deficit Archives - Page 3 of 3 - The Automatic Earth

[..] Misinvoicing contributes a not entirely insignificant share to unrecorded capital inflows and outflows. However, Chinese authorities have become much more aware and concerned about these issues and gone through various waves of cracking down over this issue. Furthermore, the aggregate sums here are not enough to move the RMB and cause the currency pressures we are currently seeing. In fact, misinvoicing is merely the beginning of the financial flow problems in trade with Chinese innovation taking it a step further. China, as a country with strict currency controls, maintains records on international financial transactions sorted by a variety of categories. For instance, there is data on payment or receipt of funds by current or capital account, goods or service trade, and direct or portfolio investment.

For our purposes, this allows us to compare in a relatively straightforward manner, how international payments are flowing compared to the customs reported flow of goods. The differences in key data surrounding trade data is illustrative. Chinese Customs data reports goods exports valued at $2.27 trillion, with SAFE reporting goods exports of $2.14 trillion but Chinese banks report receipts of $2.37 trillion. In other words, funds received for exports of goods and services or about $100 billion higher than reported. At 4-11% higher than the Customs and SAFE reported values this is slightly elevated, but given expected discrepancies in the mid-single digits, this number is slightly elevated but not extreme. The differences between import and international payment data, however, is astounding.

Whereas Chinese Customs reports $1.68 trillion and SAFE report $1.57 in goods imports into China, banks report paying $2.55 trillion for imports. In other words, funds paid for imported goods and services was $870-980 billion or 52-62% higher than official Customs and SAFE trade data. This level of discrepancy is extreme in both absolute and relative terms and cannot simply be called a rounding error but is nothing less than systemic fraud. If we adjust the official trade in goods and services balance to reflect cash flows rather than official headline trade data as reported by both Customs and SAFE, the differences are even worse.

According to official Customs and SAFE data, China ran a goods trade surplus of $593 or $576 billion but according to bank payment and receipt data, China ran a goods trade surplus of only $128 billion. If we include service trade, the picture worsens considerably. China via SAFE trade data reports a $207 billion trade deficit in services trade. Payment data reported via SAFE actually reports about $42 billion smaller deficit of $165 billion. In other words, the supposed trade surplus of $600 billion has become a trade in goods and services deficit of $36 billion. Expand to the current, through a significant primary income deficit, and the total current account deficit is now $124 billion.

It’s all about the yuan by now, I’m afraid.

• China Equities Plunge 6.4% as Volatility Reignites (BBG)

China’s stocks tumbled the most in a month as surging money-market rates signaled tighter liquidity and the offshore yuan declined for a fifth day. The Shanghai Composite Index sank 6.4% at the close, with about 70 stocks falling for each that rose. Industrial and technology companies led losses. The overnight money rate, a gauge of liquidity in the financial system, climbed the most since Feb. 6. The plunge in equities underscores the challenge for China’s policy makers as they seek to project an image of stability in the nation’s financial markets as the economy slows.

Finance chiefs and central bankers from the Group of 20 will meet in Shanghai on Friday, while the annual meeting of the legislature begins in Beijing next week. The return of volatility is also a test for China’s new top securities regulator, who took over on the weekend after his predecessor was removed amid criticism of mismanagement. “The market is in a quite fragile state when everyone scrambles for an exit,” said Central China Securities Shanghai based strategist Zhang Gang.“None of the news in the market is sufficient enough to trigger such a slump.” Today’s declines almost erased a 10% rebound in the benchmark equity index from a January low. The Shanghai Composite has fallen 23% this year, the world’s worst performer after Greece. Volumes on the gauge were 43% above the 30-day average.

The numbers are stunning.

• Rush of Corporate Bonds Inflames Worries About China’s Debt (WSJ)

A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis that could further set back the country’s efforts to shift the economy to a slower, consumption-led model. Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s Ratings Services. The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion), according to the central bank.

Worries over China’s rapid accumulation of credit, up 12.4% last year, are compounded by signs that not much of it is creating new wealth. State policy is directing the boom in corporate bonds, which can be 15% cheaper for borrowers than benchmark loans, meaning issuers can use them to favorably reschedule loans. The government says the push is part of a plan to have companies bear more direct risk as banks struggle with rising bad loans, and there is room for more. “This is in accordance with China’s reform direction,” Wang Yiming, vice minister at the Development Research Center of the State Council, the national cabinet’s think tank, said last week. “In the past, we’ve primarily relied on bank loans. We want to gradually increase direct financing.”

China has long sought to deepen its capital markets by developing debt and equity financing. Banks have traditionally accounted for about 70% of all lending in China. As souring loans began to pile up two years ago, regulators looked to the stock and bond markets to spread credit risk in the system, lower funding costs and expand financing channels for companies. Hopes to use equity markets as a key fundraising tool fell apart as stock prices collapsed last summer, but regulators still view the bond market as a viable channel to restructure risk. “In 2016, we want to adequately fulfill the financing function of the corporate bond market to further promote reform, steady growth and a bigger role for risk management,” the National Development and Reform Commission said in a statement on Wednesday.

Also on Wednesday, China’s central bank moved to make it easier for qualified foreign institutional investors to buy bonds on China’s interbank market, where issues from the Ministry of Finance and large government entities are traded. The move follows similar permission granted to some central banks and sovereign wealth funds last July and comes as China seeks to encourage use of the yuan to continue liberalizing its currency system. To accomplish its goal, analysts say, China needs to attract investment into its bonds, in particular by global institutional investors. [..] As the cost of debt servicing grows, capital is diverted from productive investment to interest payments. Research firm Gavekal Dragonomics estimates China now spends around 20% of its GDP just servicing its corporate and household debt.

And why not…

• PBOC Says China Can Handle Raising Budget Deficit to 4% (BBG)

China is able to increase its budget deficit to 4% of gross domestic product as the government seeks to cut corporate taxes, central bank officials wrote in an article on the Economic Daily’s website. Low levels of government debt, “relatively fast” economic growth and abundant state-owned assets give the country more capacity to sell more bonds, according to an article written by People’s Bank of China officials including Sheng Songcheng, head of the statistics department. China could maintain a debt-to-GDP ratio of up to 70% at end-2025 if the deficit were raised to 4%, the officials said.

China is looking to fiscal policy to help it grapple with the slowest growth since 1990. The deficit is likely to rise this year from 2.3% of GDP in 2015, the official Xinhua News Agency recently reported, citing a statement after a fiscal work conference. Vice Finance Minister Zhu Guangyao said last year the “red line” of 3% for the deficit-to-GDP ratio and 60% for the debt-to-GDP ratio should be revisited after lessons learned from the financial crisis. The article in the official Economic Daily publication comes ahead of a gathering of the nation’s top lawmakers early next month, when the year’s economic plans and targets will be agreed upon and announced.

Doesn’t look like it’s going to happen, though. Unless they’re all just faking the denials.

• Why China and the World Needs a New Plaza Accord (Barron’s)

Perhaps it’s time for a new Plaza Accord that focuses on Chinese imbalances in ways that calm world markets. The most obvious expression of those vulnerabilities is an overvalued yuan. Barclays speaks for many when it says the No. 2 economy needs a radical devaluation. Perhaps not in the 25%% neighborhood analysts Ajay Rajadhyaksha and Jian Chang suggest, but sizable enough to stimulate growth and keep pace with Beijing’s depleting currency-reserve holdings. Yet doing so could devastate jittery world markets – and President Xi Jinping knows it. The last thing Xi wants is to trigger Lehman Brothers 2.0. The Group of Seven nations could serve up a face-saving solution: a globally authorized yuan drop organized in a cooperative, transparent and orderly manner.

The model is what transpired 30 years ago in the New York hotel owned by U.S. presidential wannabe Trump. On Sept. 22, 1985, the then G-5 nations – France, Germany, Japan, the U.K. and the U.S. – plotted an unprecedented intervention in currency markets. One can argue Japan came out on the losing end of a deal to boost the yen, but traders marveled at the show the unity and relative competence of the moment. Arguably, it’s never been duplicated, even after the group expanded to include Canada and Italy to become the G-7. Of course, we live in more of a G-20 world nowadays – an admission that without Brazil, China, India, Saudi Arabia and Turkey at the table, many problems are intractable. But too many G-20 members fear retribution and won’t speak truth to Chinese power. That’s why the G-7 should quietly hatch a devaluation plan with Beijing.

If this sounds like a non-starter, consider the alternative: on an unsuspecting evening in the not-so-distant future, Beijing announces a 10% downshift, knocking the Dax, Dow Jones, FTSE, Nikkei and Shanghai Composite indexes several hundred points lower each. The yen surges, putting the final nail in the Abenomics coffin. Deutsche Bank executives call TV stations to insist, anew, their balance sheet is sound. Rumors of hedge-fund blowups ricochet around global markets. Politicians in London, Tokyo and Washington wonder how, of how, did this happen?

They got one chance, and then announce beforehand it’s a no-go?!

• Lew Says Don’t Expect ‘Crisis Response’ From G20 Meeting (BBG)

U.S. Treasury Secretary Jacob J. Lew downplayed expectations for an emergency response to global market turbulence when Group of 20 finance chiefs and central bankers meet this week in China, calling on nations to do more to boost demand without pursuing unfair currency policies. “Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.” Policy makers from the world’s biggest economies are unlikely to make the kind of detailed national commitments to restore growth they did to at the height of the global financial crisis, Lew said.

Instead, the group, which meets in Shanghai Feb. 26-27, may put more “meat on the bones” of the principles it has advocated in recent years, such as by strengthening the pledge that nations will refrain from competitive currency devaluations, he said. While the world economy isn’t in a moment of crisis, Lew said that “I don’t think it’s unreasonable to have the expectation that coming out of this will be a more stable understanding of what the future may look like.” Lew’s comments discount the prospect of a coordinated agreement to boost lackluster global growth and restore confidence after a selloff in world stocks to start the year. Some analysts and investors have called for a modern-day Plaza Accord, the 1985 deal among major economies to weaken the dollar and stabilize currency markets.

The world’s cloudy growth outlook and policy makers’ potential response will dominate the agenda in Shanghai, according to people familiar with the talks. It’s unlikely to produce the kind of action that came out of the G-20 meeting in London in April 2009, when countries collectively pledged more than $1.1 trillion in stimulus to rejuvenate a then-hobbled global economy.

You don’t say.

• IMF Warns The Global Economy Is “Highly Vulnerable” (BBC)

The IMF has said the global economy has weakened further and warned it was “highly vulnerable to adverse shocks”. It said the weakening had come “amid increasing financial turbulence and falling asset prices”. The IMF’s report comes before the meeting of G20 finance ministers and central bank governors in Shanghai later this week. It said China’s slowdown was adding to global economic growth concerns. China’s economy, the second-biggest in the world, is growing at the slowest rate in 25 years. “Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery,” the Washington-based IMF said.

“Adding to these headwinds are concerns about the global impact of China’s transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices.” The IMF also noted any future prospects for global growth “could be derailed by market turbulence, the oil price crash and geopolitical conflicts”. The agency has called on the G20 group to plan new mechanisms to protect the most vulnerable countries. Earlier this year, the IMF downgraded its forecast for global economic growth. It now expects economic activity to increase 3.4% this year followed by 3.6% in 2017.

Them’s some graphs.

• Dear Janet, Mario, & Haruhiko – It’s Time For The ‘C’ Word (ZH)

As policy errors pile up – just as they did in 2007/8 – around the world, we thought the following three charts might warrant the use of the most important word in modern central banking… "Contained"

Haruhiko, You Are Here…

Mario, You Are Here…

And Janet, You Are Here…

It does make one wonder, with all this carnage and so little action, whether "coordinated" inaction is the post-Davos decision – Don't just do something, stand there and jawbone!!

With the goal being a big enough catastrophe to warrant unleashing the war on cash, then NIRP, then the unlimited money drop… because as we stand, no matter what crazy policy has been imagined by the Keynesian "seers" – inflationary (well deflationary now) expectations have collapsed.

Weidmann keeps taking the other side.

• Bundesbank Chief Warns Of Zero-Rate Impact On Banks (Reuters)

Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany’s central bank warned on Wednesday, signaling that he favors an eventual change in tack. The remarks from the Bundesbank’s influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country’s flagship Deutsche Bank. “The low interest-rate environment particularly weighs on banks’ earnings potential,” Weidmann told journalists, referring to the market slump. “The longer the low-interest-rate phase stays, the steeper interest rates fall, the … smaller banks’ profit,” said Weidmann, who also sits on the European Central Bank’s decision-taking Governing Council.

Early next month, ECB governors will meet to decide whether to loosen monetary policy further, for instance, by extending a €1.5 trillion money printing scheme to buy government bonds or by cutting interest rates further. A cut to the deposit rate, which translates into a charge on banks that park money with the ECB, would penalize banks. Weidmann referred to a survey of German banks that concluded they would see pre-tax profits shrivel by 25% by 2019 as a result. Should low interest rates remain in place until 2019, he said, profits could fall by up to half. Further cuts to borrowing rates during this time would make their results worse still.

The former adviser to German chancellor Angela Merkel, saying that he hoped interest rates would eventually rise again, played down any threat of deflation or falling prices and predicted that a modest economic recovery would continue. Falling price inflation is generally considered an economic alarm bell and is typically used as a trigger for ECB action. In talking down such a problem, Weidmann is also playing down the need for any action. He also voiced scepticism about the proposal to scrap the €500 note, saying that Germans still wanted to be free to pay in cash. “It would be fatal if the impression were to be created … that the discussion about the scrapping of the €500 note … was a step towards ending the use of cash generally.”

I’m convinced the real numbers are much worse.

• Oil Slump To Hit US Investment Banks’ Capital Market Revenue (BBG)

Revenue generated by U.S. investment banks through their capital markets businesses may “suffer” if oil and commodity prices stay low and the global economy slows further, Moody’s Investors Service has warned. While direct energy loan exposures for the largest U.S. banks look “manageable relative to earnings” and most of their exposures are to investment-grade borrowers, additional loss provisions will be necessary in some cases should oil remain subdued for an extended period, the credit assessor said in a report dated Feb. 24. Moody’s also warned that “lower-for-longer” oil prices presented a rising threat for lenders around the world.

JPMorgan Chase said this week its reserves for impaired energy loans would increase by about $500 million in the first quarter and it would have to add an additional $1.5 billion to the set-aside if oil prices held at $25 a barrel for about 18 months. Wells Fargo, the world’s largest bank by market value, said Wednesday in a filing soured energy loans climbed 49% in the last three months of 2015, while higher oil-and-gas provisions at Royal Bank of Canada crimped quarterly earnings. “Oil price volatility has contributed to increased market volatility, which could help boost trading activity and returns,” Moody’s said. “However, current weak sentiment in global equity and credit markets could work in the opposite direction, reducing trading volumes and banks’ related revenues.”

For U.S. global investment banks such as Bank of America, Citigroup and JPMorgan Chase, funded exposures to the oil and gas industry range from 1.5% to 5% and average 2.3% of total loans, according to Moody’s. The ratings company also underscored risks for banks in energy-exporting regions from the Middle East and Russia to Africa and Latin America. “Banks’ direct and indirect exposures to the drop in oil prices pose the potential for deterioration in asset quality, particularly in net oil-exporting countries,” Moody’s said. “While direct exposures appear broadly manageable from both a solvency and earnings perspective, low oil prices could still test the credit profiles of banks across our global rated portfolio.”

The debt figures are incredible. “Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money.”

• Biggest Wave Yet of U.S. Oil Defaults Looms as Bust Intensifies (BBG)

In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI and SandRidge Energy, oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy. If the two companies fail in March, it would be the biggest cluster of oil and gas defaults in a month since energy prices plunged in early 2015. “We’re just beginning to see how bad 2016 is going to be,” said Becky Roof, managing director for turnaround and restructuring with consulting firm AlixPartners.

The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades. Oil prices have now fallen more than 70% from a 2014 peak, and banks and bondholders are fighting for scraps. Bond prices reflect investors’ fears. U.S. high yield energy debt lost 24% last year, the biggest fall since 2008, according to Bank of America Merrill Lynch U.S. High Yield Indexes.

Both Energy XXI and SandRidge could still reach an agreement with creditors that will give them time to turn their businesses around. SandRidge said last week that it missed a $21.7 million interest payment. The company owes $4.2 billion, including a fully-drawn $500 million credit line. Energy XXI, which owes $3.4 billion, said in a filing last week that it missed an $8.8 million interest payment. David Kimmel, a spokesman for SandRidge, said it has the money to make interest payments due in February, March and April. He wouldn’t comment on SandRidge’s options if it doesn’t make the interest payments by the end of the grace period.

And its shares soar…

• North Dakota’s Largest Oil Producer Suspends All Fracking (Reuters)

North Dakota oil producer Whiting Petroleum Corp said on Wednesday it will suspend all fracking and spend 80% less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices. Shares of Whiting jumped 7.7% to $4 per share in after-hours trading as investors cheered the decision to preserve capital. During the trading session, Whiting had slid 5.6% to $3.72. Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.

Denver-based Whiting said it will stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance. Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting. “We believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices,” Whiting CEO Jim Volker said in a statement. The cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day.

Excellent by Pedro da Costa.

• Big Banks and the White House Are Teaming Up to Fleece Poor People (FP)

When Wall Street and its regulators talk about servicing the so-called “unbanked,” people who are generally disconnected from the banking sector, it often sounds like a mission to do God’s work — bank unto others as thou banketh for thyself. “Basic financial services are out of reach for one in four individuals on Earth,” U.S. Treasury Secretary Jack Lew, a former Citigroup banker, said at a December speech launching the White House’s latest initiative targeted at the unbanked, which involves a partnership with JPMorgan Chase and PayPal. A report co-sponsored by JPMorgan Chase in 2014 speaks of the problem in similarly biblical terms: “Roughly 75% of the world’s poor — 2.5 billion people — do not have a bank account or otherwise participate in the mainstream financial system.” The lack of access to “secure, affordable financial products and services severely limits the global poor’s financial security and opportunities.”

Yet when bankers and regulators debate the travails of the unbanked or underbanked — effectively euphemisms for poor and lower-middle-class Americans — they usually avoid two key questions: Why is this cross-section of society so marginally attached to the banking system in the first place? And who is behind the provision of “alternative” services — high-cost loan sharks, payday lenders, cash checking stores, pawnshops — the poor turn to instead of banks? In reality, it is the banks themselves that appear to have cut off and driven away the low-income consumer, not the other way around. Wall Street won’t make loans to the poor — at least not directly. But large banks, it turns out, are behind many of the predatory nonbank, high-cost lenders that notoriously prey on poor communities.

Most recently, the same JPMorgan Chase that’s working with the White House to reach the unbanked partnered with OnDeck Capital, an online lender that approves loans in a flash and charges eye-popping interest rates that averaged around 54% as of 2014. In other words, the big banks are already well-acquainted with the poor unbanked poor — and they’re fleecing them.In other words, the big banks are already well-acquainted with the poor unbanked poor — and they’re fleecing them. They’re simply doing it the clean, Wall Street way, through intermediaries and with little accountability. Some banks are willing to do the dirty work themselves.

