. “The saving regime is being forced in Ukraine and it’ll officially come into operation as of August 1,” he said. The ‘regime of gas saving’ includes cutting the use of gas by 30% in manufacturing and municipalities, while consumers that rely on government funding, such as schools and hospitals, would have to cut gas consumption by 10%. The measure are expected to save about 150 million cubic meters of gas per month, which will be pumped into underground storage, said Todiichuk, adding that the volume should increase starting from August.

Coming into the winter, Ukraine has 16-17 billion cubic meters of natural gas saved up in underground storage. The government in Kiev estimates Ukraine needs to import 7.23 billion cubic meters of gas in the next eight months through to March in order to keep economic activity stable, especially during the high-demand winter season. Supplies from Russia were cut (link) in June after Kiev failed to pay a$5.3 billion gas bill and as Ukrainian and Russia sides squabbled over a fair price. Ukraine’s Energy Minister Yuri Prodan said reverse gas flow supplies from Slovakia could begin in August, if not September. The US government has considered starting gas exports to Europe, but there is a lack of infrastructure.

• ‘Nightmare Bacteria’ Spread In Southeastern US (USA Today)

Superbugs known as CRE — called “nightmare bacteria” by federal health officials because they are deadly and virtually untreatable — are skyrocketing in the Southeastern USA, new research shows. Experts fear a growing national problem, and some say the spread of such superbugs may portend a “post-antibiotic era.” Cases of the antibiotic-resistant CRE rose fivefold in community hospitals in the region from 2008 to 2012, researchers at Duke University Medical Center found, and they said those rates are likely underestimates. “We’re trying to sound the alarm. This is a problem for all of us in health care,” said Deverick J. Anderson, senior author of the study and an associate professor of medicine at Duke. “These (bacteria) are just about as bad as it gets.”

CRE, short for carbapenem-resistant Enterobacteriaceae, are a family of bacteria that have over time become resistant to last-resort antibiotics. They prey mostly on vulnerable, hospitalized patients and kill nearly half who get bloodstream infections. CRE are the worst of the worst in a growing sea of pernicious germs resistant to antibiotics that take hold in sick patients in health care settings. According to the U.S. Centers for Disease Control and Prevention, one in 25 hospitalized patients has at least one health care-associated infection on any given day. Two of the more common superbugs are C. difficile, which is rising steeply and is linked to about 14,000 American deaths each year, and MRSA, which has been a problem in hospitals for decades. Researchers point to a recent decrease in invasive MRSA infections but estimate there were still more than 80,000 in 2011. MRSA has spread beyond hospitals into communities.

Nice studies, fast evolving. Lots of dinosaurs with feathers.

• Birds: Incredible Shrinking Dinosaurs (CSM)

For decades, paleontologists have been uncovering the remarkable evolutionary relationships between fearsome, two-legged, meat-eating dinosaurs and birds. A new study suggests that the pace of the transition from one to the other was quick by dinosaur standards. In the 50 million years preceding the appearance of the first birds some 163 million years ago, the size and weight of theropods along the direct line of descent to birds shrank one group after another – slowly at first, but going into free fall during the final 10 to 15 million years once Maniraptors took the evolutionary baton from their direct ancestors, the Coelurosaurs. The skeletal changes taking place during the 50-million-year dinosaur-to-bird transition were occurring four times faster than for dinosaurs as a whole, according to the analysis, conducted by an international team of researchers led by Michael Lee, with the South Australia Museum in Adelaide.

Rapid rates of change in body size have appeared before in the fossil record. Following a mass extinction at the end of the Cretaceous period some 65 million years ago, an event that drove non-avian dinosaurs extinct, the size and diversity of mammals exploded over a 15-million-year period, researchers say. This came as mammals began to fill ecological niches vacated by the late, great dinosaurs. The interplay between evolution and ecological niches was likely at work for the ancestors to birds as well – in this case, the Great Escape. Some researchers surmise that the changes in body size and skeletal structures that led to the first birds, particularly during the phase of accelerated change, could have occurred as the now-smaller theropods moved into trees to escape becoming another animal’s meal or to take advantage of new sources of food.

The continuing reduction in size needed to succeed as tree dwellers would have triggered a cascade of evolutionary changes, suggests University of Bristol paleontologist Mike Benton. These changes would have improved vision, improved the aerodynamics of forelimbs to allow for increasingly ambitious leaps from tree to tree, or encouraged the evolution of feathers to insulate the new tree dwellers. “Being smaller and lighter in the land of giants, with rapidly evolving anatomical adaptations, provided these bird ancestors with new ecological opportunities,” Dr. Lee said in a prepared statement. Past studies of animal sizes in the run-up to birds had looked at individual branches of the avian ancestral tree or used trees that used physical traits to establish relationships, but no dates. Lee and colleagues were able to take advantage of the explosion of small feathered theropod fossils coming out of China since the mid-1990s, known collectively as Paraves. These animals were trying to exploit various ways of getting from tree to tree – jumping, gliding, or parachuting …

Debt Rattle Mar 25 2014: Cold Warning

Mar 252014

March 25, 2014 Posted by Raúl Ilargi Meijer at 4:15 pm Finance Tagged with: China, cold war, psychopath, Putin 4 Responses »

Charlotte Brooks Duke Ellington at bat near segregated motel in Florida April 1955

You can hurt a few handfuls of Putin’s people for a few days with sanctions like closing their Visa accounts. But if you threaten to buy less Rosneft oil and Gazprom gas, why should they really care? It’s not as if there’s a glut of either available. Any pain will be short lived. Moreover, it’s all but certain that such actions will drive Russia and China closer together, and is that such a dream scenario for America and Europe?