This is how Wells Fargo advertises its Direct Deposit Advance Loan, which carries an annual percentage rate of 120%: “These short term loans … can assist you with getting through a short term financial crisis by providing you with options and flexibility…. [for example] a medical bill, car repair, or similar unplanned expense.” How sweet of them. Those who are already in the system don’t fare much better. Big banks push the poor into the more shadowy corners of consumer finance by charging those at the financial margins high and sometimes repeated and lofty overdraft fees, ATM charges, and checking account minimum balances. The poor often live in areas that lack bank branches, meaning that even after they open an account, they have to use a local ATM that charges them $3 on top of the $3 their own bank likely charges. So taking out a $20 bill could cost $6, a 30% surcharge.

Ungovernable poster child for recovery.

• Spanish Government Pact Dealt Fatal Blow Hours After Announcement (Reuters)

A government deal between Spain’s Socialists and liberal Ciudadanos was dealt a fatal blow hours after it was announced on Wednesday when both the Conservatives and anti-austerity Podemos refused to back it. Such is the fragmentation of Spain’s political landscape after an election last December that the Socialists and Ciudadanos, with only 130 seats in the 350-seat parliament between them, cannot govern alone. Podemos won 69 seats and the center-right People’s Party (PP) 123. Continued bickering between all sides means Spain could be without a government for several more months at a time when the economic recovery is still fragile and unemployment stubbornly high at over 20%. To be elected prime minister, socialist leader Pedro Sanchez needs an absolute majority on March 2 or a simple majority of seats in a second vote that would take place in parliament on March 5.

The pact with Ciudadanos could have gone through only if the PP or Podemos had backed it or at least abstained in the second vote, something they again ruled out. Podemos said it did not agree with the social and economic policies outlined in the deal, which includes tax reforms and measures to make government spending more efficient. The party also said it was suspending its own talks with the Socialists. “This is a deal that is incompatible with Podemos,” Inigo Errejon, a senior party member, told a news conference. Hours earlier, the leader of the PP, acting Prime Minister Mariano Rajoy, had also reiterated his party would vote against the pact which he called “misleading” because it fell way short of any majority.

Long article. Do read it though. Matt’s in a class of his own.

• How America Made Donald Trump Unstoppable (Matt Taibbi)

The first thing you notice at Donald Trump’s rallies is the confidence. Amateur psychologists have wishfully diagnosed him from afar as insecure, but in person the notion seems absurd. Donald Trump, insecure? We should all have such problems. At the Verizon Giganto-Center in Manchester the night before the New Hampshire primary, Trump bounds onstage to raucous applause and the booming riffs of the Lennon-McCartney anthem “Revolution.” The song is, hilariously, a cautionary tale about the perils of false prophets peddling mindless revolts, but Trump floats in on its grooves like it means the opposite. When you win as much as he does, who the hell cares what anything means? He steps to the lectern and does his Mussolini routine, which he’s perfected over the past months.

It’s a nodding wave, a grin, a half-sneer, and a little U.S. Open-style applause back in the direction of the audience, his face the whole time a mask of pure self-satisfaction. “This is unbelievable, unbelievable!” he says, staring out at a crowd of about 4,000 whooping New Englanders with snow hats, fleece and beer guts. There’s a snowstorm outside and cars are flying off the road, but it’s a packed house. He flashes a thumbs-up. “So everybody’s talking about the cover of Time magazine last week. They have a picture of me from behind, I was extremely careful with my hair … ” He strokes his famous flying fuzz-mane. It looks gorgeous, like it’s been recently fed. The crowd goes wild. Whoooo! Trump!

It’s pure camp, a variety show. He singles out a Trump impersonator in the crowd, tells him he hopes the guy is making a lot of money. “Melania, would you marry that guy?” he says. The future first lady is a Slovenian model who, apart from Trump, was most famous for a TV ad in which she engaged in a Frankenstein-style body transfer with the Aflac duck, voiced by Gilbert Gottfried. She had one line in that ad. Tonight, it’s two lines: “Ve love you, New Hampshire,” she says, in a thick vampire accent. “Ve, together, ve vill make America great again!” As reactionary patriotic theater goes, this scene is bizarre – Melania Knauss didn’t even arrive in America until 1996, when she was all of 26 – but the crowd goes nuts anyway. Everything Trump does works these days. He steps to the mic. “She’s beautiful, but she’s more beautiful even on the inside,” he says, raising a finger to the heavens. “And, boy, is she smart!”

Outcome is guaranteed.

• Hungary To Hold Referendum On EU Plan For Migrant Quotas (Reuters)

Hungary will hold a referendum on European Union plans to create a system of mandatory quotas for migrants, an initiative that Hungary’s government has rejected, Prime Minister Viktor Orban said on Wednesday. Orban has used harsh anti-migrant rhetoric since the migrant crisis escalated last year and gained notoriety for erecting a steel fence along Hungary’s southern border to keep out migrants – a policy now adopted by other Balkan countries. He said the plebiscite, the first of its kind in Europe, would be a major test of European democracy. The EU declined official comment, saying it was were trying to clarify what Orban was proposing.

Orban, who did not say when the vote might be held, has said the quotas would redraw the ethnic, cultural and religious map of Hungary and Europe. Under the plan, most EU nations would be obliged to accept a certain number of immigrants. “Nobody has asked the European people so far whether they support, accept, or reject the mandatory migrant quotas,” he said at a news conference. “The government is responding to public sentiment now: we Hungarians think introducing resettlement quotas for migrants without the backing of the people equals an abuse of power.” Orban said he was aware of potential wider ramifications of such a referendum, especially if Hungarians say “No” to quotas. “We had to think about the potential impact on European politics of such a proposal, but that was a secondary consideration,” he said.

Late last year expectations were for 3 million in Europe this year alone. Still, more realistic than ‘we have to stop them all’.

• German Government Expects Arrival Of 3.6 Million Refugees By 2020 (Reuters)

The German government expects a total influx of 3.6 million refugees by 2020, with an average of half a million people arriving each year, German media reported on Thursday, in a country that took in a record 1.1 million migrants last year. The calculations are based on internal estimates by the Economy Ministry in coordination with other ministries, German newspaper Sueddeutsche Zeitung said. In order to project economic development, the Economy Ministry created “an internal, purely technical estimate on migration in coordination with other government departments”. There is no official government estimate on how many refugees Europe’s biggest economy expects over the next years, as numbers are highly volatile.

But the unprecedented arrival of 1.1 million asylum seekers last year, included in the 3.6 million forecast, stretched public resources thin and put strains on German Chancellor Angela Merkel’s government. Merkel, whose open-door refugee policy has put her under much pressure, in recent months vowed to significantly reduce the number of people arriving this year. On Wednesday, German federal police said that they had only registered 103 migrants arriving on Tuesday, suggesting a sharp drop as a result of tighter controls along the Balkan route. At the start of the prior week, over 2,000 were arriving on a daily basis. Last autumn the daily arrivals sometimes totaled over 10,000.

Things are intensifying fast here.

• Greek Authorities Scramble To Find Shelter For Refugees (Kath.)

Government officials were on Wednesday night trying to find more places to host refugees and migrants as the number of people arriving continued to rise while limits on those leaving remained in place. Tens of thousands of migrants are thought to be in Greece at the moment, waiting to find a way out after border controls were stepped up north of the country. An official at the Migration Policy Ministry said that the government had made contingency plans for looking after 50,000 people. But these plans may prove inadequate as the Former Yugoslav Republic of Macedonia (FYROM) is only allowing a few hundred migrants to cross from Greece each day. In contrast, an average of around 3,000 people have been arriving on Greek islands each day this week.

On Wednesday, more than 1,700 migrants arrived at Piraeus on passenger ferries from the islands. Greek authorities are trying to find ways, including stopping coaches on the national highway, to prevent all the arrivals traveling to Idomeni, next to the border with FYROM, where some 3,000 people have already gathered. The migrants who have been stopped on their journey north are being housed in motels and sports centers. The transit centers at Schisto, Elaionas and Elliniko in Athens, as well as Diavata in Thessaloniki have filled up over the last few days. The camps at Schisto and Diavata are hosting around 2,000 people each. There are concerns that the lack of spaces will mean that migrants will start camping out in city squares. Some 300 people set up camp in Victoria Square, central Athens, on Wednesday.

The talks will not be very friendly for much longer.

• Tsipras: “We Will Not Allow Greece To Turn Into A Warehouse Of Souls” (Afp)

EU interior ministers hold fresh talks on migration on Thursday, seeking to reduce the flow of people through the Balkans and plan for what the bloc has warned is a looming humanitarian crisis. Ministers from non-EU members Serbia, Former Yugoslav Republic of Macedonia (FYROM) and Turkey will also be in Brussels as the European Union reaches outside the borders of the 28-nation bloc in a desperate attempt to deal with the stream of people. Ahead of the talks, Greek Prime Minister Alexis Tsipras threatened not to cooperate with future EU agreements on the migrant crisis if the burden was not fairly shared among member states.

Athens is seething over a series of border restrictions along the migrant trail to northern and western Europe that has caused a bottleneck in Greece, the main entry point to Europe. “Greece will no longer agree to any deal if the burdens and responsibilities are not shared proportionally,” Tsipras told the Greek parliament Wednesday, adding: “We will not allow our country to turn into a warehouse of souls.”

Debt Rattle November 23 2015

Nov 232015

November 23, 2015 Posted by Raúl Ilargi Meijer at 10:14 am Finance Tagged with: buybacks, China, commodities, cuts, deficit, euro, oil, refugees, Schengen, war 5 Responses »

Kennedy and Johnson Dallas, Morning of November 22 1963

• Commodity Slump Deepens as Dollar Gains; European Stocks Slide (Bloomberg)

• Europe Warned On ‘Permanent’ Downturn Amid PMIs (CNBC)

• Euro Drops To Seven-Month Low As Draghi Feeds Bears (Bloomberg)

• Zinc Producers Keep Cutting Back, Yet Prices Keep Falling (Bloomberg)

• Barclays Bets On Stock Boom As World Money Growth Soars (AEP)

• Masters of the Finance Universe Are Worried About China (Bloomberg)

• Is the Surge in Stock Buybacks Good or Evil? (WSJ)

• You’re Not the Yuan That I Want (Bloomberg)

• UK Deficit Could Hit £40 Billion By 2020 On Ill-Advised Cuts (Guardian)

• Everything We Hold Dear Is Being Cut To The Bone. Weep For Our Country (Hutton)

• Five Years Into Austerity, Britain Prepares For More Cuts (Reuters)

• Save The Library, Lose The Pool: Britain’s Austere New Reality (Guardian)

• Greek Disposable Income Shrinks Twice As Fast As GDP (Kath.)

• Cut Oil Supply or Drop Riyal Peg? Saudis Face ‘Critical’ Choice (Bloomberg)

• Oil Deal of the Year: Mexico Set for $6 Billion Hedging Windfall (Bloomberg)

• London House Prices Have Nothing on Auckland (Bloomberg)

• We Still Haven’t Grasped That This Is War Without Frontiers (Robert Fisk)

• Yanis Varoufakis: Europe Is Being Broken Apart By Refugee Crisis (Guardian)

• Life After Schengen: What a Europe With Borders Would Look Like (Bloomberg)

• Greek Concerns Mount Over Refugees As Balkan Countries Restrict Entry (Guardian)

• Why Syrian Refugees Are Not A Threat To America (Forbes)

Can’t believe people would still seek to ignore this. It’s China grinding to a halt.

• Commodity Slump Deepens as Dollar Gains; European Stocks Slide (Bloomberg)

A slump in commodities deepened, with industrial metals and oil leading losses as the dollar extended gains. European equities retreated after the region’s equities posted their biggest weekly advance in four weeks. Crude extended its drop below $42 a barrel and copper fell to levels unseen since 2009 as comments from Federal Reserve officials about the prospect of a December rate increase bolstered the greenback. Nickel plunged 4.1% and gold declined, helping send the Bloomberg Commodity Index to a 16-year low. Russia’s ruble and the Australian dollar led commodity-producers’ currencies lower. The Stoxx Europe 600 Index slid, while the euro touched the weakest level in seven months against the dollar.

“This is not a really welcoming environment for risk taking,” said Tim Condon at ING in Singapore. “Liquidity is beginning to dry up as people are waiting for what happens in December with the Fed. Worries about China persist.” The greenback’s surge this year has weighed on material prices at the same time as demand slows in China, the world’s biggest commodity consumer. John Williams, president of the Fed Bank of San Francisco, said at the weekend that there was a “strong case” for a U.S. rate hike at the Fed’s last meeting of 2015. Agricultural commodities face a new headwind after Sunday’s election of Mauricio Macri as Argentina’s president, according to growers and analysts, who said the result heralds the end of punitive export taxes and may unleash an estimated $8 billion in shipments of stored crops.

But wasn’t eurozone business activity supposed to be great?

• Europe Warned On ‘Permanent’ Downturn Amid PMIs (CNBC)

The economic downturn experienced by Europe and its after-effects, such as high unemployment and labor market weakness, could become a permanent fixture in the region, according to a leading think tank. “Europe continues to face the significant challenges of tackling unemployment, underemployment and inactivity,” the Institute for Public Policy Research (IPPR), a U.K.-based left-leaning think tank, said in its latest report on Monday. “The southern European economies in particular are still combating the effects of the sovereign debt crisis – high levels of joblessness and insecure or temporary work.” Across the rest of the continent, the IPPR said that workers could be left behind due to advances in automation and global competition which “act as more long-term headwinds blowing skill supply and demand out of alignment.”

Such headwinds, the IPPR added, “threaten to consolidate some of the medium-term effects of recession into more permanent features of the economy – a prospect that would be deeply alarming.” The 19-country euro zone bloc was plunged into a deep crisis and regional recession following the 2008 financial crisis. The most acute effect of the crisis was the widespread loss of jobs as a result of industry and business cutbacks and closures. The crisis hit southern euro zone countries more than their more prosperous northern counterparts with a number of countries, Greece, Portugal, Spain, Cyprus and Ireland, requiring bailouts of various magnitudes.

Despite a slow economic recovery in most of the euro zone over recent years, unemployment remains a problem and is stubbornly high in several countries. While Germany has the lowest rate of unemployment, at 4.5% in September, according to Eurostat, joblessness in Greece and Spain remains high, at 25%. in Greece (in July) and 21.6% in Spain. For young people aged 16-25, the statistics are even worse. The IPPR said that policymakers needed to respond “by minimizing the long-term erosion of skills as a result of recession, and investing to reshape and re-skill the labor force for the jobs of the future.”

Wish he would go do just that. In the Arctic.

• Euro Drops To Seven-Month Low As Draghi Feeds Bears (Bloomberg)

The euro weakened to a seven-month low after futures traders added to bearish bets and ECB President Mario Draghi encouraged speculation his board will ease policy next week. Europe’s common currency dropped versus the majority of its 10 developed-market peers after Draghi said Friday the ECB will do what it must to raise inflation “as quickly as possible.” The Governing Council meets in Frankfurt on Dec. 3 for its next monetary-policy decision. Hedge funds ramped up wagers on dollar strength last week by the most since August 2014. The Australian dollar tumbled as copper and nickel prices plunged to multi-year lows. “It’s probably reasonable to think we can spend time down below $1.05 now,” for the euro, said Ray Attrill at National Australia Bank in Sydney. “It looks to me like we’re building up into a fairly classic sell the rumor, buy the fact.”

The euro slid 0.2% to $1.0623 at 6:46 a.m. in London Monday. It earlier touched $1.0601, the lowest since April 15. The shared currency traded at 130.83 yen after declining 0.9% to 130.77 at the end of last week. The dollar rose 0.3% to 123.17 yen. Japanese markets are shut for a holiday. The Aussie dollar dropped 0.8% to 71.79 U.S. cents, following a two-week, 2.8% advance. Copper fell through $4,500 for the first time since 2009, while nickel dropped to the lowest level since 2003 after Chinese smelters announced plans to cut production. “The commodity washout is weighing on Aussie sentiment,” Stephen Innes at foreign- exchange broker Oanda wrote.

New Zealand’s dollar weakened 0.7% to 65.17 U.S. cents. Swaps traders increased the odds the Reserve Bank will cut its benchmark interest rate next month to 55%, from 46% a week ago, according to data compiled by Bloomberg. “A mix of U.S. dollar strength and rising expectations of more RBNZ rate cuts” dragged the kiwi lower, said Elias Haddad, a currency strategist at Commonwealth Bank of Australia in Sydney. “The accumulation of unimpressive New Zealand economic data and declining dairy prices are weighing on short-term swap rates.” New Zealand’s currency will depreciate to 59 cents by the middle of next year, he said.

Overcapacity bites.

• Zinc Producers Keep Cutting Back, Yet Prices Keep Falling (Bloomberg)

Zinc producers keep on cutting back and yet prices keep on falling. After Glencore cut a third of its supply last month to combat a rout, the price rallied 10% and the gains lasted a month. When producers in China did the same on Friday, the jump was smaller and got rolled back after a day. “The benefit of previous such announcements have been fleeting, and we are not expecting this occasion to be any different,” Australia & New Zealand Banking analyst Daniel Hynes said in a note on Monday. “The market is intently focused on slowing growth in manufacturing activity in China.”

The rapid rollback of zinc’s bounce, which followed the announcement by China suppliers of output cuts for 2016, signals supply curtailments by producers probably won’t be sufficient on their own to change the course of the rout in base metals. That tallies with the view from Goldman Sachs, which said in a note this month recent output cuts aren’t large enough to rescue prices, and that will require a substantial rise in Chinese demand. In addition to zinc, producers have also announced reductions in copper and aluminum. “If you look at the track record of these vaguely worded statements, unless there is a specificity to it, they are generally not fully carried through,” Ivan Szpakowski at Citibank in Hong Kong, said by phone on Monday. “The market is very suspicious.”

A group of 10 Chinese smelters – including Zhuzhou Smelter Group, the country’s top producer – said they planned to lower refined output 500,000 tons next year, according to a joint statement. That represents about 7% of China’s production and over 3.5% of world supply, according to ANZ. Still, prices fell on Monday as base metals sank. Zhuzhou Smelter hasn’t yet completed drafting its production plan for 2016, according to Liu Huichi, the company’s securities representative. The company is still working on meeting the production target for this year, Liu said by phone on Monday.

Ambrose loves taking “the other side”, but ignores that a soaring money supply is meaningless if there’s no-one to spend it. And that means people, not companies buying their own stock.

• Barclays Bets On Stock Boom As World Money Growth Soars (AEP)

Barclays has advised clients to jump into world stock markets with both feet, citing the fastest growth in the global money supply in over thirty years and an accelerating recovery in China. Ian Scott, the bank’s global equity strategist, said the sheer force of liquidity will overwhelm the first interest rate rises by the US Federal Reserve, expected to kick off next month. Global equities rose by an average 15pc over the six months after the last three US tightening cycles began, on average, and Barclays argues that this time stocks are cheaper. The cyclically-adjusted price to earnings ratio (CAPE) for the world’s equity markets is currently 18, compared to 25.5 at the beginning of the last rate rise episode in 2004.

This is roughly 14pc below the CAPE average since 1980, though critics say earnings have been artificially inflated by companies borrowing a rock-bottom rates to buy back their own stock. Mr Scott said the growth of global M1 money – essentially cash and checking accounts – has surged to 11pc in real terms, led by China and the eurozone. This is higher than during the dotcom boom and the pre-Lehman BRICS boom. It is likely to ignite a powerful rally in equities nine months later if past patterns are repeated, although the lags can be erratic, and the M1 data gave false signals in the mid 1990s. Barclays said American stocks are trading at a 30pc premium to the rest of the world. This gap is likely to close as emerging markets – “the epicentre of negative sentiment” – come back from the dead.

The pattern of foreign fund flows into the reviled sector has triggered a contrarian buy-signal. Everything hinges on China where real M1 money has ignited after languishing for over a year. Floor space sold is growing at 20pc and house prices have stabilized. Simon Ward from Henderson Global Investors says real M1 is now surging in China at the fastest rate since the post-Lehman credit blitz, though money data is cooling in the US Chinese fiscal spending has jumped by 36pc from a year ago and bond issuance by local governments has taken off, drawing a line under the recession earlier this year. “A growth revival is under way and will gather strength into the first half of 2016,” he said.

[..] Sceptics abound. Nobody knows for sure what will happen to the most indebted countries if the Fed embarks on a serious tightening cycle. Dollar debts in emerging markets have jumped to $3 trillion, and much higher under some estimates. Private credit in all currencies has risen from $4 trillion to $18 trillion in a decade in these countries. Research by the Bank for International Settlements suggests that rate rises by the Fed ineluctably lifts borrowing costs everywhere.

“..Singer wrote that the world could face a more severe scenario like a “global central bank panic.”

• Masters of the Finance Universe Are Worried About China (Bloomberg)

David Tepper says a yuan devaluation may be coming in China. John Burbank warns that a hard landing there could spark a global recession. Tepper, the billionaire owner of Appaloosa Management, said last week at the Robin Hood Investor’s Conference that the Chinese yuan is massively overvalued and needs to fall further. His comments follow similar forecasts from some of the biggest hedge fund managers, including Crispin Odey, founder of the $12 billion Odey Asset Management, who predicts China will devalue the yuan by at least 30%. The money managers are losing faith in China’s ability to revive its economy, which suffers from rising nonperforming loans and falling exports, after the surprise 1.9% currency devaluation in August and global market rout that followed.

The investors made their dire forecasts after shares of U.S.-traded Chinese companies, which their funds sold in the third quarter, began to rebound in October. “The downside scenario for China seems more intimidating than ever before,” billionaire Dan Loeb wrote on Oct. 30 to investors at Third Point, which manages $18 billion. “The new question is not whether but how severe the slowdown of the world’s foremost growth machine will be.” Goldman Sachs on Thursday echoed the managers’ concerns, saying the biggest risk to a rebound in emerging-market assets next year is a “significant depreciation” of the yuan. Policy makers, facing a stronger dollar and slower growth, may let the currency decline, which would ripple through emerging markets, strategists led by Kamakshya Trivedi wrote. “In our view, the fallout from such a shift is the primary risk,” the analysts said.

[..] Elliott Management’s Paul Singer also warned about global contagion from China’s decline. Singer told investors in an October letter that emerging market countries are “choking” on U.S. dollar-denominated debt that was extended due to low interest rates and monetary stimulus. He said many emerging economies, which are in recession, are “scared to death” about even a 25 basis-point increase in U.S. interest rates. While “muddling along” is still an option, Singer wrote that the world could face a more severe scenario like a “global central bank panic.” He said that policy makers will probably “double down on monetary extremism” in response to deteriorating economies in emerging markets and China.

It’s about discounting the future as much as you can. Faustian.

• Is the Surge in Stock Buybacks Good or Evil? (WSJ)

Corporate stock buybacks are climbing toward a post-financial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports. Stock repurchases boost earnings per share, even if total earnings don’t change, by reducing the number of shares. Analysts and investors typically track per-share earnings, not overall earnings. Buybacks have drawn criticism from some fund managers including Larry Fink, chief executive of BlackRock, which oversees $4.5 trillion in assets. He has said some companies invest too much in buybacks and too little in longer-term business growth. Repurchases also have become a political issue. Democratic presidential candidate Hillary Clinton has called for more-frequent and fuller disclosure of them by the companies involved, even as some activist investors push for more buybacks as a way of returning cash to investors.

In the year’s first nine months, U.S. companies spent $516.72 billion buying their own shares, with third-quarter reports still not complete, according to Birinyi Associates. That is the highest amount for the first three quarters since the record year of 2007, the year before the financial crisis. It leaves this year on track for a post-2007 high if fourth-quarter buybacks hold up. Buybacks can have a significant impact on earnings, as was illustrated this quarter by companies including Microsoft, Wells Fargo, Pfizer and Express Scripts. Microsoft turned a decline in total earnings into a per-share gain by repurchasing a little more than 3% of its shares in the past 12 months. Its total third-quarter earnings were down 1.3% from a year earlier, but per-share earnings rose 3.1%, according to FactSet.

For Wells Fargo, a 0.6% increase in total earnings became a 2.9% gain in earnings per share after buybacks. At Pfizer, a 2% overall earnings gain became a 5.3% per-share jump. Express Scripts, a large drug-benefits manager, turned a 2.8% overall gain into a 12.4% per-share increase. Apple Inc. is by far the biggest buyback spender this year, with $30.22 billion, followed by Microsoft, Qualcomm and AIG. This year isn’t on pace to surpass 2007 in total buybacks. But Birinyi’s data show that announcements of planned future buybacks are the highest for any year’s first 10 months, more even than in 2007. “If companies execute their plans, we are looking at a record amount being deployed over the next couple of years,” said Birinyi analyst Robert Leiphart.

“No one’s ever suggested including the loonie in the SDR.”

• You’re Not the Yuan That I Want (Bloomberg)

In its ongoing quest for glory and global influence, China appears to have won a notable victory. The IMF is set to anoint the renminbi – the “people’s currency,” also known by the name of its biggest unit, the yuan – as one of the world’s reserve currencies along with the dollar, pound, euro and yen. For those who fear (or hope) that China will eventually transform the postwar economic order, this appears to be the first step toward dethroning the dollar. The IMF’s decision, however, is mere political theater. The yuan will now be included among the basket of currencies that make up its so-called Special Drawing Rights. As the IMF itself notes, “the SDR is neither a currency, nor a claim on the IMF.” Holders simply have the right to claim the equivalent value in one or more of the SDR’s component currencies. Central banks and investors won’t suddenly be required or even explicitly encouraged to use the yuan.

Indeed, all that’s changed is that it’s now clear that the IMF isn’t blocking the yuan from becoming a true global reserve currency: China is. To the contrary, the IMF appears to be doing everything it can to help China. SDR currencies are meant to be “freely usable,” which the IMF defines as “widely used to make payments for international transactions” and “widely traded in the principal exchange markets.” The yuan’s champions note that the currency has grown from being used in less than one% of international payments in September 2013 to 2.5% in October – among the top five globally. This simple metric, however, enormously overstates the yuan’s influence. Globally, it’s still barely used more than the Canadian and Australian dollars. No one’s ever suggested including the loonie in the SDR.

True, China is the world’s second-largest economy and its biggest trading nation. Yet at the same time, more than 70% of payments made in yuan still go through Hong Kong, primarily due to its strategic location as a shipping and trading hub for the mainland. All but 2% of yuan-denominated letters of credit are issued to Hong Kong, Macau, Singapore, and Taiwan to facilitate trade with China. Even in Asia, the yuan isn’t accepted as collateral for derivatives trading and similar financial transactions. Instead it’s used almost exclusively for trade in physical goods where China is one of the counterparties. Nor is the currency widely traded in financial markets. Hong Kong, the largest center of yuan deposits outside of China, holds less than 900 billion renminbi, or about $140 billion.

That’s $40 billion less than Coca-Cola’s market cap (and barely a fifth the value of Apple’s). The entirety of yuan deposits held outside of China still amounts to less than the market capitalization of the Thai stock market. This isn’t the result of prejudice against China, but deliberate policy. Take the oft-cited statistic that 2% of global reserves are already held in renminbi. Virtually all yuan reserves are held under swap agreements with the People’s Bank of China, rather than as physical currency. That means China’s central bank maintains control over the currency and its pricing and can refuse transactions if needed, as it did last week when it ordered banks to halt renminbi lending offshore. While other central banks have significant latitude to engage in onshore renminbi purchases, they face restrictions on using the currency outside China.

As Greece and Britain show us, yes you CAN cut a society to death.

• UK Deficit Could Hit £40 Billion By 2020 On Ill-Advised Cuts (Guardian)

George Osborne could be forced to borrow billions of pounds more than forecast by 2020 if he sticks with spending cuts that will damage hit economic growth, according to a report by City University. With only days to go before the chancellor’s autumn statement, the report said the Treasury has underestimated the impact of welfare and departmental spending cuts on the broader economy and especially cuts to public sector investment. Without a boost to public infrastructure, private sector businesses will limit their own investment plans, leading to lower productivity and depressed GDP growth over the next four years. By 2020 the government will be forced to report a £40bn deficit instead of the planned £10bn surplus, the report concludes, undermining Osborne’s fiscal charter, which dictates that governments borrow only in times of distress.

The study by two academics from City University comes only days before the chancellor is expected to tell parliament that he plans to achieve a budget surplus by 2020 from a mixture cuts to departmental spending, welfare and from higher tax receipts, especially income tax and national insurance. But he is already off track in the current 2015/16 year after a run of poor figures for the public finances. Last week the Office for National Statistics reported that higher government spending and lower corporation tax receipts than expected in October had sent borrowing to highest for that month since 2009. Richard Murphy, an academic at City University who has advised the Labour leader Jeremy Corbyn, said the £50bn gap in borrowing is likely because the Treasury will repeat the same mistakes it made between 2010 and 2015, when the coalition government borrowed £160bn more than predicted.

He said the government planned to ignore a detailed study by the IMF that showed cuts to public expenditure during the recovery from a financial crash can result in lower growth, depressed tax receipts and the need for higher borrowing. The analysis of the multiplier effect from spending cuts shows that far from allowing private consumption and investment to accelerate, it remains modest at best, limiting growth and tax receipts. Murphy said: “The very low multiplier the Treasury uses assumes that cuts in government spending will stimulate growth. That’s an assumption, and not a fact. “It is one the IMF now disagree with. And the result of basing policy on that multiplier is we have more cuts than we need, lower growth in the UK economy as a result, lower earnings for most households and so lower tax revenues – which actually makes balancing the government’s books harder,” he added.

The world view of a handful crazed rich sociopaths is ruining an entire formerly proud nation.

• Everything We Hold Dear Is Being Cut To The Bone. Weep For Our Country (Hutton)

Last Thursday, my wife was readmitted to hospital nearly two years after her first admission for treatment for acute lymphoblastic leukemia. She is very ill, but the nursing, always humane and in sufficient numbers two years ago, is reduced to a heroic but hard-pressed minimum. She has been left untended for hours at a stretch, reduced to tearful desperation at her neglect. The NHS, allegedly a “protected” public service, is beginning to show the signs of five years of real spending cumulatively not matching the growth of health need. Between 2010 and 2015, health spending grew at the slowest (0.7% a year) over a five-year period since the NHS’s foundation. As the Health Foundation observed last week, continuation of these trends is impossible: health spending must rise, funded if necessary by raising the standard rate of income tax.

There will be tens of thousands of patients suffering in the same way this weekend. Yet my protest on their behalf is purposeless. It will cut no ice with either the chancellor or his vicar on earth, Nick Macpherson, permanent secretary at the Treasury. Their twin drive to reduce public spending to just over 36% of GDP in the last year of this parliament is because, as Macpherson declares more fervently than any Tory politician, the budget must be in surplus and raising tax rates is impossible. Necessarily there will be collateral damage. It is obviously regrettable that there are too few nurses on a ward, too few police, too few teachers and too little of every public service. but this is necessary to serve the greater cause of debt reduction. To reduce the stock of the public debt to below 80% of GDP and not pay a penny more in income or property tax, let alone higher taxes on pollution, sugar, petrol or alcohol, is now our collective national purpose.

Everything – from the courts to local authority swimming pools – is subordinate to that aim. Not every judgment George Osborne makes is wrong. He is right to advocate the northern powerhouse, to spend on infrastructure, to stay in the EU, radically to devolve control of public spending to city regions in return for the creation of coherent city governance and to sustain spending on aid and development. It is hard to fault raising the minimum wage or to try to spare science spending from the worst of the cuts. But the big call he is making is entirely misconceived. There is no economic or social argument to justify these arbitrary targets for spending and debt, especially when the cost of debt service, given low interest rates and the average 14-year term of our government debt, has rarely been lower over the past 300 years.

But £12 billion more for the military.

• Five Years Into Austerity, Britain Prepares For More Cuts (Reuters)

After laying off nearly half its staff over the last five years, scaling back street cleaning and relying on volunteers to work at some of its libraries, the London borough of Lewisham is getting ready for what could be much more painful spending cuts. Officials in Lewisham’s town hall, like those across the country, know they will have to shoulder much of finance minister George Osborne’s renewed push to fix Britain’s budget. Osborne is due to announce on Wednesday the details of a new spending squeeze which, according to International Monetary Fund data, ranks as the most aggressive austerity plan among the world’s rich economies between now and 2020. It is also a gamble by Osborne, a leading contender to be the next prime minister, that voters can stomach more cuts.

He rejects accusations that his insistence on a budget surplus by the end of the decade is a choice, saying Britain needs fiscal strength to fight off future shocks to the economy. As in the first five years of his austerity push – which Osborne originally hoped would wipe out the budget deficit – he plans to spare Britain’s health service, schools and foreign aid budget from his new cuts and will increase defense spending. That means that cuts for unprotected areas of government, such as local councils, will be all the deeper. Kevin Bonavia, a councilor who oversees Lewisham’s budget, said the borough had just agreed to merge computing teams with another one on the other side of London as it seeks to make more savings in its back-office operations and protect services.

But voters are likely to notice the cuts more in the years ahead than they have done so far. Rubbish bins may no longer be emptied weekly. Delivery of cooked meals could be replaced with help for people in need to do their own online shopping. Lewisham will also have to find savings in the way it provides social care for the elderly and children, which accounts for the lion’s share of its spending. “We are always trying to rationalize. But we have to do it at pace now, and when you do it at pace, you can make mistakes,” Bonavia, a member of the opposition Labour Party, said.

You read that right: £12 billion more for the military

• Save The Library, Lose The Pool: Britain’s Austere New Reality (Guardian)

On a weekday morning in Blakelaw, two miles from the heart of Newcastle, the scene inside a community centre suggests a perfect example of what David Cameron used to call the “big society”. Local women have gathered for a “coffee and conversation” session, while people nearby are cutting flyers for a residents’ association’s Christmas fair. Meanwhile, an effervescent 36-year-old councillor called David Stockdale is discussing plans to bring a key amenity into community ownership. The prime minister would presumably balk at his terminology: Stockdale proudly talks about a “socialist post office”. Since March 2013, the Blakelaw neighbourhood centre has been run as a not-for-profit local partnership, raising money and rising to the challenges presented by austerity.

When the library that extends off the foyer was threatened with closure, the partnership took over its funding. About six months after Newcastle city council cut all money for youth services, the partnership appointed a full-time youth worker. For all Stockdale’s collectivist passions, if you believe wonders can result from the enforced retreat of the state, what happens here might hint at a positive case study – but scratch the surface and it is a lot more complicated. The coffee-and-conversation women say the weekly sessions are pretty much all the area’s pensioners have left: cuts in council grants stopped the exercise classes and local history group. Doreen Jardine, chair of the residents’ association, says that in the past she had enough money from the council to organise up to seven annual coach trips for local children. She’s now down to two.

And while Stockdale extols self-organisation, he also wonders how his area has reached this point. “This is one of the most deprived communities in Newcastle,” he says. “Can you imagine what we could be doing if we didn’t have to meet the costs of running our library? We run this thing on a shoestring, with the goodwill of a lot of people. And it’s difficult.” It is my fourth journalistic visit to Newcastle in three years. The last time I was here, in November 2014, I talked to people anxious about the city’s fate, and pieced together the story of local austerity with the city’s Labour leader, Nick Forbes.

The council was in the midst of a £100m programme of cuts to be spread from 2013 to 2016. Its projections pointed to additional cuts in 2016-17 of £30m then £20m the next year – and Forbes suggested by that point the financial position would be impossible. “By 2017-18,” he told me, “our estimate is that we will have less than £7m to spend on everything the city council does, above and beyond adult and children’s social care. So it’s completely untenable.” Now, in the buildup to George Osborne’s spending review, the position seems even tougher. The projected cuts for 2017-18 have gone up by £20m, and thanks chiefly to Osborne’s failure to pay down the deficit by his original deadline, another £30m is set to follow in 2018-19.

That sinking feeling persists.

• Greek Disposable Income Shrinks Twice As Fast As GDP (Kath.)

Despite the major decline in disposable incomes, Greece remains among the most expensive countries in Europe in dozens of products and services. For instance, a kilogram of flour in Spain costs €1.03, while in Greece it costs €1.25. An iPhone 6s, with a capacity of 16 gb costs €789 in Greece against €739 in Germany, Portugal and Austria, €749 in France and €770 in Italy, all of them countries with a considerably higher per capita income than Greece.

While prices have started declining marginally in this country since 2013, disposable incomes started shrinking from 2008 by an average rate of 6.7% every year, according to figures collected by the Organization for Economic Cooperation and Development (OECD): This stands nowadays at €17,448 per household, far below the OECD member-state average of €24,339 per year. That means Greece ranks only 27th among the OECD’s 36 member-states in terms of people’s disposable income, way below fellow countries of the European south, such as Portugal, Spain and Italy. In practice the disposable income in Greece appears to have shrunk in the last seven years at a rate almost twice as big as the country’s economic contraction rate.

Cutting production is not on the table. They simply can’t.

• Cut Oil Supply or Drop Riyal Peg? Saudis Face ‘Critical’ Choice (Bloomberg)

The longer oil languishes, the more pressure builds on Saudi Arabia to abandon its currency peg. Contracts used to speculate on the riyal’s exchange rate in the next 12 months climbed to a 13-year high on Thursday, before trimming the increase a day later, according to data compiled by Bloomberg. Six-month agreements rose to near the highest in seven years on Friday. Saudi Arabia is pumping oil at a record level this year, leading OPEC’s effort to defend market share even as oil trades near the lowest level in six years. That’s forced the kingdom to tap savings and sell debt to make up for a plunge in revenue and defend its 30-year-old peg to the dollar. For Bank of America Corp., the country may face a choice next year: cut production to help boost prices or adjust the riyal’s rate to stem a decline in foreign reserves.