Of course there’s plenty of folk in the US Senate and in Brussels who relish the prospect of some sort of limited warfare with Russia, but they’re mostly fossilized entities, whether physically and/or mentally. There will be some such voices in Russia too, and there are many in Ukraine, where long festering hatred, by the looks of it, is still one of the main reasons people get out of bed in the morning.

Yulia Tymoshenko, former PM and prime candidate for prime minister again, was caught on tape uttering some real ugly threats against ethnic Russians, like nuking all 8 million of them. And that’s the kind of person the west is preparing to help back in the saddle by unleashing more sanctions and further isolating Putin? Really, we’d rather go there then seek common ground and peaceful solutions?

It would seem that many of the older Senators and EU career bureaucrats are under the impression that all that has changed since the cold war is that Russia was weakened. But if you take one look at what happened to western economies, debt levels and growth rates since then, it would be obvious to what extent the west, too, is considerably weaker.

It’s nice to draw up plans to be less independent on Russia for energy, but there would have to be alternative sources of supply for such plans to work. And they don’t seem to be available, or even if they are, at least 5-10 years away. How much more can bankrupt Europe afford to pay for its oil and gas delivery in the meantime, especially given the fact that it will also have to invest heavily in the infrastructure for the so far almost exclusively theoretical new energy streams?

Is all the chest thumping truly in the best interest of the average European or American? Or is this just the pursuit by a bunch of wrinkled demi-psychopath wannabees, of a faded dream of times gone by, still shot in black and white, that “we” have a god-given right to rule the entire planet and suck up all its resources for our own pleasure, swiping a few scraps off our tables for the rest of humanity? Do the not yet wrinkled rest of us still want to pursue that dream?

At the height of the cold war, if you recall, America still had a middle class, and the majority of the population looked forward and worked hard to achieve a better life for their children. Want to try poll Americans on that now? Want to try ask the Greeks and Italians how they see their children’s futures? The only reason the western elites care enough about reviving growth to risk going to – economic or actual – war over it, is to strengthen their own positions, not those of the increasingly downtrodden they purport to represent.

In China, the government and banking world worry, among an obvious slew of other issues, about the slowing pace of urbanization.

“The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years …” [..] “In the past 30 years we turned farmers into factory workers, triggering massive gains in productivity and hence growth …”.

One would like to add: yeah, and pollution. What’s wrong with people living in the country side, with less pollution? It hurts economic growth numbers, that’s what’s wrong. But isn’t pollution one of the spear points in Chinese government policy too? Yes, it is, but like the west, China wants to have the growth first, and then clean up the mess afterwards. Whether that’s at all possible is much less of a concern. The leadership prefers a dirty world where it can maximize its hold on power to a cleaner one where it has less. It’s the same story wherever and whenever you look.

The financial world lives in hopeful expectation of more stimulus in China and Europe, stimulus that if it comes will originate only in lousy economic numbers. It’s not a mistake by central banks that lies at the origin of these stimulus measures, they simply serve the interests of the people who actually do benefit from the measures, not the ones who pay for them. That QE et al cannot lift an economy out of the doldrums is as clear to central bankers as it is to any single working neuron. But it is a great way to transfer wealth from the bottom to the top.

In China, the people’s view of economics is much less obfuscated than it is in the west. When real estate prices and trust investments start falling, the Chinese will take to the streets demanding the government give them what they feel they deserve after having moved to smog filled cities to do mind numbing jobs. But while China’s development model is as much of a bubble as ours, after the smoke has cleared, the country will rise up again under different leadership to take on a much bigger role in the world than it’s ever had in modern times.

Are we still going to be chest thumping by then? Or will we have learned to recognize the traits that make the leaders handpicked for us to vote for, unfit to represent out interests? I think that the poorer we get, and that process will forcibly continue, the more likely we are to pick the less competent ones. As long as they use the right words to promise us better days, and they look like they could work in TV, they got the job.

And they can get into another cold war with China and Russia and whoever else challenges our broken black and white dreams by then.

But granted, that’s the future. Here’s a great graph depicting where we are today, courtesy of IceCap:

Guess maybe our bubbles are not big enough yet?

Great piece with great graph. Should perhaps be everybody’s screensaver.

• Connecting The Bubbles The Fed Blows (IceCap)

Reading down IceCap’s memory lane, you’ll recall our November 2012 “Salma Hayek” publication which described how world leaders had two choices in the way to manage the global economy. The first option was based upon economic theory by Friedrich Hayek who claimed that the economy couldn’t be and shouldn’t be managed on an acute basis. Mr. Hayek believed that governments should simply ensure there was enough money available. That was about it. If only our leaders had listened.