“A depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk,” BofA strategists led by Francisco Blanch in New York wrote in a Nov. 19 report. “It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation.” One-year forward points for the riyal jumped 167.5 points to 525 on Thursday, before falling to 455 a day later. That reflects expectations for the currency to weaken about 1.2% to 3.7962 per dollar in the next 12 months. Six-month agreements rose on Friday to 152.5, near the highest level since 2008. Weak global growth and inflation as well as a strong dollar will remain a “huge” headwind for dollar-based commodity prices, BofA said. Brent crude closed last week at $44.66 per barrel, down 44% from a year earlier.

Still, Saudi Arabia’s reserves are hardly depleted. While net foreign assets fell to a near three-year low in September as the government drew down financial reserves accumulated over the past decade, they’re among the highest in the region at $646.9 billion. The country’s peg survived low oil prices in the 1990s and revaluation pressure resulting from surging prices in the late 2000s, Shaun Osborne at Scotiabank wrote last week. Pressure may also build on the Chinese yuan amid declining reserves at central banks across the world and with expected U.S. interest-rate increases, BofA said. A meltdown of the yuan may ultimately force Saudi Arabia’s hand because of the “very high sensitivity” of commodities to the currency, the bank said.

Betting against your own resources is the only way to make money.

• Oil Deal of the Year: Mexico Set for $6 Billion Hedging Windfall (Bloomberg)

Mexico is set to get a record payout of at least $6 billion from its oil hedges this year, according to data compiled by Bloomberg. The Latin American country locks in oil sales as a shield against price declines through a series of financial deals with banks including Goldman Sachs, JPMorgan and Citigroup. For 2015, Mexico guaranteed sales at almost $30 a barrel higher than average prices over the past year. The 2015 payment, due next month, is set to surpass the record from 2009, when the Mexican government said it received $5.1 billion after prices plunged with the global financial crisis. The country’s crude has fallen by almost half over the hedging period so far this year. Crude sales historically cover about a third of the government budget.

“The windfall is huge,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a London-based consulting company. “This gives Mexico breathing space.” The hedge, which runs from Dec. 1 to Nov. 30, covered 228 million barrels at $76.40 each for the Mexican oil basket, according to government documents and statements. With less than two weeks to the end of the program, the basket has averaged $46.61 a barrel over the period. The difference would result in a payment of around $6.8 billion, not including fees. The final figure could vary from the Bloomberg estimate as some details of the hedge aren’t public and oil prices will change over the next two weeks. The Mexican oil basket fell on Nov. 18 to $33.28 a barrel – its lowest since December 2008.

“People are sick of seeing these people in the paper who made a million after just mowing the lawn three times,” said Wetzell, the realtor in Devonport.”

• London House Prices Have Nothing on Auckland (Bloomberg)

Even with its mold-streaked bathroom and kitchen without a sink, the duplex in bayside Auckland attracted a frenzied bidding war. Now it’s one of the city’s newest million-dollar government-built houses. The two-bedroom, brick cottage on Kerr Street on the city’s inner north shore fetched NZ$1.04 million ($685,000) at an auction in September, netting the vendor, New Zealand’s government, double a valuation used for taxes. Long symbols of economic disadvantage, homes built by the state last century for low-income tenants are on a tear, thanks to their typically generous land sizes and proximity to the city.

The changing fortunes of these modest dwellings — loved and derided by New Zealanders for their functionality over style — reflect a fervor that’s spurred Auckland’s biggest property boom in two decades. The average house price in New Zealand’s largest city is now higher than London’s. “It’s like the supermarket before it closes on Christmas Day — everyone thinks they’d better get in or they’ll miss out,” said Carol Wetzell, a realtor at Barfoot & Thompson in Devonport, the agency that sold the 82-year-old Kerr Street home. State homes, particularly those built from local timber in a wave of government-led construction in the 1940s, are regarded as iconic — products of a time when the government was determined to ensure no one lived in squalor.

Prime Minister John Key was raised in a state house in Christchurch by his widowed immigrant mother, and the Auckland municipal government plans to create a NZ$1.5 million sculpture of one on the city’s waterfront. Now, with house prices up 24% in Auckland in the past year alone, the government can count more than 650 state homes, or “staties,” worth at least NZ$1 million in its Auckland property portfolio, according to data obtained by Bloomberg News via a freedom of information request. Among the most valuable listed by property researcher CoreLogic: a two-bedroom home in the leafy, inner-city suburb of Westmere with a rotting clapboard facade. With the prospect of sea views if renovated, plus space for a tennis court and swimming pool, it’s valued at NZ$2.2 million.

Blowback for the west’s handling of the Middle East in the past 150 years.

• We Still Haven’t Grasped That This Is War Without Frontiers (Robert Fisk)

[..] Isil’s realisation that frontiers were essentially defenceless in the modern age coincided with the popular Arab disillusion with their own invented nations. Most of the millions of Syrian and Afghan refugees who have flooded into Lebanon, Turkey and Jordan and then north into Europe do not intend to return- ever – to states that have failed them as surely as they no longer – in the minds of the refugees – exist. These are not “failed states” so much as imaginary nations that no longer have any purpose. I only began to understand this when, back in July, covering the Greek economic crisis, I travelled to the Greek-Macedonian border with Médecins Sans Frontières. In the fields along the Macedonian border were thousands of Syrians and Afghans.

They were coming in their hundreds through the cornfields, an army of tramping paupers who might have been fleeing the Hundred Years War, women with their feet burned by exploded gas cookers, men with bruises over their bodies from the blows of frontier guards. Two of them I even knew, brothers from Aleppo whom I had met two years earlier in Syria. And when they spoke, I suddenly realised they were talking of Syria in the past tense. They talked about “back there” and “what was home”. They didn’t believe in Syria any more. They didn’t believe in frontiers. Far more important for the West, they clearly didn’t believe in our frontiers either.

They just walked across European frontiers with the same indifference as they crossed from Syria to Turkey or Lebanon. The creators of the Middle East’s borders found that their own historically created national borders also had no meaning to these people. They wanted to go to Germany or Sweden and intended to walk there, however many policemen were sent to beat them or smother them with tear gas in a vain attempt to guard the national sovereignty of the frontiers of the EU. The West’s own shock – indeed, our indignation – that our own precious borders were not respected by these largely Muslim armies of the poor was in sharp contrast to our own blithe non-observance of Arab frontiers.

No, Europe is being broken apart by the EU.

• Yanis Varoufakis: Europe Is Being Broken Apart By Refugee Crisis (Guardian)

Europe’s stumbling response to the refugee crisis is the result of the divisions caused by the six-year monetary crisis which has fragmented the continent and turned nations against each other, former Greek finance minister Yanis Varoufakis has told the Guardian. With thousands of migrants travelling to Europe from Africa, the Middle East and south Asia, Varoufakis said the future of the European Union was threatened by the worst such crisis since 1945. European leaders have agreed a plan to share 120,000 refugees through a quota system, but countries on the Balkan route have begun refusing people of certain nationalities as part of a backlash against migrants in the wake of the Paris attacks. The issue has become symbolic of Europe’s inability to act together.

Countries such as Britain were gripped by “moral panic” at the sight of refugees camped out at Calais, Varoufakis said, while countries such as Hungary had erected razor-wire fences to prevent migrants getting in. “Take a glance at events in Europe over the last 10-15 years ever since monetary union. The project has failed spectacularly,” said Varoufakis, who quit his job in July after failing to win the deal on debt relief that he believed was necessary for the Greek economy to turn the corner. “Europeans are a people divided by a common currency. The euro crisis has fragmented Europe, turning Greeks against Germans, Irish against Spanish etc. “It makes it hard for the EU to function as a political entity, as a unified entity. The centrifugal force of monetary union has made it harder to deal with the refugee crisis. In a sense, it is the straw that has broken the camel’s back.”

Varoufakis, speaking during a short speaking tour of Australia, admitted that he did not have the solution to the refugee crisis. “I don’t have the answer. The numbers of people are very large. But if someone knocks on my door at three in the morning, scared, hungry and having been shot at, as a human it is my moral duty to let them in and give them a drink and feed them. And then ask questions later. Anything else is an affront to European civilisation. “From a European perspective, we have a lot to answer for. Countries such as Iraq and Syria are creations of western imperialism and the cynicism of the west’s treatment of the region in the past has caused a backlash. “The invasion of Iraq was a great example of the inanity of the west. Syria and Iraq were very fragile states but by creating the rupture, it propelled a shockwave.”

Back to the future.

• Life After Schengen: What a Europe With Borders Would Look Like (Bloomberg)

Continental Europeans have gone so long – two decades – without internal border controls that the younger generation doesn’t know what life is like with them. For a glimpse of the past, and the fortress mentality setting in after the Paris terrorist attacks, look no further than France’s frontier with Luxembourg. Five days after the Paris murder spree, the highway into Luxembourg resembled a truck parking lot, with a two-hour wait as the police stopped and, occasionally, searched. “What a pain in the neck,” said Alban Zammit, 43, a shaven-headed French truck driver who travels back and forth across the border with cargoes ranging from batteries to sacks of sugar. “Is it just to give people the impression of increased security?”

To grasp the economic toll in the time-is-money society, imagine commuters and truckers lining up for passport checks every morning to take the George Washington Bridge or Lincoln Tunnel from New Jersey into Manhattan. Rush hour is slow enough as it is. Luxembourg is central to the border-free story. The Grand Duchy is at the heart of Europe, and every day its population of 550,000 swells by 157,000 commuters taking the train or bus, or driving or carpooling in from bedroom communities in France, Germany and Belgium. Schengen, a Luxembourg town just across the Moselle river from where Germany meets France, was the site of the signing of the open-borders treaty in 1985. Border controls were fully abolished in 1995, initially between seven countries.

Now passport-free travel is the norm between 26 European countries, with the island nations of Britain and Ireland as the notable exceptions. Some 400 million people live in the zone that makes travel within Europe like travel between American states, with only signs like “Bienvenue en France” to denote a change of country. The European Commission guesstimates that there are 1.25 billion cross-border journeys annually, but the unsupervised nature of the system makes the true number unknowable. Incantations such as “Schengen is the greatest achievement of European integration” – intoned by the European Union’s home affairs commissioner, Dimitris Avramopoulos, on Wednesday – are now coupled with the fear that the system will be rolled back, and in the worst case abolished.

Before the Paris attacks, five countries had temporarily reimposed passport controls to cope with the unprecedented wave of refugees from the Middle East. France followed suit as the Europe-wide manhunt got under way for the Paris culprits. Brief suspensions are nothing new, and are foreseen during security scares and for countries staging big events like the Group of Seven summit in southern Germany in June or the European soccer championship in Poland in 2012. But never before has there been so much pressure for a wholesale tightening of the system.

Wonder what Christmas they will have,

• Greek Concerns Mount Over Refugees As Balkan Countries Restrict Entry (Guardian)

Concerns are mounting in Greece that the country could have to deal with thousands of trapped migrants and refugees, after border crossings to Balkans countries to the north were abruptly closed. Macedonia’s decision to prohibit entry to anyone not perceived to be from wartorn countries such as Syria, Afghanistan and Iraq has ignited concern that the EU’s weakest member may be left picking up the pieces. “The nightmare scenario has started to develop where Greece is turned from a transit country to a holding country due to the domino effect of European nations closing their borders,” said Dimitris Christopoulos, vice-president of the International Federation for Human Rights. “There is no infrastructure in place to handle people being stuck here,” he told the Guardian.

An estimated 3,600 Europe-bound migrants were stranded on the Greek side of the frontier on Sunday. “More and more are arriving all the time,” said Luca Guanziroli, field officer with the United Nations refugee agency in the border village of Idomeni. “There is a lot of anxiety, a lot of tension.” Labouring under its worst crisis in modern times, debt-stricken Athens is ill-placed to deal with any emergency that might put more burden on a fragile state apparatus. As spontaneous protests erupted at the weekend, the government dispatched its junior interior minister for migration, Yiannis Mouzalas, to Idomeni to hold talks with local officials. One said: “We are very worried. We can hardly cope, and that’s just waving them [refugees] through.”

Those affected by the ban – mainly Iranians, north Africans, Pakistanis and Bangladeshis – demonstrated within spitting distance of Macedonian border guards on Saturday, shouting “we are not terrorists” and “we are not going back”. The UNHCR said it was wrong to profile people on the basis of nationality. “You cannot assume that they are all economic migrants,” said Guanziroli. “You cannot assume that a lot of them aren’t persecuted in their own countries.” Macedonia is not the only state to tighten border controls. In the wake of the Paris attacks, many nations along Europe’s refugee corridor – in the western Balkans and further north – have also restricted access to those not thought to be fleeing war. “This business of placing restrictions and erecting fences to keep terrorists out when terrorists are already in their countries makes no sense whatsoever,” said Ketty Kehayiou, a UNHCR spokeswoman in Athens. “Profiling by nationality defies every convention.”

“..some of the attackers were French citizens, so they could have come to New York without needing a visa.”

• Why Syrian Refugees Are Not A Threat To America (Forbes)

The days following the Paris attacks have seen a backlash against Syrian refugees. The governors of 31 states have refused to accept Syrian refugees, citing security fears. But the numbers don’t back them up. Here are a few powerful statistics. Only 2% of Syrian refugees admitted to America are males of military age. 50% are children, and 25% are above the age of 65, according to the the U.S. Committee for Refugees and Immigrants. There are very few Syrian refugees in the United States. Since Oct. 1 2012, a total of 2,128 of the world’s four million Syrian refugees have been resettled across the United States, with 4,900 more in the pipeline. That’s hardly the unmanageable torrent some Republicans are fearfully describing. Six of the states that are refusing to accept refugees have not had a single refugee settle there since 2012.

For comparison, the U.S. State Department issues visas to tens of thousands of tourists and students each year. They go through some security checks, but they avoid the stringent refugee screening process. It takes at least four years for refugees to be approved to enter the U.S.. The United Nations High Commissioner For Refugees (UNHCR) puts refugees through its own two-year screening process before referring them to the U.S.. The American screening process takes about another two years as well. Lavinia Limon, the chief executive officer of USCRI points out that that’s a long time for undercover terrorists to wait. ”It seems to me that terror networks are better funded than to keep someone in a refugee camp for four years to hope that they’ll be the half of 1% that will get to come in,” she said.

“That’s not very efficient!” She pointed out that some of the attackers were French citizens, so they could have come to New York without needing a visa. Once they get that UNHCR referral, refugees are vetted by a high number of American agencies. Lee Williams of USCRI names a few. “We know they go through the CIA, the FBI, the national counter-terrorism database, and the Department of Defense,” he said. Then they’re vetted by “agencies with acronyms that none of us know about,” he added, describing the process as a “black box.” It works, for the most part.

Since 9/11 just three refugees out of the 784,000 admitted have been arrested on terrorism charges. Two weren’t planning an attack on American soil, and the plans of the third were “barely credible,” according to the Migration Policy Institute. None of the three were Syrian. Once the refugees get to America, they’re placed in one of 300 resettlement sites by one of nine resettlement agencies. The goal of these agencies is to get the refugees to self-sufficiency as quickly as possible, Simon said. 85 percent of family groups are self-sufficient four months after they arrive.

Debt Rattle November 5 2015

Nov 052015

November 5, 2015 Posted by Raúl Ilargi Meijer at 9:08 am Finance Tagged with: Anonymous, deficit, earnings, Lesbos, Merkel, rate hike, refugees, shipping, VW 3 Responses »

Martha McMillan Roberts Three sisters at Cherry Blossom Festival, Washington, DC” 1941

• This Is the Worst U.S. Earnings Season Since 2009 (Bloomberg)

• U.S. Posts Record Deficit in Manufacturing Trade (Bloomberg)

• German Factory Orders Unexpectedly Drop for Third Straight Month (Bloomberg)

• America’s Labour Market Is Not Working (Martin Wolf)

• Yellen Signals Solid Economy Would Spur December Rate Hike (Bloomberg)

• David Stockman Explains How To Fix The World -In 7 Words- (Zero Hedge)

• The Bear Case for China Sees PBOC Following Fed to Zero Rates (Bloomberg)

• I’ll Eat My Hat If We Are Anywhere Near A Global Recession (AEP)

• VW Could Face Billions In Car Tax Repayments Over Latest CO2 Scandal (Guardian)

• VW Scandal Widens Again as India Says Vehicles Exceeded Emission Rules (BBG)

• Germany Ups Pressure On VW As Scandal Takes On New Dimension (Reuters)

• VW Emissions Scandal Still Obscured By A Cloud (Guardian)

• Germany To Retest VW Cars As Scandal Pushes Berlin To Act (Reuters)

• Basque Secessionists Follow Catalans In Push For Independence (Guardian)

• US Presses Europe To Take Steps To Reduce Greece’s Debt Burden (Bloomberg)

• Fannie, Freddie May Need To Tap Treasury, FHFA Director Says (MarketWatch)

• Maersk Line to Cut 4,000 Jobs as Shipping Market Deteriorates (WSJ)

• 2015 Million Mask March: Anonymous Calls For Day Of Action In 671 Cities (RT)

• Merkel Overwhelmed: Chancellor Plunges Germany Into Chaos (Sputnik)

• Merkel Reasserts Control as Rebellion Over Refugees Fades (Bloomberg)

• Rough Seas and Falling Temperatures Fail to Stop Flow of Refugees (NY Times)

• 800,000 ‘Illegal Entries’ To EU In 2015, Frontex Chief Says (AFP)

Not a freak incident, but a trend.

• This Is the Worst U.S. Earnings Season Since 2009 (Bloomberg)

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet. So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1% on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year. The damage is the biggest in commodity-related industries, with the energy sector showing a 54% drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15%. The picture is brighter for the telecom services and consumer discretionary sectors, with EPS growth of 23% and 19% respectively so far this quarter.

When compared with analyst expectations, about 72% of companies have beaten profit forecasts. That’s only because the consensus has been sharply cut in the past few months, Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management says in a telephone interview. For the year as a whole, S&P 500 earnings are expected to fall 0.5%, data compiled by Bloomberg shows. For 2016, earnings growth is now seen at 7.9%, down from 10.9% in late July. Next year’s consensus is “still very optimistic,” Asseraf-Bitton says, citing the lack of positive catalyst seen for U.S. stocks in 2016 as well as the negative impact from the sharp slowdown in the U.S. energy sector. By contrast, the euro-zone is the only region worldwide where earnings are expected to “grow significantly” in 2015, according to a note from Societe Generale Head of European Equity Strategy Roland Kaloyan.

Lower oil prices hurt where they were ‘supposed’ to heal.

• U.S. Posts Record Deficit in Manufacturing Trade (Bloomberg)

The U.S. trade deficit in manufacturing hit a record $74.7 billion in September, according to an analysis of new Census Bureau data by RealityChek, a reliable blog on manufacturing and trade. That could become fodder for debate in the presidential election, where candidates have been arguing over the plight of American factory workers. The record was spotted by Alan Tonelson, founder of RealityChek. Spotting records involves searching through historical trade data, since the Census Bureau doesn’t make comparisons in its news releases. The swelling of the manufacturing trade deficit is more evidence that while the overall U.S. economy has recovered from the 2007-09 recession, the manufacturing sector continues to lag. While overall employment is up 3% since the start of the recession, in December 2007, manufacturing employment is down 10%.

According to Tonelson, the previous high for the manufacturing trade deficit was $73 billion in August. He says the U.S. appears headed for an annual record deficit in manufacturing. The Alliance for American Manufacturing noted that U.S. imports from China hit a record of $45.7 billion in September, and President Scott Paul said the inflow is “killing America’s manufacturing recovery.” Thanks to the lowest oil imports in a decade, the overall U.S. trade deficit shrank in September to $40.8 billion from $48 billion in August, according to the Census Bureau. But the one-month dip masks a rising trend. “A weakening global economy, soaring dollar, and global petro-recession with an associated inventory overhang are hurting exports and widening the deficit despite the improvement once expected with the big drop in oil prices,” Action Economics said in a statement.

It’s a global trend.

• German Factory Orders Unexpectedly Drop for Third Straight Month (Bloomberg)

German factory orders unexpectedly extended a series of declines in September amid a slump in demand for investment goods in the euro area, highlighting increasing risks for Europe’s largest economy. Orders, adjusted for seasonal swings and inflation, fell 1.7% from August, when they dropped 1.8%, data from the Economy Ministry in Berlin showed on Thursday. That’s the third consecutive decrease and compares with a median estimate of a 1% gain in a Bloomberg survey. Orders declined 1% from a year earlier. The Bundesbank said last month that an upward trend in economic activity in Germany continued in the third quarter, albeit less dynamically. While business confidence as measured by the Ifo institute fell in October for the first time in four months in response to weakening global trade, the slowdown in China in itself should only have a modest impact on the euro-area economy, according to the European Central Bank.

“Manufacturing orders are experiencing a hard time at the moment, which relates primarily to weak demand from outside the euro area,” the ministry said in the statement. “Domestic demand and from within the euro area continue to point moderately upward and supports manufacturing. Sentiment in the industry remains good.” Factory orders dropped 2.8% in the third quarter from the previous one, according to the report. Demand from within the country increased 0.3% and was up 0.9% for the euro area. Non-euro-area orders fell 8.6% in the July-to-September period. In September, orders for investment goods from the euro area fell 12.8%, reflecting a drop in demand for big-ticket items. Excluding bulk orders, demand fell 0.4%.

There are over 93 million Americans not in the labor force. How can you write about this issue and leave out that number? Wolf says ‘just’ 12% of US men “were neither in work nor looking for it.”

• America’s Labour Market Is Not Working (Martin Wolf)

In 2014, 12% — close to one in eight — of US men between the ages of 25 and 54 were neither in work nor looking for it. This was very close to the Italian ratio and far higher than in other members of the group of seven leading high-income countries: in the UK, it was 8%; in Germany and France 7%; and in Japan a mere 4%. In the same year, the proportion of US prime-age women neither in work nor looking for it was 26%, much the same as in Japan and less only than Italy’s. US labour market performance was strikingly poor for the men and women whose responsibilities should make earning a good income vital. So what is going on? The debate in the US has focused on the post-crisis decline in participation rates for those over 16. These fell from 65.7% at the start of 2009 to 62.8% in July 2015.

According to the Council of Economic Advisers, 1.6 percentage points of this decline was due to ageing and 0.3 percentage points due to (diminishing) cyclical effects. This leaves about a percentage point unexplained. Princeton’s Alan Krueger, former chairman of the council, argues that many of the long-term unemployed have given up looking for work. In this way, prolonged cyclical unemployment causes permanent shrinkage of the labour force. Thus unemployment rates might fall for two opposite reasons: the welcome one would be that people find jobs; the unwelcome one would be that they abandon the search for them. Happily, in the US, the former has outweighed the latter since the crisis. The overall unemployment rate (on an internationally comparable basis) has fallen by 5 percentage points since its 2009 peak of 10%.

In all, the proportion of the fall in the unemployment rate because of lower participation cannot be more than a quarter. Relative US unemployment performance has also been quite good: in September 2015 the rate was much the same as the UK’s, and a little above Germany’s and Japan’s, but far below the eurozone’s 10.8%. US cyclical unemployment performance has at least been decent by the standards of its peers, then. Yet as the 2015 Economic Report of the President notes, the UK experienced no decline in labour-force participation after the Great Recession, despite similar ageing trends to those in the US. Even on a cyclical basis, the decline in participation in the US is a concern. It is, however, the longer-term trends that must be most worrying. This is particularly true for the prime-aged adults.

Back in 1991, the proportion of US prime-age men who were neither in work nor looking for it was just 7%. Thus the proportion of vanished would-be workers has risen by 5 percentage points since then. In the UK, the proportion of prime-aged men out of the labour force has risen only from 6% to 8% over this period. In France, it has gone from 5 to 7%. So supposedly sclerotic French labour markets have done a better job of keeping prime-aged males in the labour force than flexible US ones. Moreover, male participation rates have been declining in the US since shortly after the second world war.

This nonsense keeps on going. Whoever follows it deserves what they get.

• Yellen Signals Solid Economy Would Spur December Rate Hike (Bloomberg)

Fed Chair Janet Yellen said an improving economy has set the stage for a December interest-rate increase if economic reports continue to assure policy makers that inflation will accelerate over time. “At this point, I see the U.S. economy as performing well,” Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington. “Domestic spending has been growing at a solid pace” and if the data continue to point to growth and firmer prices, a December rate hike would be a “live possibility,” she said in response to a question from Representative Carolyn Maloney, a New York Democrat. The Federal Open Market Committee in its October statement said it will consider raising interest rates at its “next meeting,” citing “solid” rates of household spending and business investment.

“There are pretty good odds that the Fed will hike rates in December as long as employment perks back up and the unemployment rate slips further, which is what we are looking for,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “She is trying to keep the Fed’s options open in December.” No decision has yet been made on the timing of a rate increase, Yellen cautioned. Yellen appeared before the House Financial Services Committee to testify primarily on the Fed’s supervision and regulation of financial institutions. “What the committee has been expecting is that the economy will continue to grow at a pace that’s sufficient to generate further improvements to the labor market and to return inflation to our 2% target over the medium term,” she said.

But that wouldn’t make the 1% nearly as much money…

• David Stockman Explains How To Fix The World -In 7 Words- (Zero Hedge)

While we are used to David Stockman’s detailed and lengthy “nailing” of the real state of the world, the following brief clip of an interview with Fox Business, in which David explains how to ‘fix’ so many of our problems, can be summarized perfectly in just seven short words: “Replace The Fed with the free market.” Enjoy 4 minutes of refeshing honesty… as the Fox anchor just cannot fathom who or what would “control” rates if there was no Fed…

“He and colleagues at Fathom reckon its growth rate has slowed to about 3% a year..”

• The Bear Case for China Sees PBOC Following Fed to Zero Rates (Bloomberg)

Danny Gabay “bows to nobody” in his pessimism about China’s economy. Gabay, a former Bank of England economist, says the world’s second-biggest economy is barreling toward a hard landing. He and colleagues at Fathom reckon its growth rate has slowed to about 3% a year – less than half the official estimate of 6.9% for the year to the third quarter and the 6.5% the government is aiming for over the next five years. That means desperate measures are in store, he says. The People’s Bank of China will eventually follow its western counterparts by cutting its benchmark interest rate to zero from the current 4.35% and begin buying assets. Politicians will ease fiscal policy and step in to support banks. By cutting so deeply, the PBOC’s main rate will next year fall below that of the Fed for the first time since 2001.

It has already lowered its benchmark six times in a year and devalued the yuan by 3% against the dollar in August. “They will try to do it stone by stone, step by step,” says Gabay, a director and co-founder of Fathom. The authorities also will need to let the yuan slide further, probably by between 2% and 3% a quarter for the next two years and ultimately by about 25% overall to stop it from choking the economy even more. “The rope the Chinese have is currently around their neck and they need to let it go,” said Gabay. “It’s going to hurt.” Fathom’s case conflicts with that of Ma Jun, the PBOC’s chief economist. He said on Tuesday that some market participants are “too bearish” on the economy, where a recovery in property sales alongside recent stimulus should support expansion. The PBOC has repeatedly said it won’t need to do quantitative easing.

Underpinning Gabay’s pessimistic view is his argument that China is no special case and that its policy makers are no better equipped that those elsewhere to prop up a faltering economy. Like the U.S. and U.K. before it, China needs to face life with excess debt.
China’s total government, corporate and household debt load as of mid-2014 was equal to 282% of the country’s total annual economic output, according to McKinsey. “They will be no more adept at stopping an asset price bubble from bursting than the rest of us,” said Gabay. Its banks are now on perilous ground with non-performing loans totaling more than 20% of gross domestic product, more than the level witnessed in Japan in the 1990s before its economy entered deflation, according to Gabay. “We haven’t yet had the final shoe drop,” he said. “There could be a larger further fall in Chinese activity if we’re right and the banking system implodes.”

Ambrose notes the rise in money supply, but fully ignores that means nothing is it is not spent. A curious oversight.

• I’ll Eat My Hat If We Are Anywhere Near A Global Recession (AEP)

The damp kindling wood of global economic recovery is poised to catch fire. For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging. Such optimistic claims are perhaps hazardous, given record debt ratios in most areas of the world and given that we are six-and-a-half years into an aging economic cycle that might normally be rolling over at this stage. It certainly feels lonely. Citigroup’s Willem Buiter has issued a global recession alert. Professor Nouriel Roubini from New York University joined him this week, warning that the odds of a fresh slump have doubled to 30pc. Mr Roubini’s gloom is unsettling for me.

We saw the world in almost exactly the same way in the lead-up to the Lehman crisis, when it seemed obvious to both of us that sharply rising interest rates would prick the US housing bubble and the EMU credit bubble. This time I dissent. Years of fiscal retrenchment and balance sheet deleveraging have prevented the current global economic recovery from gathering speed, and have therefore stretched the potential lifespan of the cycle. The torrid pace of worldwide money growth over recent months is simply not compatible with an imminent crisis. A combined gauge of the global money supply put together by Gabriel Stein at Oxford Economics shows that the “broad” M3 measure grew by 8.1pc in August, and by almost as much in real terms. This is the fastest rate in 25 years, excluding the final blow-off phase of the Lehman boom.

The index has since fallen back slightly as the US settles down but the pattern is clear. It bears no relation to the monetary implosion in early to mid-2008 before the collapse of Fannie Mae and Freddie Mac, the twin mortgage giants that in turn brought down the banking system. It is, of course, possible that money signals have lost their meaning in our brave new world of zero rates and secular stagnation, but the current pace of growth would typically imply a flurry of economic activity over the following year or so. “It is a very benign picture for the world. We should see above trend growth over the next year,” said Tim Congdon from International Monetary Research. Mr Congdon said the expansion of broad money in China has accelerated to an annual pace of 18.9pc over the past three months, thanks in part to equity purchases by the central bank (PBOC), a shot of adrenaline straight to the heart – otherwise known as quantitative easing with Chinese characteristics.

The eurozone is no longer hurtling into a 1930s deflationary vortex. A trifecta of cheap money, cheap oil and a cheap euro have entirely changed the landscape, and now the European Central Bank seems curiously determined to push stimulus yet further by doubling down on QE. Central banks are strange animals, pro-cyclical by nature.

“VW has now lost €32.4bn, or 40% of its value,..”

• VW Could Face Billions In Car Tax Repayments Over Latest CO2 Scandal (Guardian)

Volkswagen could have to repay billions of pounds of tax credits to European governments after finding irregularities in the levels of carbon dioxide emitted by its cars. Shares in the embattled carmaker slumped by 10% on Wednesday, wiping €5bn off the value of the company, as analysts warned that the consequences of rigging CO2 and fuel consumption tests could be worse than the initial scandal around diesel emissions tests. VW has now lost €32.4bn, or 40% of its value, since admitting in September that it installed defeat devices into 11m diesel vehicles. The scandal is dragging down sales of new VW cars, according to industry figures due to be released in Britain on Thursday. Sales data for October from the Society of Motor Manufacturers and Traders is expected to show that VW sales fell by more than 8% year-on-year, with Seat and Skoda also down.

The latest admission about CO2 tests dramatically widens the scandal that VW is facing. Germany, Britain and other countries set vehicle tax rates based on their CO2 emissions. This means that if VW artificially lowered CO2 emissions during testing then its vehicles will have contributed far less in tax than they should have. VW has said that at least 800,000 cars are affected by the CO2 discovery and estimated the economic risks at €2bn. This works out at €2,500 per car, far more than the €609 per car put aside for the cost of the 11m cars involved in the diesel emissions scandal, which was €6.7bn in total. Analysts said these costs were likely to relate to repaying tax credits in Europe rather than customer compensation. [..]

VW could also face compensation claims from motorists over the misstatement of their vehicle’s fuel economy. According to BNP Paribas, the cost of compensation to governments and customers could reach €4bn, on top of the estimated €12bn cost of rigging nitrogen oxide tests. UBS said the total costs of the scandal, including legal claims, could reach €35bn. The discovery about the irregularities in CO2 data emerged from VW’s investigation into the diesel emissions scandal. This found that figures for CO2 and fuel consumption were set too low during CO2 tests. VW is yet to confirm which models are involved or how the misstatement occurred. The majority of the cars have a diesel engine, but petrol vehicles have been dragged into the scandal for the first time.

The whole world.

• VW Scandal Widens Again as India Says Vehicles Exceeded Emission Rules (BBG)

India sought a response from Volkswagen after probes into four car models showed diesel-fuel emissions exceeding permissible limits, and variations in results between on-road tests and those done in laboratories. Investigations into the Jetta, Vento, Polo and Audi A4 marques showed significant variations and about 314,000 vehicles are potentially affected, Ambuj Sharma, an additional secretary in India’s Heavy Industries Ministry, said in an interview in Mumbai. If cars have defeat devices that cheat tests, the matter would become criminal, he said.

Emissions exceeding India’s Bharat Stage IV standards were detected, and VW has 30 days to reply to the findings, Sharma said. The notice adds to Volkswagen’s woes after the automaker admitted in September to cheating U.S. pollution tests for years with illegal software, prompting a plunge in its shares and a leadership change. India’s standards for controlling pollution from exhaust fumes lag behind those in Europe by several years. The company said yesterday it will present its results on the diesel-engine emissions issue by the end of November, and that it’s co-operating fully with the Indian government.

Merkel is way late on this issue too.

• Germany Ups Pressure On VW As Scandal Takes On New Dimension (Reuters)

German officials stepped up the pressure on Volkswagen to clean up its act on Wednesday after it revealed it had understated the fuel consumption of some vehicles, opening a new front in the crisis at Europe’s biggest carmaker. The company said late on Tuesday it had understated the level of carbon dioxide emissions in up to 800,000 cars sold in Europe, and consequently their fuel usage. This means affected vehicles are more expensive to drive than their buyers had been led to believe. The revelations add a new dimension to a crisis that had previously focused on VW cheating tests for smog-causing nitrogen oxide emissions. They are the first to threaten to make a serious dent in the firm’s car sales since the scandal erupted as they could deter cost-conscious consumers, analysts said.

The latest admission provoked some of the strongest criticism yet from the German government of Volkswagen, which is part of an auto industry that employs over 750,000 people in the country, has been a symbol of German engineering prowess and dwarfs other sectors of the economy. Transport minister Alexander Dobrindt said the latest irregularities had caused “irritation in my ministry and with me”. Chancellor Angela Merkel’s spokesman, Steffen Seibert, said the carmaker had to take steps to prevent this happening again. “VW has a duty to clear this up transparently and comprehensively,” he added. “It’s important (for VW) to create structures to avoid such cases.” The latest revelations, which led to Volkswagen adding €2 billion to its expected costs from the scandal, are also the first time gasoline cars have been drawn into the scandal.

It’s becoming a valid question: can VW survive this?

• VW Emissions Scandal Still Obscured By A Cloud (Guardian)

The surprise is that Volkswagen’s shares fell only 10% as the cheating affair deepened in several ways. First, the scandal now covers emissions of carbon dioxide, or CO2, not only nitrogen oxide. Second, some petrol engines are now involved. Third – perhaps most importantly for shareholders who hope VW can recover quickly – the company still seems incapable of giving a straightforward account of what its own investigation has uncovered. Tuesday evening’s statement contained the obligatory expressions of regret and commitment to transparency. Indeed, Matthias Müller, the executive shoved into the hot seat in the first week of the crisis, opted for pomposity overdrive. “From the very start I have pushed hard for the relentless and comprehensive clarification of events,” he declared.

“We will stop at nothing and nobody. This is a painful process, but it is our only alternative. For us, the only thing that counts is the truth.” What, though, did VW actually say beyond the confession that “based on present knowledge” 800,000 vehicles have been affected? Almost nothing. Were cheat devices attached to the vehicles, or were real CO2 emissions disguised by other means? How many petrol cars are affected? Does the phrase “present knowledge” mean most cars in VW’s fleet are in the clear, or that they haven’t yet been examined for CO2? And, since the word “irregularities” is so vague, how severely wrong is the published CO2 data? None of these issues were addressed. A little reticence is understandable while investigations continue but it is not unreasonable to expect VW to explain why it can’t answer questions that would occur to most readers of its statement.

More disgracefully from the point of view of shareholders, the company failed to explain how it derived its estimate that the latest revelations will cost “approximately €2bn”. Does that figure merely cover tax credits that now would appear to have been unfairly earned? Analysts assume so, in which case there could also be a wave of claims from consumers who were encouraged to buy VW vehicles on the basis of bogus claims about fuel efficiency. Analysts at Exane BNP Paribas, for example, added €4bn for recall and compensation costs for customers. That assumption sounds fair. The point, though, is that VW ought to be able to say what its €2bn covers and what it doesn’t.

They should have done this two months ago, when the scandal broke.

• Germany To Retest VW Cars As Scandal Pushes Berlin To Act (Reuters)

Germany is to retest all Volkswagen car models to gauge their genuine emissions levels after new revelations from the carmaker six weeks into its biggest-ever corporate scandal pushed the government to act. Expressing his “irritation” with one of Germany’s biggest employers, Transport Minister Alexander Dobrindt said on Wednesday that all current models sold under the VW, Audi, Skoda and Seat brands – with both diesel and petrol engines – would be tested for carbon dioxide and nitrogen dioxide emissions. As the crisis deepened, VW said it had told U.S. and Canadian dealers to stop selling recent models equipped with its 3.0 V6 TDI diesel engine, while the Moody’s agency downgraded the firm’s credit rating.