Instead, the financial world we enjoy today chose the second option which was built entirely on the mislead belief of John Maynard Keynes, that man could in fact control or better still eliminate the business cycle by changing interest rates, changing tax rates, and spending more money than you own. In theory, this approach works beautifully. Then it meets reality. From our perspective, reality arrives when there are no more interest rates to cut, no more taxes to cut, and no more money to spend.

Chart 1 shows the success enjoyed by the US central bank’s interest rate policy over the years. In 1997, the Asian crisis followed by the Russian crisis followed by the collapse of a gigantic hedge fund, allowed the American central bank to plant the seeds for the next crisis which turned out to be the tech bubble.

At the time, both financial pundits and the big banks with their balanced funds proclaimed that the world had indeed entered a different financial and economic era – yes, this time it was different. Of course 4,000 Dow Jones Industrial and NASDAQ points later, the sheep started to lazily admit that perhaps this new post-Y2K economy wasn’t all that it was cracked up to be.

Not to worry, once again the American central bank mounted their ponies and rode the global economy straight into several years of ultra-low interest rates. The hope (there’s that word again) was that really cheap money would encourage people, companies and governments to borrow and spend again. And borrow and spend they did – right smack into the biggest housing bubble in economic history. Day traders became passé, and the newest game in town was flippin’ houses.

Rich people flipped mansions, plumbers and teachers flipped suburban homes and even Vegas strippers got in on the act and flipped condos among other things. By the time it was over, the entire world was flipped upside down – courtesy of the US Federal Reserve and their interest rate machine. And this brings us to the next global crisis, which we assure you is on its way. After all, Chart 1 proves it is crystal clear that every time the US Federal Reserve acts to “save us” from one crisis, it directly sows the seeds for an even bigger crisis in the future.

• China’s Urbanization Loses Momentum as Growth Slows (Bloomberg)

The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years, deepening economic-growth concerns. A government report released this month projected a 6.3 percentage-point rise in the share of people living in cities from 2013 to 2020 – down from a 9.4-point gain the previous seven years. Nomura Holdings Inc. estimates that slower urbanization will slice as much as half a percentage point from annual gross domestic product growth over the next half decade.

“In the past 30 years we turned farmers into factory workers, triggering massive gains in productivity and hence growth,” said Ken Peng, Asia Pacific investment strategist at Citigroup Inc.’s private-bank business in Hong Kong. “Now those gains are diminishing.”

Li, who asked an arm of China’s cabinet to work with the World Bank on an urban-planning strategy released today, is under increasing pressure to take steps to address weakening economic expansion. A private report yesterday indicated a fifth straight slowdown in manufacturing in the world’s second-largest economy. The premier, who has advocated an urbanization-growth strategy for two decades, is up against a shrinking pool of rural workers, rising local-government debt and unhealthy air pollution in almost all big cities. Diminishing returns from urbanization make it tougher to achieve economic goals including this year’s 7.5% expansion target.

Today’s report from the World Bank and the State Council’s Development Research Center, which helped inform the government’s plan, recommends changes including on land use to spur more-efficient and denser cities. That can save China $1.4 trillion from a projected $5.3 trillion in infrastructure spending over the next 15 years, World Bank Chief Operating Officer Sri Mulyani Indrawati said in a speech today. “You cannot go on with the same urbanization model,” Sri Mulyani said in a separate interview.

Big Risk for Big Oil. But they’re in such bad shape they’re going for the jugular: get rid of Putin and take it all.

• Kremlin Partnership Places BP at Risk in Russia Crisis (Bloomberg)

No business has as much at stake as BP, as the crisis in the West’s relations with Russia escalates. The British oil company, whose shares are down 6.2% since Putin deployed troops in Crimea, holds the single biggest foreign investment in Russia – a 20% stake in OAO Rosneft (ROSN) it acquired last year. U.S. sanctions last week against oil-trading billionaire Gennady Timchenko showed willingness to target Russia’s most important industry and Vladimir Putin’s closest associates.

That’s a concern for BP because Rosneft links it directly to Putin’s regime: the state owns 70% of Russia’s largest oil producer and it’s run by Igor Sechin, a confidant of Putin for two decades. While current sanctions won’t harm BP’s ability to do business in Russia, analysts said they worry about the long-term prospects for the Rosneft investment against a background of worsening relations between the West and Moscow. “Tight sanctions would impact BP more than peers given Russia is their second-largest contributor to earnings and production after the U.S.,” said Brian Youngberg, an analyst at Edward Jones in St. Louis. “BP’s placed a big bet on Russia and something like this shows the risk in doing so.”

Since the start of the month, BP’s shares have dropped more than any of the 30 members of the Dow Jones Oil & Gas Titans index apart from Russian gas exporter OAO Gazprom. On a March 4 conference call, one day after the value of London-based BP’s deal tumbled $850 million as investors sold Russian stocks in response to the Ukrainian crisis, Chief Executive Officer Bob Dudley summed up the importance of Rosneft for a company still trying to recover from 2010’s Gulf of Mexico disaster.