The German government’s announcement followed a VW statement on Tuesday that it had understated the level of carbon dioxide emissions in around 800,000 cars sold mainly in Europe, and consequently their fuel usage. This means affected vehicles are more expensive to drive than their buyers had been led to believe. The revelations added a new dimension to a crisis that had previously focused on how Europe’s biggest carmaker cheated in U.S. tests on diesel cars for emissions of nitrogen oxide, which cause smog. Previously the government had said it would review only nitrogen dioxide emissions from VW diesel cars.

“We all have an interest that everything at VW is turned over and reviewed,” Dobrindt said, adding that the government wanted to force the company to pay the extra car taxes which would be incurred by the higher CO2 emissions levels. VW is Europe’s biggest motor manufacturer, employing over 750,000 people in Germany, and has been a symbol of the nation’s engineering prowess.

Basque independence is not that strong now, but Catalunya may change that.

• Basque Secessionists Follow Catalans In Push For Independence (Guardian)

As the central government in Madrid squares off against secessionists in Catalonia, separatists in another Spanish region have begun formally laying the groundwork for their own push for independence. EH Bildu, a leftwing pro-independence party in the Basque country, has submitted a bill to the regional parliament that it hopes will pave the way for consultations to be held in the region. “The aim is to put the political, economic and social future of the Basque country in the hands of its citizens,” EH Bildu’s spokesman, Hasier Arraiz, said as he presented the legislation. The bill mirrors that passed by the Catalan parliament last year, which aimed to create legal cover for a consultation on independence in the region. Spain’s constitutional court suspended the regional law, but Catalonia pressed ahead with the consultation, rebranding it as a symbolic referendum.

The Catalan leader, Artur Mas, and two associates are under investigation for disobedience, abuse of power and obstruction of justice over their actions. Basque separatists have shied away from specifically mentioning independence, but they referred several times to Catalonia as they presented their bill. “It’s time to confront the state democratically. They are doing it in Catalonia and we want to do it in the Basque country,” Arraiz said. The Basque bill has little chance of being passed, because EH Bildu holds only 21 of the 75 seats in the Basque parliament. Its actions, however, confirmed worries in Madrid that any concessions made to secessionists in Catalonia may have to be extended to separatist movements across the country.

Regurgitated ‘news’.

• US Presses Europe To Take Steps To Reduce Greece’s Debt Burden (Bloomberg)

The US is pressing euro-area countries to agree to an overhaul of Greece’s debt to give private-sector investors confidence that the nation’s borrowing burden is sustainable, a US Treasury official said. Europe needs to take action to lower Greece’s overall debt levels, said the official, who asked not to be identified because discussions are in progress. Participation by the European Bank for Reconstruction and Development would also be helpful to restore financial stability in Greece, the official said. The EBRD, which was created to help central and eastern European countries after the Cold War, could lend staff and contribute technical expertise to help the Greek banking system get on firmer footing, according to the official.

Lowering interest rates and extending maturities can ease Greece’s debt burden, and the US and IMF have stopped short of calling for writing down the principal of the loans. Many euro-area nations have indicated that would be a “red line,” while indicating they might agree to better servicing terms. The US call to reduce Greece’s debt burden echoes the position taken by the IMF, which has said it won’t offer new money to Greece unless the euro area commits to a formal debt operation. The US is the largest shareholder in the Washington-based IMF, which lends to countries that run into balance-of-payments troubles. Germany and other creditor nations say bringing the IMF on board is an essential element of the €86 billion bailout that the currency bloc approved in August.

The bailout loans Greece has amassed over its three rescues are the focus in the debt-relief talks, since Greece’s private- sector debt was already restructured in early 2012. Greece’s borrowing outlook gained a boost over the weekend, when the European Central Bank found that capital shortfalls at the four biggest banks won’t require all of the money set aside for financial-sector assistance within the aid program. The banks need €14.4 billion, of which €10 billion is expected to come from the rescue coffers. The European Stability Mechanism said on Saturday that this means Greece won’t draw down the full bailout amount, since it doesn’t appear to need another 15 billion euros that had been earmarked for bank aid if needed. The banks are expected to raise 4.4 billion euros from private-sector sources.

Greek government officials say the EBRD, which took bank stakes in Cyprus, has indicated its willingness to take part in the Greek banks’ search for fresh capital. The EBRD is actively looking at the recapitalization plans of the Greek banks with a view to determining whether we can play a role in the process over the next few weeks, said Axel Reiserer, a spokesman for the London-based development bank. The EBRD has recently established a presence in Greece and is now building relationships and exploring options for investments, Reiserer said. The EBRD handles project finance and does not provide budget support or financial aid.

Time warp.

• Fannie, Freddie May Need To Tap Treasury, FHFA Director Says (MarketWatch)

Fannie Mae and Freddie Mac are at risk of needing an injection of Treasury capital after the latter reported its first quarterly loss in four years, the director of the Federal Housing Finance Agency said Tuesday. FHFA Director Mel Watt issued a statement following mortgage-finance company Freddie Mac’s $475 million third-quarter loss, its first quarterly loss in four years. “Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018 under the terms of the senior preferred stock purchase agreements with Treasury will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward,” Watt said. Freddie Mac said its loss was driven by interest rate changes that soured the value of derivatives it holds.

Watt, in his statement, pointed out that Freddie Mac didn’t report a decline in the credit quality of credit-related losses. The status of Fannie Mae and Freddie Mac has been left in limbo since the government took them under conservatorship in 2008. Efforts to reform the companies have stalled in Congress. But Treasury Secretary Jack Lew and his deputies have pushed back against the idea of privatizing Fannie Mae and Freddie Mac. So-called recap and release could raise the possibility of another bailout, the Treasury says. Freddie Mac has paid $96.5 billion to the U.S. Treasury in dividends. It won’t make any payments to the Treasury for the third quarter, but it won’t have to draw, either, due to the $1.8 billion in reserves.

This is big. When the supply chain of the global economy starts sputtering, look out below.

• Maersk Line to Cut 4,000 Jobs as Shipping Market Deteriorates (WSJ)

The world’s biggest container-ship operator is altering course, slashing jobs and canceling or delaying orders for new vessels after years weathering a sharp downturn in the container-shipping market. Danish conglomerate A.P. Møller-Maersk A/S said Wednesday its Maersk Line container-shipping unit would cut 4,000 jobs from its land-based staff of 23,000. It is also canceling options to buy six Triple-E vessels, the world’s largest container ships, to cope with the deepest market slump in the industry since the 2009 global financial crisis. Maersk said it would also push back plans to purchase eight slightly smaller vessels. The decision to halt its fleet expansion represents a significant U-turn for the company, which had been investing heavily amid the downturn.

Counting on its market-share dominance and deep pockets, it aimed to expand as smaller competitors retrenched. But after issuing a surprise profit warning last month, Maersk signaled it, too, was no longer immune to a combination of slowing global growth and massive container ship overcapacity on many routes. The conglomerate said it would cut its annual administration costs by $250 million over the next two years and would cancel 35 scheduled voyages in the fourth quarter. That is on top of four regularly scheduled sailings it canceled earlier in the year. Maersk has already ordered 27 vessels this year, including 11 Triple-E behemoths, which can carry in excess of 19,000 containers. “Given weaker-than-expected demand, this will be enough for us to grow in line with our ambitions over the next three years or so,” said Maersk Line Chief Executive Søren Skou.

The Triple-E orders were placed at South Korean yard Daewoo Shipbuilding and included a nonbinding option to order six more ships. Maersk officials said that under the terms of the deal, the Danish company isn’t subject to any damages for canceling the option. DSME wasn’t immediately available for comment. Although such options aren’t included in the order books of shipbuilders until they become solid orders, a move like Maersk’s represents a psychological blow for the global shipbuilding industry as well. Ships like the Triple-E go for more than $150 million each, and orders for them have helped cushion the blow for dwindling orders for other ship types.

Remember remember the 5th of November. Today Anonymous promised to ‘unveil’ 1000 American KKK members.

• 2015 Million Mask March: Anonymous Calls For Day Of Action In 671 Cities (RT)

Tens of thousands of activists disguised as Guy Fawkes are expected to the flood streets of over 671 cities as the Anonymous-led Million Mask March sweeps the globe. The hacktivist group and its followers will protest censorship, corruption, war and poverty. For the fourth year in a row the “Anonymous army,” as the group likes to call its activists, will rise up and take part in rallies and protests from Sydney to Los Angeles and Johannesburg to London. Hiding their faces behind stylized ‘Anonymous’ masks popularized by the “V for Vendetta” movie, they will come forward to make their voices heard. The Million Mask March is also about letting “various governments” know that “the free flow of information” will never be stopped.

“We now face a dilemma unfamiliar to any previous human civilization, we face this dilemma not simply as a community, nor a nation; rather collectively as a planet. We have something no previous generation has ever had, the internet,” Anonymous said in its 2015 promo video for the Million Mask March. Social media has been their major megaphone calling on people to unite in a global move. Just like last year, London expects one of the most massive marches on its streets. According to the demonstration’s page on Facebook, 18,000 people are going to join the Anonymous-inspired march. “The government and the 1% have played their hand, now it is time to play ours,” a Facebook statement reads. This year’s dress code for the London’s Million Mask March calls for “white judicial wigs, black robes & Anonymous masks for Order of Public Court.”

Activists will start gathering by the Ecuadorian Embassy “to free Robin Hood [Julian Assange]” at 9 am. The Metropolitan Police is bracing for 2015’s Million Mask March with thousands of extra police. Law enforcement will be on stand-by in case activists attack businesses or cause damage to property. Potential targets have been warned. The 2014 Million Mask March in London was marked by scuffles between activists and police. Meanwhile in Washington, the Million Mask March is expected to be attended by 25,000 people, according to Facebook’s number of “going” at the time of publication. Activists plan to meet by the Washington monument not far from the Capitol building and march towards the White House.

Note how this piece is 180º different from the next one.

• Merkel Overwhelmed: Chancellor Plunges Germany Into Chaos (Sputnik)

Merkel’s recent statements about the need to keep German borders open in order to prevent military conflicts in Europe is causing panic and anxiety among the German population, DWN wrote. According to the newspaper, Merkel’s actions have surprised political observers as well, some of whom say that the German Chancellor is “overwhelmed” and that her era will soon come to an end. The author argued that Merkel’s statements about the possibility of a military conflict are causing fear and panic among Germans. “A warning of a war in Europe expressed by the German Chancellor in public is irresponsible,” the article said, adding that in this context Merkel’s statements about the need to keep the borders open sound confusing and ridiculous.

“The reaction of all ordinary people to such a threatening statement would be that they would want the borders to be closed quickly,” the author wrote. The situation in the country is extremely critical. There is aggression and a tense atmosphere between various groups in refugee camps that may lead to an explosion anytime. Some refugees do not view the German authorities as an obstacle and do not take into account the local legislation when initiating violent clashes. “Will Merkel send the Bundeswehr to the camps? The police have already called the Bundeswehr during violent clashes because otherwise they would lose control,” the newspaper wrote.

According to the newspaper, the catastrophic situation has its roots in Merkel’s irresponsible policy of open doors towards all refugees and migrants. Now at a time when the influx of newcomers is still increasing and the country’s authorities are completely overwhelmed, the situation may come out of control any time. Germany and other European countries have been struggling to resolve the refugee crisis for many months, but without much success. Hundreds of thousands of undocumented migrants continue to flee their home countries in the Middle East and North Africa to escape violence and poverty.

Her power is more important than refugees’ lives.

• Merkel Reasserts Control as Rebellion Over Refugees Fades (Bloomberg)

German Chancellor Angela Merkel may have defused one of the biggest bust-ups of her third-term coalition after quelling a political revolt from her Bavarian allies over her handling of the refugee crisis. A nascent deal reached this week indicates Merkel is reasserting her control over the domestic political drift Germany has witnessed recently amid coalition sniping that put her chancellorship in question. While she has said many external factors will determine whether the flow of refugees can be stemmed – from government action in Turkey to a diplomatic solution to end the war in Syria – Merkel can also take heart from the latest polling that suggests her party’s sliding support has halted.

“There were some threats, but Merkel treated it quite calmly,” said Manfred Guellner, head of Berlin-based pollster Forsa, adding that her party’s poll numbers have probably reached the bottom. “As far as power brokers in Berlin are concerned, nobody at the moment wants to risk the coalition in any serious way.” The chancellor struck the agreement with her chief internal critic, Bavarian Premier Horst Seehofer, removing his threat of unilateral action to halt the influx of refugees. Merkel and Seehofer will meet Thursday with Sigmar Gabriel – head of junior coalition partner, the Social Democrats – to hammer out a final deal. All three have signaled in the last two days that they’re aiming to put the dispute behind them. “We will see if we can find common ground,” Merkel told reporters Wednesday in Berlin.

“If we don’t find an agreement, we have to continue negotiating. That wouldn’t be the first time, but everybody wants us to find a logical solution.” [..] Seehofer, the chairman of the Bavarian sister party of Merkel’s Christian Democrat Union, was assuaged by the chancellor’s commitment to reduce the number of refugees. Merkel said that would involve a series of measures including a political agreement with Turkey to protect that country’s border and a resolution of the civil war in Syria, rather than shutting Germany’s frontier or setting upper limits on those who can come in. “No country in the world can accommodate a limitless flow of refugees,” Seehofer said earlier this week, responding to the numbers of refugees arriving in Bavaria from Austria, issuing the biggest challenge yet to Merkel’s open-door policy.

Speaking to business leaders in Dusseldorf Wednesday evening, Merkel reiterated the need to cut the number of asylum-seekers and tackle the refugee crisis at its source in Syria, warning that a restoration of border controls within the European Union would hit the free movement of goods and people. “We probably need a European border guard, agreements with our neighbors and a fair distribution” of refugees in Europe, the chancellor said. “That means we need a change to the existing asylum system, but a change that strengthens Europe and not a change that weakens Europe.”

“..people will keep coming as long as the smugglers tell them to come, and the smugglers will keep attempting trips as long as the people are coming..”

• Rough Seas and Falling Temperatures Fail to Stop Flow of Refugees (NY Times)

The rubber dinghy rolled perilously on the waves and twisted sideways, nearly flipping, as more than three dozen passengers wrapped in orange life vests screamed, wept and cried frantically to God and the volunteers waiting on the rocky beach. Khalid Ahmed, 35, slipped over the side into the numbing waist-high water, struggled to shore and fell to his knees, bowing toward the eastern horizon and praying while tears poured into his salt-stiff beard. “I know it is almost winter,” he said. “We knew the seas would be rough. But please, you must believe me, whatever will happen to us, it will be better than what we left behind.” The great flood of humanity pouring out of Turkey from Syria, Afghanistan, Iraq and other roiling nations shows little sign of stopping, despite the plummeting temperatures, the increasingly turbulent seas and the rising number of drownings along the coast.

If anything, there has been a greater gush of people in recent weeks, driven by increased fighting in their homelands – including the arrival of Russian airstrikes in Syria — and the gnawing fear that the path into the heart of Europe will snap shut as bickering governments tighten their borders. “Coming in the winter like this is unprecedented,” said Alessandra Morelli, the director of emergency operations in Greece for the United Nations High Commissioner for Refugees. “But it makes sense if you understand the logic of ‘now or never.’ That is the logic that has taken hold among these people. They believe this opportunity will not come again, so they must risk it, despite the dangers.”

The surge means that countries throughout the Balkans and Central Europe already under intense logistical and political strain will not find relief — especially Germany, the destination of choice for many of the refugees. Hopes that weather and diplomacy would ease the emergency are unfounded so far, putting more pressure on financially strapped and emotionally overwhelmed governments to quickly find more winterized shelter. The influx also underscores the European Union’s failure to reach a unified solution to the crisis, leaving places like Lesbos struggling to deal with huge numbers of desperate people and raising questions about what will happen not just this winter, but in the spring and beyond.

Early this week, the number of people who had crossed into Greece from Turkey hit 600,000, after having passed 500,000 only a few weeks earlier. Both migrants and relief workers shrug when asked how far into the winter people will try to make the treacherous crossing. “Some of the smugglers, they tell the people who call them, ‘Yes, there will be more trips, you should come,’ and so the people keep coming,” said Abu Jawad, a 28-year-old Palestinian Syrian who works as a broker for Turkish smugglers, recruiting passengers from the crowds in Izmir, Turkey, and other coastal cities. “So what I think is that people will keep coming as long as the smugglers tell them to come, and the smugglers will keep attempting trips as long as the people are coming,” he said.

Leggeri should be fired from framing the issue this way. But he won’t, because this is Europe’s new normal, this is how politics wants is framed. Still, under international law people fleeing war zones cannot be labeled ‘illegal’.

• 800,000 ‘Illegal Entries’ To EU In 2015, Frontex Chief Says (AFP)

Migrants have made some 800,000 “illegal entries” to the European Union so far this year, the head of the bloc’s border agency Frontex said in an interview with German newspaper Bild published Wednesday. Warning that the influx of migrants has probably not yet “reached its peak,” Fabrice Leggeri called for European states to detain unsuccessful asylum seekers so they can be “rapidly” sent back to their countries of origin. “EU states must prepare for the fact that we still have a very difficult situation ahead of us in the coming months,” added Leggeri. Last month, Frontex said that 710,000 migrants had entered the EU in the first nine months of the year but cautioned that many people had been counted twice. The agency said on October 13 that “irregular border crossings may be attempted by the same person several times.”

“This means that a large number of the people who were counted when they arrived in Greece were again counted when entering the EU for the second time through Hungary or Croatia,” explained the agency. According to the most recent figures from the UN refugee agency, more than 744,000 people have made the perilous journey across the Mediterranean this year, the majority to Greece. On Wednesday, the first set of 30 migrants was due to leave Athens for Luxembourg under an EU plan to redistribute people throughout the 28-member bloc in order to ease pressure on countries like Greece and Italy. The bloc hopes to transfer some 160,000 people under the plan.

Debt Rattle June 28 2015

Jun 282015

June 28, 2015 Posted by Raúl Ilargi Meijer at 11:42 am Finance Tagged with: climate, deficit, ECB, Europe, Greece, math, pope, Portugal, Troika 6 Responses »

Harris&Ewing Goat team, Washington, DC 1917

• A Perfect Storm Of Crises Blows Apart European Unity (Guardian)

• The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)

• The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)

• Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)

• Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)

• Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)

• Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)

• Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)

• Europe’s Moment of Truth (Paul Krugman)

• Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)

• Greece Referendum: Why Tsipras Made the Right Move (Fotaki)

• IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)

• Austrians Launch Petition To Quit EU (RT)

• The Government Must Run Deficits, Even In Good Times (Ari)

• Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

Because it has no morals.