“And then there is our unique investment in Russia’s growing energy industry,” he said. “Russia is, of course, one of the world’s largest oil and gas producers and a country where BP has a long and successful track record. Through our investment in Rosneft, we have created a unique position.” While the company is monitoring the situation, it remains fully committed to its investment in Russia, said Toby Odone, a BP spokesman. Rosneft declined to comment.

True colors shining through.

• Former Ukraine PM Tymoshenko: Time To Grab Guns And Kill Damn Russians (RT)

Ukrainians must take up arms against Russians so that not even scorched earth will be left where Russia stands; an example of former Ukrainian PM Yulia Tymoshenko’s vitriol in phone call leaked online. Tymoshenko confirmed the authenticity of the conversation on Twitter, while claiming that a section where she is heard to call for the nuclear slaughter of the eight million Russians who remain on Ukrainian territory was edited. She tweeted “The conversation took place, but the ‘8 million Russians in Ukraine’ piece is an edit. In fact, I said Russians in Ukraine – are Ukrainians. Hello FSB 🙂 Sorry for the obscene language.”

The former Ukrainian PM has not clarified who exactly she wants to nuke. The phone conversation with Nestor Shufrych, former deputy secretary of the National Security and Defense Council of Ukraine, was uploaded on YouTube on Monday by user Sergiy Vechirko. Shufrych’s press service flatly contradicted Tymoshenko, slamming the tape as fake. The press release reads “The conversation didn’t take place,” as quoted by korrespondent.net. The leaked phone call took placed on March 18, hours after the Crimea & Sevastopol accession treaty was signed in the Kremlin.

While Shufrych was “just shocked,” Tymoshenko was enraged by the results of the Crimean referendum . “This is really beyond all boundaries. It’s about time we grab our guns and kill go kill those damn Russians together with their leader,” Tymoshenko said. The ex-PM declared if she was in charge “there would be no f***ing way that they would get Crimea then.”

Shufrych made the valid point that Ukraine “didn’t have any force potential” to keep Crimea. But Tymoshenko, who plans to run in Ukraine’s presidential election, expressed confidence that she would have found “a way to kill those a*****es.” “I hope I will be able to get all my connections involved. And I will use all of my means to make the entire world raise up, so that there wouldn’t be even a scorched field left in Russia,” she promised. Despite being incapacitated by spinal disc hernia the ex-PM stressed she’s ready to “grab a machine gun and shoot that m*********er in the head.”

These moves have been under consideration for a long time. All the plans are drawn up.

• Russian Oil Seen Heading East Not West in Crimea Spat (Bloomberg)

The Crimean crisis is poised to reshape the politics of oil by accelerating Russia’s drive to send more barrels to China, leaving Europe with pricier imports and boosting U.S. dependence on fuel from the Middle East. China already has agreed to buy more than $350 billion of Russian crude in coming years from the government of President Vladimir Putin. The ties are likely to deepen as the U.S. and Europe levy sanctions against Russia as punishment for the invasion of Ukraine.

Such shifts will be hard to overcome. Europe, which gets about 30% of its natural gas from Russia, has few viable immediate alternatives. The U.S., even after the shale boom, must import 40% of its crude oil, 10.6 million barrels a day that leaves the country vulnerable to global markets. The alternatives to Russia also carry significant financial, environmental and geological challenges. Canada’s oil sands pollute more than most traditional alternatives, while Poland’s promising shale fields have yet to be unlocked. The biggest oil finds of the past decade are trapped under the miles-deep waters offshore Brazil and West Africa.

“You’re going to see the Russians go out and try to sell and you’re going to see the Asian buyers drive hard bargains with Russia,” said Philip Verleger, an energy economist at PKVerleger LLC in Carbondale, Colorado, suggesting European countries will feel the most pain in the form of higher gas prices as they struggle to reduce their dependence on Russia. As world leaders gathered in The Hague to discuss nuclear security issues, U.S. President Barack Obama sought to encourage Chinese criticism of Russia on Ukraine. Chinese President Xi Jinping in turn pressed Obama about a reported U.S. breach of the servers of China’s largest phone-equipment maker.

China has always held a “just and objective attitude” toward the Ukraine crisis, Xi said in the meeting with Obama, according to a report yesterday from China’s official Xinhua news agency. The world’s biggest energy user, China abstained from the United Nations Security Council resolution that declared the Crimean succession referendum illegal. Russia vetoed it.

China imported a record amount of Russian crude last month, 2.72 million metric tons, about a supertanker full every three days. The total more than tripled in a decade, and Russia now represents 12% of China’s crude imports, customs data show, among the highest levels in the past seven years.

“It’s always been assumed Russia reorienting its shipments toward China would be a long-term objective; originally it was considered something of a leverage point for Russia,” said Robert Kahn, a senior fellow at the Council on Foreign Relations in Washington. “Now people may see it as a reaction to the possible loss of a European market.”

Hilarious. Nothing US infighting can’t make worse.

• Senate Republicans Seek to Void IMF Money in Ukraine Aid (Bloomberg)

A partisan dispute over the International Monetary Fund will be at the center of the U.S. Senate debate this week on legislation providing aid to Ukraine and imposing sanctions on Russia. After a Senate vote yesterday, 78-17, to advance the bill, Republicans say they’ll try to strike language boosting the U.S. share, or quota, at the IMF and implementing a 2010 international agreement giving rising economies more voice. “If the IMF reform is in there, you’re not going to have that strong show of unity from the Congress,” said Senator Ron Johnson, a Wisconsin Republican, who said he would offer an amendment to eliminate the language. “Hopefully we can strip that out so that we have as singular a voice coming from Congress as possible.”

The IMF provision has slowed Senate consideration of legislation that otherwise has drawn broad bipartisan support. The Senate measure, which Majority Leader Harry Reid said yesterday he wants to complete this week, would provide about $1 billion in loan guarantees and authorize $150 million in direct assistance to Ukraine. Senators could begin considering amendments as soon as today. In addition to removing the IMF provision, Republicans will seek to boost U.S. natural gas exports to countries that are members of the North Atlantic Treaty Organization.

Senator Ted Cruz, a Texas Republican, told reporters yesterday that the IMF changes Democrats are seeking “would decrease America’s influence at the IMF and perversely would increase Russia’s influence in the IMF.” “These provisions have no business in a Ukraine aid package,” Cruz said, adding that taking out the IMF language would be the “easiest way” to quickly pass the legislation. Significantly, Cruz said he wouldn’t try to block a final vote on the underlying bill as long as Republicans are given a vote on their amendment to remove the IMF provision.

Delay “sends a very weak message” to Moscow, said Reid, who blamed Republicans for slowing action, noting that Russia moved to annex Crimea while Congress was on a week-long break that ended yesterday. “It’s impossible to know whether events would have unfolded differently if the United States had responded to this Russian aggression with a strong, unified voice, which we did not do,” Reid said.

• Why The EU Won’t Annex Ukraine (RT)

Hysterical 24/7 Western spin conveys the impression Ukraine will be annexed by a (mostly bankrupt) EU tomorrow. No so fast! The final deal will be just an association agreement; afterwards there would be a long and winding road towards EU admission (which, by the way, the absolute majority of EU member-nations don’t want.) Article 7.2. of the association agreement states that Ukraine will have to comply with the common foreign and security policy (CFSP) and the European security and defense policy (ESDP).

The obscure – even for most Europeans – ESDP happens to be the key European pillar of NATO. Translation: it details how the EU is subordinated to the US (which controls NATO). For instance, the EU may only act in a determined case if NATO first declines to. Additionally, the March 2003 Berlin-plus agreement allows the EU to use NATO’s hardware and software for military operations if NATO declines to. What this essentially means is that Ukraine is on the road to become legally bound to NATO’s overall project. Along with other independent analysts, I’ve argued from the start that this whole geopolitical drama is first and foremost about NATO annexing Ukraine.

The NATO-Ukraine twisted love affair started in the early 2000s. After some soul-searching, it was decided NATO or no NATO should be the subject of a national referendum in the future. In the 2008 Bucharest summit NATO opened its arms, stating that Ukraine could join as soon as it met the criteria. In 2010 Yanukovich announced Ukraine was not interested anymore. Still, Ukraine remains quite a muscular member of NATO’s innocent-sounding Partnership for Peace (PfP).

No wonder NATO is now in overdrive selling the notion that Ukraine is “under threat” – and should join as soon as possible. NATO’s secretary-general – the astonishingly mediocre American poodle, Anders Fogh Rasmussen – said we’re living the most serious threat to Europe’s security since the end of the Cold War: “This is a wake-up call. For the Euro-Atlantic community. For NATO. And for all those committed to a Europe whole, free and at peace.’’ He forgot to add: a Europe under free and peaceful submission to the Pentagon.

Weidmann is Bundesbank. Bundesbank is enemy no. 1 of EU QE.

• ECB’s Weidmann Says QE Not Out Of The Question (Reuters)

Bundesbank President Jens Weidmann said it was not ‘out of the question’ for the European Central Bank to buy bank assets to fight deflation, in a softening of the German central bank’s strict stance on the issue. Quantitative easing (QE) is when a central bank buys loans or other assets from banks and would represent a radical departure for the ECB, which has so far, not least under pressure from Germany, refused to make such a move.

Weidmann, who is a member of the European Central Bank Governing Council told MNI in an interview published on Tuesday that the scope of the ECB’s conventional tools, such as changes to the interest rates, was limited. “The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and side-effects,” Weidmann said in the interview, conducted on Friday. “This does not mean that a QE program is generally out of the question,” Weidmann said. “But we have to ensure that the prohibition of monetary financing is respected.”

Yay! More vampires. Guess that means China’s ready to play in the big leagues.

• China Banks Drained by Internet Funds Called Vampires (Bloomberg)

It has been labeled a “blood-sucking vampire” by a prominent commentator on state-run television. Executives at China’s largest banks have called for regulators to curb its rapid expansion.