• A Perfect Storm Of Crises Blows Apart European Unity (Guardian)

The time was shortly after 3am when David Cameron descended from level 80 of the vast Justus Lipsius building in Brussels on Friday. The birds were singing as he was whisked away for a much-curtailed sleep at the British ambassador’s residence, five minutes up the road. The prime minister is no novice when it comes to long and tedious discussions at European summits. But what he had just witnessed over a seemingly never-ending dinner with the other 27 EU leaders was something different altogether. The immediate crisis under discussion was migration and what the EU should do to handle the many thousands who have crossed the Mediterranean from Africa and the Middle East and arrived via Italy and the western Balkans over recent months.

Increasingly, Europe is a magnet for those seeking a better life. But the EU does not know how to react and the problems are spreading. Last week a strike by French workers at Calais caused huge tailbacks on motorways leading to both the ferry port and Channel tunnel as hundreds of migrants – mainly from east Africa, the Middle East and Afghanistan – tried to take advantage of queueing traffic by breaking into lorries bound for the UK. Against this background, a supposedly cordial working dinner, held high in the Council of Ministers building, rapidly descended into personal insults and finger-jabbing – which an exhausted-looking Cameron later summed up as “lengthy and, at times, heated discussions”.

Matteo Renzi, the Italian prime minister, was incensed by the refusal of several countries, including Hungary, which has taken in 60,000 refugees since the beginning of the year, and the Czech Republic, to agree to take part in a compulsory refugee-sharing scheme to help ease Italy’s burden. Cameron kept fairly quiet. The UK has opted out of EU asylum policy and Renzi, who was in an emotional state, did not need to be reminded of its non-participation. But others took up the cudgels as the row intensified across the table. Dalia Grybauskaite, the Lithuanian president, told Renzi in no uncertain terms that her country would not take part either. Bulgaria, one of the EU’s poorest countries, took a similar line. Disputes flared. European commission president Jean-Claude Juncker, prime mover behind the idea of compulsory burden sharing, and council president Donald Tusk tore strips off each other over what should be done, as inter-institutional solidarity broke down.

They don’t seem to realize that though.

• The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)

Greece is on the brink. Even if a last-minute deal is found it is clear that the solutions proposed are little more than a way to delay the crisis. A more comprehensive resolution of the Greek tragedy needs to address the medium-term (non-)sustainability of the Greek debt position. Economists know that negotiations usually break down when there is uncertainty in bargaining. When the two sides are uncertain as to what gains and losses the other side can make through any deal or by walking away. In this case, part of the uncertainty is political, because the Greek and other EU governments don’t fully know what might be acceptable to their electorates. But a good part of the uncertainty at this bargaining table is economic. Because we are in totally uncharted waters.

Monetary unions can be, and have been, dissolved before in history but, except in the aftermath of wars, not usually in anger. There are several sources of uncertainty for both sides in the dispute. First, if Greece leaves the Eurozone, at one level it will have greater freedom to walk away from at least some its debt, or to restructure it in a way which suits its short-term economic need. It could plan a moderate primary surplus. The problem for the Greek government is that it will inherit a broken banking system and there will be great uncertainty on whether a devaluing new Drachma could benefit its net trade position, with an impaired financial system, and shut out from world capital markets. Greece is not Iceland, and there is less social consensus on how to share the short-run burden of economic adjustment in a Grexit scenario.

Second, the losses for the EU lenders are truly eye-watering. The two bail-out packages for Greece amount to €215.8 billion. Of these €183.8 billion came from other EU countries and the rest from the IMF. The biggest shares of the support through the European Financial Stability Facility came from Germany and France. None of this includes the cost of support given to the Greek banking system via the ECB. The IMF would suffer considerable losses too (the UK’s main exposure is through this channel). The impact of Grexit and a partial or full debt repudiation on the rest of the EU would be considerable. Paradoxically by triggering a Grexit rather than an orderly debt restructure, the EU lenders may lose more of their current bail-out. So why are they not more accommodating? Because if it stays in, Greece will need a further bail-out, as no-one believes the current plan is sustainable. It’s that uncertainty again.

Dead on. 1- 2 = -1.

• The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)

Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen. Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize. When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable. In the US the 4 principle “solutions” to make the math workable were to:
1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.

ZIRP’s true purpose is actually much more sinister: To make global debt serviceable. To make the math work without a default. Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default. Which brings us to Greece the butterfly, the truth and indeed the future: Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work. It never has and it never will until there is a default on at least some of the debt. And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

“The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt.”

• Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)

Colleagues, In our last meeting (25th June) the institutions tabled their final offer to the Greek authorities, in response to our proposal for a Staff Level Agreement (SLA) as tabled on 22nd June (and signed by Prime Minister Tsipras). After long, careful examination, our government decided that, unfortunately, the institutions’ proposal could not be accepted. In view of how close we have come to the 30th June deadline, the date when the current loan agreement expires, this impasse of grave concern to us all and its causes must be thoroughly examined.

We rejected the institutions’ 25th June proposals because of a variety of powerful reasons. The first reason is the combination of austerity and social injustice they would impose upon a population devastated already by… austerity and social injustice. Even our own SLA proposal (22nd June) is austerian, in a bid to placate the institutions and thus come closer to an agreement. Only our SLA attempted to shift the burden of this renewed austerian onslaught to those more able to afford it – e.g. by concentrating on increasing employer contributions to pension funds rather than on reducing the lowest of pensions. Nonetheless, even our SLA contains many parts that Greek society rejects.

So, having pushed us hard to accept substantial new austerity, in the form of absurdly large primary surpluses (3.5% of GDP over the medium term, albeit somewhat lower than the unfathomable number agreed to by previous Greek governments – i.e. 4.5%), we ended up having to make recessionary trade-offs between, on the one hand, higher taxes/charges in an economy where those who pay their dues pay through the nose and, on the other, reductions in pensions/benefits in a society already devastated by massive cuts in basic income support for the multiplying needy.

Let me say colleagues what we had already conveyed to the institutions on 22nd June, as we were tabling our own proposals: Even this SLA, the one we were proposing, would be extremely onerous to pass through Parliament, given the level of recessionary measures and austerity it entailed. Unfortunately, the institutions’ response was to insist on even more recessionary (aka parametric) measures (e.g. increasing VAT on hotels from 6% to 23%!) and, worse still, on shifting the burden massively from business to the weakest members of society (e.g. to reduce the lowest of pensions, to remove support for farmers, to postpone ad infinitum legislation that offers some protection to badly exploited workers).

There’s more than one candidate.

• Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)

In the end, they kicked the can a little further down the road. After keeping the markets on a cliff-hanger for the last week, wondering whether the Greeks might end up getting kicked out of the eurozone, a deal of some sort looks likely. It won’t fix Greece, and it won’t fix the euro either. But it will patch the whole system up until Christmas — and that will buy everyone some time to concentrate on something else. And yet, in reality, the real crisis may not be in the east of the eurozone, but right over in the west. Portugal is the ticking time-bomb waiting to explode. Why? Because the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well.

The elections later this year may well trigger the second Portuguese crisis — and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the world’s attention. All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable. Back in 2011 and 2012, when the euro crisis first flared up, three countries went bust. Of those, Greece is still in intensive care, and looks likely to remain so for the foreseeable future — the Greeks look willing to do just enough to stay in the eurozone, while the rest of Europe is willing to offer it just enough money to stay afloat while making it impossible to grow (it is a reverse Goldilocks — probably the worst of all possible solutions).

Ireland, which was always the strongest of the three bankrupt nations, is now growing again at a reasonable rate, helped along by the robust recovery in the U.K., which is still its main export market. And then there is Portugal — which is not in Greek-style permanent crisis, and yet does not seem capable of a sustainable recovery. On the surface, Portugal looks in much better shape than it did three years ago. It has exited the bailout scheme, leaving the program in May last year, after hitting European Central Bank and International Monetary Fund targets. The economy is starting to expand again. GDPt rose by 0.4% in the latest quarter, extending the run to a whole year of expansion, taking the annual growth rate up to 1.5%. It is forecast to expand by another 1.6% this year.

If Portugal can indeed recover, that would be a big win for the EU and IMF. Their catastrophic mix of internal devaluation and austerity looks to have been a complete failure in Greece, but if they can make it work in both Ireland and Portugal, the reputation of both institutions could be salvaged.

Don’t think the ECB is smart enough to oversee the fall-out.

• Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)

[..] if this is correct, Goldman essentially says that it is in the ECB’s, and Europe’s, best interest to have a Greek default – and with limited contagion at that – one which finally does impact the EUR lower, and resumes the “benign” glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14. Needless to say, that is a “conspiracy theory” that could make even the biggest “tin foil” blogs blush. A different way of saying what Goldman just hinted at: “Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE).” Or, in the parlance of Rahm Emanuel’s times, “Let no Greek default crisis go to QE wastel.” Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30% across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2).

In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten% (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking – it tells the truth! “As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled.” Bingo – because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts..

It’s stunning to see that when confronted with basic democracy, the press has no idea what to say or do.

• Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)

Economists with PhDs and hedge-fund traders can barely stay on top of the vagaries of Greece’s spiraling debt crisis. Now, try getting grandma to vote on it. That’s what Prime Minister Alexis Tsipras is doing by calling a snap referendum for July 5 on the latest bailout package from creditors. The 68-word ballot question namechecks four international institutions and asks voters for their opinion on two highly technical documents that weren’t made public before the referendum call and were only translated into Greek on Saturday.
Worse, they may no longer be on the table. International Monetary Fund chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements which are no longer valid.”

Tsipras’s decision means everyone from fishermen to taxi-drivers and factory workers will have to form an opinion on the package, with their country’s economic future hanging in the balance. A rejection of the bailout terms could lead to an exit from the euro area and economic calamity; accepting them would probably keep Greece in the euro, but with more austerity. “Usually in democracies, it’s the technocrats and the politicians who take care of the details, while voters are asked about broader issues and principles,” said Philip Shaw, the chief economist in London at asset manager Investec. “This is a transfer of responsibility from parliament to the voters.”

The numbers stopped making sense long ago. Quit looking at the numbers.

• Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)

All the heated negotiations and analysis around a bailout for Greece seem oblivious to the key problems of any settlement. Since February’s “deal,” the parties have inched close to an agreement in a prolonged battle of alternative drafts (some incorrect; other misdirected). It remains highly uncertain whether agreement can be reached. The creditors insist this is their “last and best” offer. The Greeks bluster about democracy and blackmail. Now, the Greek government has called a snap referendum on the new proposals. In its current form, the terms will represent a few concessions by the creditors, but almost total capitulation by the Greek government. Consider:

First, the agreement is likely to cover five months, necessitating a more comprehensive further program, which will inevitably require creditors to provide new financing to Greece (in effect a third bailout) if default is to be avoided. Second, the focus originally has been on the release of €7.2 billion from the existing second bailout program. If the amounts that Greece has run down from reserves, pensions and also its account at the IMF are replaced, then there is little additional new funding to Greece. It seems the European have found a little more money, by shuffling funds, whereby the amount would be a more “generous” 17 or so billion euro. But it is far from clear what Greece needs in any case.

Third, the issue of debt repayments or relief is not addressed, other than in vague terms. Greece has commitments of around 5-10 billion euro each year plus the continuing need to roll over around €15 billion in short-term Treasury bills. Greece may not have the ability to meet these obligations on an ongoing basis. This does not take into account additional funding needs of the State that may arise from budget shortfalls or the need of Greek banks.

Oh, c’mon, I feel so awkward agreeing with Krugman….

• Europe’s Moment of Truth (Paul Krugman)

Until now, every warning about an imminent breakup of the euro has proved wrong. Governments, whatever they said during the election, give in to the demands of the troika; meanwhile, the ECB steps in to calm the markets. This process has held the currency together, but it has also perpetuated deeply destructive austerity — don’t let a few quarters of modest growth in some debtors obscure the immense cost of five years of mass unemployment. As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

It seems to me that the troika — I think it’s time to stop the pretense that anything changed, and go back to the old name — expected, or at least hoped, that Greece would be a repeat of this story. Either Tsipras would do the usual thing, abandoning much of his coalition and probably being forced into alliance with the center-right, or the Syriza government would fall. And it might yet happen. But at least as of right now Tsipras seems unwilling to fall on his sword. Instead, faced with a troika ultimatum, he has scheduled a referendum on whether to accept. This is leading to much hand-wringing and declarations that he’s being irresponsible, but he is, in fact, doing the right thing, for two reasons.

First, if it wins the referendum, the Greek government will be empowered by democratic legitimacy, which still, I think, matters in Europe. (And if it doesn’t, we need to know that, too.) Second, until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way. If you ask me, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point. But they have, and I can’t at all blame Tsipras for turning to the voters, instead of turning on them.

Getting ugly.

• Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)

Evidence pointing to international espionage, a plot to murder former Greek Prime Minister Costas Karamanlis and a 2012 plan for Greece’s exit from the euro code-named the “Silver Drachma” are just some of the sensational findings unveiled in a report by Greek Anti-Corruption Investigator Dimitris Foukas, released on Friday and sent to the Justices’ Council for consideration. The report outlines the findings of three converging judicial investigations spanning several years, initiated after the notorious phone-tapping scandal in 2005 and revelations that the mobile phones of then Prime Minister Karamanlis and dozens of other prominent Greeks were under surveillance.

This investigation later merged with that of the “Pythias Plan’” – for the neutralization and even murder of Karamanlis – and allegations that Greek National Intelligence Service officers and former Minister Michalis Karchimakis had leaked classified state secrets and documents. Foukas cited evidence – including Wikileaks reports – supporting the existence of the Pythias Plan, which he said was designed to exert pressure on the Greek government to change its policy in crucial sectors, such as energy, arms procurements and public sector procurements. According to the report, the rapprochement between Greece and Russia provoked action by the United States to avert agreements for Russian pipelines, leading to the gradual abandonment of the plans by Athens and its commitment to the Trans-Adriatic Pipeline (TAP), as well as the cancellation of plans to acquire Russian military equipment.

Word: “With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.”

• Greece Referendum: Why Tsipras Made the Right Move (Fotaki)

Greece will hold a referendum on July 5 on whether the country should accept the bailout offer of international creditors. The government’s decision to reject what was on offer and call the referendum is ultimately an attempt to take charge of its domestic policy and reaffirm its credibility with voters. Although Greece is hard strapped for cash this is clearly a political decision with profound consequences for the future of the European Union. It is also the right one. This is not merely useful as a negotiating tactic for obtaining a better deal with its creditors, as many commentators might suggest. The coalition of the left, Syriza, had no choice but to oppose further measures that would lock its economy into a deflationary spiral, the trappings of which are destroying Greek society.

Elected with the mandate to end the savage austerity policies already imposed, Syriza could hardly accept the further cuts demanded. These include cuts in income support for pensioners below the poverty line and a VAT hike of up to 23% on food staples. Even more onerous was the demand that Greece should deliver a sustained primary budget surplus of 1% for 2016, gradually increasing to 3.5% in the following years when its economy has already been contracting for six years. By most counts the austerity policies imposed by Greece’s creditors in 2010 in exchange for the bailout money have been an abject economic and moral failure. The IMF itself has acknowledged “a notable failure” in managing the terms of the first Greek bailout, in setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed.

The former IMF negotiator, Reza Moghadam, has acknowledged the fund’s erroneous projections about Greek growth, inflation, fiscal effort and social cohesion. The debt is now almost 180% of Greece’s GDP, up from 120% when the bailout program began. And this is mainly due to the fact that GDP has contracted by 25%, rather than the significantly lower projections by the IMF. The shrinking of the economy and rising unemployment levels have exceeded those that hit the US in the financial crisis of the 1930s. The human and social costs have been even more staggering in Greece. Incomes have fallen by an average of 40%, and the unemployment rate reached 26% in 2014 (and higher than 50% for youth). With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.

Yet in the terms presented to Greece by their creditors there is no commitment to reducing Greece’s crippling debt (which all commentators acknowledge is unrepayable). Nor is there any tangible proposal for rebuilding the Greek economy. Germany, France, and the EU, aided by the IMF and ECB, continue to insist on implementing policies that have so manifestly failed Greece. They do so to avoid having to justify the massive bailouts of their own financial systems – shifting the burden from banks to taxpayers – if Greece fails to make the repayments. The leading EU partners must not be seen to act leniently towards Greece as this might encourage anti-austerity parties Spain and elsewhere.

No, the IMF should be dismantled.

• IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)

Whatever the eventual outcome of the Greek debt talks, there are a number of judgments can already be made; one is that a large part of the blame for this ever deepening debacle lies at the doors of the International Monetary Fund, which from the very beginning has had both its priorities and its analysis of the situation hopelessly wrong. The IMF is meant to fix these things; instead, it has conspired to turn what should have been a containable crisis into a total disaster. With its reputation in tatters and its credibility shot to bits, it is small wonder that China and others are seeking alternative, rival models of governance for the global financial system. If this were any normal organisation, the IMF’s managing director, Christine Lagarde, would be forced to resign and someone with less of a vested interest in propping up the folie de grandeur of EMU installed in her place.

Tharman Shanmugaratnam, deputy prime minister of Singapore – measured, clever, internationally respected and impressively free- market orientated in his approach to global affairs – would make an excellent choice, though even he, as a long-standing chairman of the IMF’s policy committee, is somewhat tainted. It may require a complete outsider. Crisis management is of course what the IMF is there for; and if in the thick of a crisis, you are almost bound to get flak. Has there ever been a crisis in the IMF’s 70-year history that was not said to have done irreparable damage to the organisation’s reputation? It’s hard to think of one. Whatever it does, the IMF always gets it in the neck. Take the Russian financial crisis of 1998. The $5bn the IMF lent to help the country over its difficulties was immediately stolen and spirited away into Swiss bank accounts.

Or the pre-millennial Asian crises, where the IMF was accused of imposing a degree of austerity on afflicted nations it would never dare advocate for any G7 economy. I could go on, but it would fill the rest of the newspaper. In any case, criticism comes with the territory, which is possibly why the IMF has always been so impervious to it, and also why it repeatedly fails to learn from its mistakes. By any standards, however, the IMF’s entanglement with the eurozone crisis is a whopper of a screw-up. Nor is it something in which the IMF should have got involved in the first place. Europe, one of the richest regions in the world, should have been left to sort out its own affairs. This is more particularly the case as the Greek debt crisis is almost entirely one of the eurozone’s own making.

Shut off the light on your way out.

• Austrians Launch Petition To Quit EU (RT)

Austrians have launched a petition to quit the EU, arguing that the nation will be better off economically if it leaves the union. To force the national parliament to consider the initiative activists need to have gathered 100,000 signatures by July 1. The petition was started by a retired 66-year-old translator, Inge Rauscher, who has collected enough signatures to launch an official campaign. The plea seeks to request that the national parliament debate the idea of a referendum on quitting the EU. However, to get that issue even discussed, the petition must gather 100,000 signatures. “We want to go back to a neutral and peace-loving Austria,” Rauscher said at the start of the campaign this week. Austrians have until July 1 to sign the petition which they can do in municipal or district offices.