The focus of this ire is Internet financing, specifically Yu’E Bao, the fund pioneered nine months ago by Alibaba Group Holding Ltd.’s online-payment affiliate Alipay. Its ease of use, involving a few taps on a smartphone, has drawn deposits from 81 million customers, more than the population of Germany, as they chase returns higher than China’s banks can offer. The total exceeded 500 billion yuan ($80 billion) as of Feb. 28, according to the official Xinhua news agency, double the amount reported by Alipay in mid-January.

At least six other technology firms, including Baidu Inc. and Tencent Holding Ltd., have embraced Internet financing with similar products offering returns as high as 10% and threatening to drain more cash from China’s banking system. Bank executives, unable to stop the outflow of their cheapest source of funding because interest rates on comparable deposits are fixed by the government at 0.35%, are calling for more regulation, saying that lack of oversight and risks related to account security, yield volatility and liquidity management threaten China’s financial stability.

“Now it’s time to step up regulation for the industry’s own good,” Yang Kaisheng, a former president of Industrial & Commercial Bank of China Ltd. and now an adviser to the China Banking Regulatory Commission, said in an interview this month at the National People’s Congress in Beijing. “The emergence of Internet financing is inevitable in China because it serves the grassroots better, but whoever is engaging in financial services, no matter online or off-line, must comply with regulations. If someone stays out of oversight for too long, the chances of it disrupting financial stability will increase significantly.” [..]

“Why is all the money going into Yu’E Bao? Because banks fail to pay what savers deserve. You can’t fool them,” Ma Weihua, a former president of China Merchants Bank Co., said during a group discussion at the National People’s Congress. “Yu’E Bao is forcing banks to face up to the challenges of interest-rate deregulation.” The drain from the banks prompted Niu Wenxin, a managing editor and chief commentator at China Central Television, to attack Yu’E Bao in his blog on Feb. 21, drawing 11.5 million views and sparking nationwide debate.

“Yu’E Bao is a vampire sucking blood out of the banks and a typical financial parasite,” Niu wrote. “It didn’t create value. Instead it makes a profit by pushing up the whole society’s borrowing costs. By passing some teeny-weeny benefit to the public, it makes massive profit for itself and lets the entire society foot the bill.”

• Credit Problems To Rattle China Economy: New Zealand FinMin (CNBC)

The Chinese economy will continue to face more volatility as the country wrestles with credit problems, says New Zealand’s Finance Minister Bill English. “There’s clearly a will [in China] to allow some defaults to try and work through the credit build up,” English told CNBC Asia’s “Squawk Box” on Tuesday. “As an economy selling into China, we’re expecting more volatility in the economy in general, but still reasonably solid consumer demand,” he added.

The stability of China’s financial sector has been in focus in recent months after a near high-profile failure of a trust product, which was marketed by local lender ICBC, in January. Earlier this month, China experienced its first domestic bond default when Shanghai Chaori Solar Science & Technology Co was unable to make an 89 million yuan ($14.5 million) interest payment. In addition, recent economic data has pointed to slowing growth momentum. This has raised speculation that authorities may provide monetary or fiscal stimulus to support growth. “I think we’ve had an artificially smooth growth profile out of China because of the extent of their intervention. They can’t keep doing that,” said English.

China is New Zealand’s biggest export destination, with dairy products accounting for roughly half of the $10 billion worth of goods the country dispatched to the mainland in 2013. Last week, China and New Zealand signed a currency deal to allow the direct conversion of the New Zealand dollar with the Chinese renminbi or yuan. The deal aims to reduce costs for exporters and importers by removing the necessity for transactions to be settled in two foreign exchange trades via a third currency – typically the U.S. dollar.

True enough, Moody’s, but only the worst handful have to go down to create mayhem.

• China’s Local Government Debt Burden Varies Widely: Moody’s (CNBC)

Concerns over high levels of debt among local governments in China have mounted in recent months, but the quality and quantity of that burden varies widely by province, Moody’s said. “The provinces all show varying degrees of credit risk as their indebtedness levels differ significantly, from moderate to high,” credit rating service Moody’s Investor Service said in a report on Tuesday. China’s state auditor said in a report in December that local governments owe almost $3 trillion in outstanding debt as of the end of June last year, up 67% from the last audit in 2011.

The debt pile is viewed as one of the biggest threats facing the country’s economy and there are worries that much of it cannot be repaid as it was used to fund non-profitable projects. Among the top 31 upper-tier local governments reporting government-related debt on their websites, indebtedness ranged from 69% to 156% of revenues, with the median at 108%, Moody’s said. The median debt for all the provinces was 31% of their gross domestic products (GDP), but the levels ranged from 79% of GDP for Guinzhou province to 13% for Shandong.

“While higher levels of debt are typically credit negative, the credit quality implications also depend on economic strength, budget flexibility, access to financing, and ability to repay,” Moody’s said. “In addition to the debt figures, we need to understand an entity’s ability to mobilize resources to repay its debt and the extent to which government-related entities have projects that generate streams of revenue sufficient to repay debt.”

Moody’s said it was concerned about a lack of information on which financing vehicles and other entities are generating enough revenue to repay their debt without tapping the local government. It cited Beijing Infrastructure, which operates the capital’s subway system, as an example of a company unable to operate without heavy subsidies.

• China Demands End To US Spying Activities After New Snowden Leak (RT)

China has demanded that the US stop the snooping activities of its National Security Agency against Chinese officials and companies. Beijing has also asked Washington to explain the reports on the illegal spying. Chinese foreign ministry spokesman, Hong Lei, said on Monday that China is “extremely concerned” about allegations that the US National Security Agency (NSA) infiltrated the servers of Chinese telecom giant, Huawei, targeting the Chinese Trade Ministry, national banks, leading telecommunications companies and the country’s top officials.

“China has already lodged many complaints with the United States about this. We demand that the United States makes a clear explanation and stop such acts,” the spokesman stressed. Hong cited media reports on “eavesdropping, surveillance and stealing of secrets by the United States of other countries, including China,” which were based on the revelations of the former NSA contractor, Edward Snowden.

The Snowden leaks published by The New York Times and Der Spiegel on Sunday exposed the details of the NSA’s activities in China, which allegedly involved spying on the former Chinese President Hu Jintao. China’s reaction comes amid the European trip of Chinese President Xi Jinping, who met US President Barack Obama in The Hague on Monday.

The US first lady, Michelle Obama, on Saturday addressed college students in Beijing, saying that open access to online information is a “universal right.” However, the two countries’ governments clearly had a different understanding of “open access” to the global net. “We consistently believe internet communication technologies should be used to develop a country’s economy in a normal way, and not be used in stealing secret information, phone-tapping and monitoring,” Hong said.

Oh, it’s coming, alright.

• Dying Memphis Neighborhood Foretells Next U.S. Crisis (Bloomberg)

When Rebecca Black bought the three-bedroom house at 698 Hazelwood Road in southwest Memphis in May 2005 and moved in with her two teenage sons, it was a quiet community. Children played in the street and neighbors tended their yards. She could afford the $57,000 mortgage if she skipped oil changes for the car and served the boys store-brand groceries. Then trouble came.

Her next-door neighbor died, and his family lost the house. Across the street, there were two foreclosures. One morning, the abandoned house three doors down had gang graffiti spray-painted on the side. A girl in the neighborhood pulled a gun on Black’s son. In 2010, it was Black’s turn to go. She’d gotten one of those 2–28 mortgages that slowly strangled so many borrowers – two years of a low, fixed interest rate followed by 28 years of rising payments – and she’d reached her limit. “I was crazy about that house, and so proud of it,” said Black, a U.S. Army veteran. “I just didn’t have enough money.”

She got a letter from her mortgage company saying it was starting the foreclosure process, and rather than hear a knock on the door one morning from a sheriff’s deputy ordering her to get out, Black packed whatever she could fit into her Chevy Astro and left the home she loved so well. By 2011, the property two doors down had sold for $3,000, and Black was in bankruptcy.

If homes are living things, sustaining their inhabitants and contributing to the vitality of their communities, then Hazelwood Road is dying. On nine of the fifteen parcels on Black’s side of the street, houses sit empty, have been bulldozed flat, or the lots have reverted to a tangle of sumac and poison ivy.

In the hottest part of 2012, four years after bad mortgages triggered a meltdown in the world’s most resilient economy, the biggest banks were reporting record profits and government agencies were trumpeting statistics showing that a robust recovery from the worst hard times since Dorothea Lange’s Great Depression photo “Migrant Mother” was just around the corner.

Though Hazelwood Road was never a paradise – a place where Black could buy a three-bedroom house for $57,000 couldn’t be described as anybody’s ideal of “location, location, location” – conditions there indicated that something essential about America had shifted in the aftermath of the 2008 financial crisis. Hope for advancement was that much tougher for most people to sustain after 2008. And just as the crisis was no accident but rather a tragic convergence of stupidity and poor oversight, so too were its consequences a result of calculation.

Just about all the behavior by the biggest banks and their Washington regulators described in this book occurred after the 2008 financial crisis. The book is divided into seven chapters, each corresponding to one of Catholicism’s seven deadly sins. Wall Street’s seven sins – size, secrecy, regulatory capture (when government supervisors identify more with the industry they police than with the people they’re supposed to protect), excessive pride, complexity, impunity, and a predatory greed – risk the second avoidable economic cataclysm of the baby boom era.

• Long-Term Unemployed on the Margins of the Labor Market (Brookings)

In “Are the Long-Term Unemployed on the Margins of the Labor Market?” Alan B. Krueger, Judd Cramer, and David Cho of Princeton University find that even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment: only 11% of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

Long-term unemployment has remained a persistent problem post-Great Recession – a somewhat new issue for the U.S., as compared to Europe. Despite declining over the last 4 years, the share of the unemployed who have been out of work for more than 6 months still exceeds its previous peak reached in 1981-82, and is well above its average in the last recovery, the authors note. Yet, measures of short-term unemployment are close to their average rates in the last recovery. As a result, overall unemployment remains elevated because of the large number of people who have been unemployed long term.

The long-term unemployed are spread throughout all corners of the economy, with a majority previously employed in sales and service jobs (36%) and blue collar jobs (28%), they find. In addition, the authors find that when long-term unemployed workers do return to work, there is a tendency to return to jobs in the same set of industries and occupations from which the workers were displaced.

The authors present a calibrated model that shows that the collapse in job vacancies, coupled with a decline in labor force withdrawal rates, accounts for the sharp rise in the number of long-term unemployed workers in 2009-13 and the overall rise in the unemployment rate. Furthermore, the authors show that the historically slower rate of reemployment for long-term unemployed workers can account for the apparent shift in the relationship between the unemployment rate and job vacancies. Their model predicts that the unemployment-vacancy relationship will return to its original position as the long-term unemployed continue to exit the labor force.

• Fracking Won’t Crack UK Dependence On Russian Gas Imports (Guardian)

As tensions with Russia intensify, government ministers and conservative commentators have increasingly sought to capitalise on the crisis to sell fracking to the electorate. Over the weekend, Conservative energy minister Michael Fallon argued that the UK should reduce its reliance on gas imports by fracking for shale gas in the UK. The foreign minister, William Hague, wrote in the Telegraph that we need to “develop indigenous European energy supplies … such as shale gas”, while commentators including Matt Ridley argued that if it wasn’t for “the greens in suits, rather than kaftans” we could have a fully fledged fracking industry up and running already.

The chutzpah of these attempts to build support for an increasingly unpopular fracking industry is astonishing. These are the same people who were arguing the case for the construction of up to 40 gas power stations. This would have left us even more dependent on imported gas. The Crimean crisis should be a catalyst for a rethink about whether the government’s “dash for gas” is the wisest energy policy for a country with dwindling North Sea resources. But rather than admit that we should be reducing our dependence on gas, its proponents prefer to blame the green groups that have for decades been arguing for a reduced reliance on finite energy sources.

Claims that fracking offers a panacea to dependence on Russian gas don’t even stack up. A study for the oil and gas industry by consultants Pöyry, found that European supplies wouldn’t even come on stream at scale for at least a decade. The study also shows that while the EU’s dependency on gas imports could be reduced by up to 18% depending on the success of EU shale gas extraction, it is actually supplies of liquefied natural gas from Qatar that would be displaced by shale gas. Supplies that are deemed “secure” by Fallon. Even a shale gas boom will have no impact on Russian imports until well into the next decade, by which point demand for gas should be falling sharply in the EU as efforts to limit climate change bear fruit.

It is, in fact, our efforts to tackle climate change that will reduce the UK’s and Europe’s exposure to energy imports. The EU has set a target of 80%-95% emissions reductions by 2050. In the UK, the government’s independent climate advisers have suggested that we will need to largely remove gas from the power sector in the coming decades. Yet the government, including the energy minister, is opposing measures that could make this ambition a reality by blocking nationally binding EU targets for both renewables and energy efficiency. The European commission’s assessment of the impacts of these targets found that they could cut net energy imports by more than half by 2050.

What did I call it again? The gift that keeps on taking.

• TEPCO Fails To Restart Fukushima Water Decontamination Process (RT)

The water decontamination process at the crippled Fukushima nuclear power plant has once again been halted, only about six hours after the plant’s operator TEPCO announced it was resuming the purification process following a previous failure. Six days ago, Tokyo Electric Power Co. (TEPCO) detected a failure in what is known as the Advanced Liquid Processing System (ALPS). The company said that up to 900 tons of water, which had not been sufficiently cleaned in the ALPS equipment, flowed into a network of 21 tanks that were holding 15,000 tons of treated water. Not only have the 21 tanks been rendered unusable, but all 15,000 tons of previously cleaned water has to be retreated.

TEPCO said it restarted two of three lines used to clean toxic water at around 04:00 GMT on Monday. A third line remained offline while crews examined a filter defect, AFP reported. Yet shortly before 10:00 GMT, TEPCO suspended the ALPS of the two units after finding about a half liter of leaked water at a tank designed to measure levels of radioactive materials in the processed water, according to Jiji Press. TEPCO said in a press release that there were no new leaks outside the system, though. The difficulties only mark the latest challenges TEPCO has faced since March 2011, when a 9.0 megathrust earthquake triggered a subsequent tsunami that resulted in a badly-damaged Fukushima Daiichi nuclear power plant.

The ALPS system was developed to dramatically curb the radiation level of highly contaminated water that is accumulating at the plant. The ALPS consists of 14 steel cylinders through which the contaminated water is filtered. After the filtering, waste materials like the absorbent and remaining sludge are transferred to high-integrity containers (HICs) that are transported to a temporary storage facility.

The ALPS can remove 62 different types of radionuclides, including strontium and cobalt, from contaminated water. While the system cannot remove tritium – a radioactive isotope of hydrogen – the purification of water through the system is expected to reduce damage levels if water leaks from storage tanks.

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