Rauscher and her non-partisan Heimat & Umwelt committee (Homeland and Environment) argue that Austria will benefit from leaving the EU both economically and environmentally. She also criticized Austria’s forceful endorsement of EU sanctions against Russia, generally blaming Brussels for the economic downturn. “We are not any longer a sovereign state in the European Union. Over 80% of all essential legislation is being imposed by Brussels, not by elected commissioners. In our view, Europe is not a democracy. The European Parliament does not even have legislative powers,” Rauscher told Sputnik Radio.

An independent Austria, the committee believes, would gain an extra €9,800 per household per year, because the country will be freed from the burdens of EU bureaucracy. Recent polls show that only about one third of Austrians would be in favor of leaving the EU, according to the Local. The idea is championed by both the right-wing Freedom Party and the Euro-skeptic Team Stronach party. “This initiative is open for all political parties and we expect a broad support,” Rauscher said. “This is proved by our numerous conversations with the citizens over the past months.”

Ari, interesting, but you kill your own argument by defining inflation as rising prices.

• The Government Must Run Deficits, Even In Good Times (Ari)

It is my view that it is very important to keep things simple and this is what I will aim to do here. I will get down to the simplest identity and build from there using empirical data. I will draw conclusions which logically follow from the data and base assumptions. But despite the elementary nature of the idea, I still think that what it will show is very informative and the conclusion it leads to is one that the current government in the UK would be appalled to consider. Although the conclusion will be surprising to some people, I believe that every step of the logic shown here is undeniably true. I would be very interested if someone can show me a faulty link in the chain. The starting point is the basic identity here:

If GDP in one year is given by £A, then the total amount of money spent on domestic goods and services is £A.
If nominal GDP the next year grows by proportion n, then GDP in year two is given by £A*(1+n) and the total amount of money spent in year two is also £A*(1+n).
What it means is that, if, for example, growth is 2% and inflation is 2%, then a total of 4% more money MUST be spent in year two than was spent in year one.

The question I will mainly be answering in the rest of this post is ‘where does this money come from?’. I will not just try to answer this question in the abstract but to quantify the effect of different sources of money. When money is spent in an economy then it contributes to nominal GDP. Nominal GDP growth is the increase in A above. The economy can be simplified to how much money was spent and how much of that leads to real growth and how much to inflation. I will try to show, using empirical data, the source of funding for our economic growth and how this leads to the conclusion that we have a big problem now. I am trying to keep things simple so I will avoid using any long equations, but to see this idea broken down into greater detail, it can be seen in the model I develop here and give an example of here (where I explain that the next crash we will have could well be a painful one).

I am not too concerned with the supply side during this discussion; it is a different issue. For example, better infrastructure and training will increase future real growth by improving productivity. There are two sides to an economy and both are important. However all of this is irrelevant for this analysis because it is just looking at the importance of demand. Deficiencies in supply will be shown in inflation figures. The supply side can expand supply to fill a certain amount of the demand as demand grows. This is dependent upon the spare capacity in the economy. If many people are out of work, then it would be easier to fulfill an increase in demand than if there is full employment. This will show in the numbers. The higher the level of GDP, the higher proportion of the extra spending that will lead to inflation.

Not sure about this…

• Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

She is one of the world’s most high-profile social activists and a ferocious critic of 21st-century capitalism. He is one of the pope’s most senior aides and a professor of climate change economics. But this week the secular radical will join forces with the Catholic cardinal in the latest move by Pope Francis to shift the debate on global warming. Naomi Klein and Cardinal Peter Turkson are to lead a high-level conference on the environment, bringing together churchmen, scientists and activists to debate climate change action. Klein, who campaigns for an overhaul of the global financial system to tackle climate change, told the Observer she was surprised but delighted to receive the invitation from Turkson’s office.

“The fact that they invited me indicates they’re not backing down from the fight. A lot of people have patted the pope on the head, but said he’s wrong on the economics. I think he’s right on the economics,” she said, referring to Pope Francis’s recent publication of an encyclical on the environment. Release of the document earlier this month thrust the pontiff to the centre of the global debate on climate change, as he berated politicians for creating a system that serves wealthy countries at the expense of the poorest. Activists and religious leaders will gather in Rome on Sunday, marching through the Eternal City before the Vatican welcomes campaigners to the conference, which will focus on the UN’s impending climate change summit.

Protesters have chosen the French embassy as their starting point – a Renaissance palace famed for its beautiful frescoes, but more significantly a symbol of the United Nations climate change conference, which will be hosted by Paris this December. Nearly 500 years since Galileo was found guilty of heresy, the Holy See is leading the rallying cry for the world to wake up and listen to scientists on climate change. Multi-faith leaders will walk alongside scientists and campaigners, hailing from organisations including Greenpeace and Oxfam Italy, marching to the Vatican to celebrate the pope’s tough stance on environmental issues. The imminent arrival of Klein within the Vatican walls has raised some eyebrows, but the involvement of lay people in church discussions is not without precedent.

Debt Rattle June 21 2015

Jun 212015

June 21, 2015 Posted by Raúl Ilargi Meijer at 10:21 am Finance Tagged with: child poverty, deficit, depression, despair, extinction, Greece, Hollande, Putin, Trump, Ukraine 2 Responses »

Unknown Army of the James at completed Dutch Gap canal, James River, Virginia 1864

• Hollande Is Implored to End ‘Financial Blackmail’ of Greece (Bloomberg)

• The Fight To End Greece’s Great Euro Depression (Telegraph)

• Greek Episodes Of Despair And Drama As Moment Of Truth Nears (Helena Smith)

• Greece, The Euro and Gunboat Diplomacy (Karl Whelan)

• As Greece Stares Into The Abyss, Has Spain Escaped From Crisis? (Observer)

• Greek PM Prepares Last-Ditch Offer To Avoid Default On Debts (Observer)

• The Greek Crisis Reveals The EU’s Democratic Deficit (Coppola)

• Rising Child Poverty Across Britain ‘Halts Progress Made Since 1990s’ (Observer)

• ‘It’s Time To Hold Physical Cash’: Senior UK Fund Manager (Telegraph)

• Steal from Taxpayers, Blame the Poor (Paul Buchheit)

• Russia Slams Renewed EU Sanctions, Says Measure Is ‘Hopeless’ (RT)

• Ukraine is a ‘Black Hole’ for European Taxpayers’ Money: German Media (Sputnik)

• Powerful People In The West And In Kiev Do Not Want Peace – Stephen Cohen (RT)

• Nomi Prins: There Is No Saving This Global Financial System (KWN)

• Liars, Cowards, Freaks & Fools: Trump for President? (Paul Craig Roberts)

• Why the Pope’s Environment Encyclical Is a Big Deal (Newsweek)

• All Kangaroos Are Left-Handed (Discovery)

• The Latest Global Temperature Data Are Literally Off The Chart (Guardian)

• The Sixth Mass Extinction Is Here (Stanford.edu)

Potential big deal. Hollande’s chance to show -independent- leadership. France is pivotal to Europe, but it must speak up to make that count.

• Hollande Is Implored to End ‘Financial Blackmail’ of Greece (Bloomberg)

French President Francois Hollande received an appeal from a group of lawmakers including some from the ruling Socialist Party and other political figures to end the “financial blackmail” of Greece by its European creditors. The message of France “cannot be a docile reminder of the rules at a time when the house is burning,” the lawmakers said in an open letter to Hollande published on the website of France’s Communist Party. “We are asking you to take the initiative to unblock the talks between the euro group and the Greek political authorities.” The letter highlights the domestic political pressure Hollande faces to help broker a deal between Greece and its creditors as the region’s most indebted nation is on the brink of a default.

German Chancellor Angela Merkel and Hollande spoke by phone on Friday after a meeting of euro area finance ministers failed to advance toward an agreement with Greece. So far the two biggest economies in the 19-nation euro bloc have presented a united front against Greek Prime Minister Alexis Tsipras, who has spent his five months in power trying to roll back the austerity policies underpinning the country’s bailout. At the finance minister’s meeting in Luxembourg on Thursday, French Finance Minister Michel Sapin pressed hardest for a compromise, while his German counterpart, Wolfgang Schaeuble stayed largely silent and ministers from other countries stepped up the pressure on Greece, according to two people familiar with the matter.

The French lawmakers, including Socialists such as Pouria Amirshahi and Fanelie Carrey-Conte, told Hollande to place France “at the side of the people of Greece.” “Bring explicit support to the healthy measures taken by the Greek authorities, notably those addressing the humanitarian crisis in the country” they said. “Accept the principle of a restructuring of Greek debt, of which a large part is notoriously illegitimate.”

“There Is No Europe Without Greece.”

• The Fight To End Greece’s Great Euro Depression (Telegraph)

Nikos Athanassiou, a 61-year-old Athenian pensioner, is at the heart of Greece’s struggle to maintain its fragile 14-year membership of the euro. Like many of his compatriots, Nikos took early retirement having worked most of his life labouring in the country’s now defunct construction industry, aged 58. He is one of the 2.6m pensioners in Greece who have become the unlikely battleground in the latest game of brinkmanship between the radical Left government and its paymasters. A member of Communist Party of Greece (KKE), Nikos spends his retirement resisting Troika-imposed cuts to public services as a union representative for his local district in northern Athens “It is my duty to demand dignity for Greeks. We are collapsing as a country,” says Nikos.

His resolve is not unusual in a society where the bulk of proposed cuts will hit the elderly and newly retired. The IMF is demanding the Greek government slash €1.8bn in pensions spending in 2016. At 16.2pc of GDP, Greece’s outlay is highest in the eurozone. Even with overhauls to the retirement age and spending cuts, this will still only fall to 14.3pc in 45 years time – the third highest in the EU. Nikos’s pension is €750 a month. He is among nearly half of all Greek pensioners who provide the sole source of income to support three generations of one family. But his pension is barely enough to provide for his seven-year old granddaughter and her parents. “When I think about my granddaughter’s future, I panic. I want her to live in an independent Greece – not a protectorate.”

Resentment against creditors’ determination to suck more funds from the country’s pension system is rife. Greeks have already seen a 40pc fall in their pension provision over five years – a shrinkage that has been ruled unconstitutional by the country’s highest administrative court. One of the reasons the spending ranks so highly is due less to generosity of individual pensions than it is the extreme recession that has shrunk GDP to almost pre-euro levels. Greece’s radical Left government has vociferously defended pensions as one of the last remaining safety nets in a country where 45pc of the elderly live below the poverty line. The issue has become the immovable “red line” in Greece’s struggle to finally end what the ruling Syriza party have dubbed a “ritual humiliation.”

One week in the life of a shattered society.

• Greek Episodes Of Despair And Drama As Moment Of Truth Nears (Helena Smith)

Sunday: Five years is a long time to be in crisis. It’s freefall by a thousand cuts; loss in myriad ways, hard choices that never get easier. Last week, as Greece descended into drama, a young man appeared on the marble steps of the neoclassical building opposite my home. Head in hand, he sat there from Sunday to Wednesday, in the beating sun, a wheelie bag in front of him, a slice of cardboard perched on top that read: “I am homeless. Help please!”

When you live in Athens you do not flinch at the signs of decay: to do so would be to give in. But somehow the sight of this forlorn figure – a waif of a man, eyes fixed only at his feet, the embodiment of wounded pride, brought home as never before that Greeks are in crisis. Was he giving up or making a hard choice? If he was 22, and he barely seemed that, his entire adult life had been spent in crisis. This is the great tragedy of Greece. It has not only been needlessly impoverished – it now eats up its own. The elderly woman who occasionally rifles through the rubbish bins on the corner of the square my office overlooks – often carrying a Louis Vuitton bag – is so glad she was born at the end of the 1946-49 civil war. “At least then it could get better. Today it can only get worse.”

Monday: For five years we have all felt as if we are on a runaway train, hurtling into the unknown. Sometimes the train picks up speed, sometimes it slows down, but never enough to stop. This week, as the drumbeat of default, impending bankruptcy and disastrous euro exit thudded ever louder, the train felt as if it might derail altogether. Had a lunatic got hold of the controls? On Monday morning it began to feel like it. For me, the day started at 2am when I received a text from Euclid Tsakalotos, the point-man in negotiations between Athens and the troika.

“We made huge efforts to meet them halfway,” he wrote hours after talks reached an impasse over a reform-for-cash deal that could save Greece. “But they insisted on pension and wage cuts.” By mid-morning, global stock markets were tumbling. By midday, the world had learned that, without an agreement, Greece might not be able to honour an end-of-month debt repayment to the IMF worth €1.6bn. By midnight, newscasters, looking decidedly nervous, had broken their own taboo: many were talking openly of euro exit.

“..unnecessary cowardice, confusion and hubris..”

• Greece, The Euro and Gunboat Diplomacy (Karl Whelan)

Original decision to provide a bail out is the source of the current crisis. Time for Europe to share the blame and financial consequences.

With everyone talking about Greece being on the verge of exiting the euro after Monday’s summit meeting, it seems to be forgotten that the current crisis is not really about Greece’s currency arrangements at all. The Greek people are not demanding a return to the drachma and few within the country are arguing for the competitive benefits a currency devaluation would entail. And there are no formal rules that Greece is breaking that must lead to an exit from the euro because, legally, the euro is a fixed and irrevocable currency union. This crisis is about more basic things: Debt and power. Indeed, the current stand-off looks a lot more like the classic gunboat diplomacy conflicts of the 19th century than it does the currency crises of the 20th century.

Europe’s governments and the IMF made an enormous mistake in bailing out Greece’s private creditors in 2010 and then overseeing a botched debt restructuring in 2012. In turn, the Greek governments of this era made the mistake of accepting official loans to pay off private creditors, perhaps not realising they were jumping out the frying pan straight into the fire. Now the Greeks are learning that defaulting on private creditors is one thing (not so hard it turns out, once you’ve got Lee Buchheit in your corner) but defaulting on governments of rich European countries is quite something else. Blaming the euro for the current impasse is actually pretty strange because the euro’s founding fathers explicitly warned member states to not to get themselves into this situation.

The story of the demise of Europe’s “no bailout clause” is an interesting one. Rather than an inevitable crisis, one can credibly argue that the decisions that landed us in the current situation did not need to be taken and were taken as a result of unnecessary cowardice, confusion and hubris. I reviewed many papers on prospects for the euro written by economists in the 1990s. I was struck by the consensus that the fiscal limitations of the Stability and Growth Pact would generally be honoured, that euro members that got into fiscal troubles would not be bailed out by other countries and this would lead to sovereign defaults when countries did get into fiscal problems.

By and large, the policy heavyweights of the day, such as Rudi Dornbusch, believed there was a “categorical no-bailout injunction.” As such, it was expected that markets would understand that European governments were more likely to default once their devaluation option was taken away and that financial markets would price the sovereign debt of countries differently depending on the health of their public finances.

Note the pattern: Spain ‘recovers’ through increasing inequality.

• As Greece Stares Into The Abyss, Has Spain Escaped From Crisis? (Observer)

While the big picture is undoubtedly improving – big investors are returning to a country that barely three years ago was widely expected to need a Greece-style sovereign bailout – Spain is still mired in a period of transition. Even the IMF report that welcomed Spain’s impressive growth rate – one of the strongest in Europe – also stressed the shaky jobs outlook, noting that unemployment was “still painfully high” and that “vulnerabilities remain”. “Spain has returned to about 95% of where it was in 2008,” says Professor Javier Diaz-Giménez of the IESE business school in Madrid. “That means 2008 is still a benchmark people look back at with nostalgia. At current growth rates, the economy will get back to where it was in 2008 at the end of next year. It’s a very late recovery.”

One of the biggest worries for those yet to see any improvements in their lives is whether even a sustained recovery will be enough to repair the damage. Jobs are starting to return, currently at a rate of 400,000-500,000 a year, but more than three million were lost during the downturn, so the new jobs represent only a small improvement in an unemployment rate, which is still running at almost 24%. In Greece, which now finds itself on the edge of the economic precipice, the rate is 26%. Inequalities, meanwhile, are deepening, leaving some to wonder whether the crisis is even over at all. “The economy is certainly not improving for those without a job or a home,” says Lotta Tenhunen, a social activist in Madrid. The group she works with, PAH, campaigns on behalf of those evicted after falling into arrears on their mortgage payments, and became especially prominent at the height of the recession. In Vallecas, it still meets every week: “People and families are still being driven out of their homes – and the rate is still rising.”

Prospects for the young are particularly bleak. About half of under-25-year-olds in the labour force are without a job, and this threatens to leave the country with a listless lost generation for whom unemployment is the norm. The ranks of the long-term jobless are also swelling. “It is not just the headline unemployment figure that is worrying; it is also the type of unemployment,” says Antonio Barroso of consultancy Teneo Intelligence. “40% of unemployed people are over the age of 45, so difficult to retrain and bring back into the labour market. You also have to look at the types of jobs being created. Most new positions are temporary contracts, where people are left in a precarious position with very few rights – this does not breed confidence.”

“Speculation is rife that Greece’s creditors at the EU, ECB and IMF would offer a six-month extension of the bailout programme..”

• Greek PM Prepares Last-Ditch Offer To Avoid Default On Debts (Observer)

The race to save Greece from economic collapse intensified on Saturday night as its beleaguered leader conducted a flurry of behind-the-scenes negotiations before an EU summit on Monday that is expected to decide the country’s fate. Alexis Tsipras, the prime minister, met senior officials in an attempt to devise a package of reforms that would secure emergency funds and avoid the nation defaulting on its massive debts. It will be the third such proposal that Athens has made to its creditors in as many weeks. “We will try to supplement our proposal so that we get closer to a solution,” Greece’s minister of state, Alekos Flabouraris, told broadcaster Mega TV. “We are not going [to the summit] with the old proposal. Some work is being done to see where we can converge, so that we achieve a mutually beneficial solution.”

Flabouraris, widely seen as a mentor to the young prime minister, said Tsipras would hold crucial talks with the head of the European commission, Jean-Claude Juncker. The Greek cabinet will meet in an emergency session on Sunday with Tsipras also dispatching senior officials to Brussels. The frantic diplomacy came as Greece’s eurozone partners warned that, after five months of fruitless talks, the game was up for Tsipras’s radical leftwing government. The country, which has been thrown two lifelines since 2010, has until 30 June to secure €7.2bn (£5.1bn) in bailout funds. Failure to release the loans will result in default, as Greece owes €1.6bn to the IMF at the end of the month. Among the measures that the Syriza-led coalition was reportedly working on on Saturday were reductions in early retirement schemes.

Pension and VAT reforms, along with labour deregulation, remain sources of friction between the two sides. Speculation is rife that Greece’s creditors at the EU, ECB and IMF would offer a six-month extension of the bailout programme – disbursing more than €10bn in aid to tide the country over the summer – if agreement was reached. Discussions over a third bailout Athens will inevitably also require would be kicked down the road. Speaking to the Observer, Athens’s chief negotiator, Euclid Tsakalotos, described the prospect of a short-term deal as perhaps the worst possible outcome. Prolongation of the political uncertainty – and scenarios of Greece’s enforced exit from the euro – would, he said, do nothing for the country’s economic recovery.

Coppola still leaves me with a host of questions. Yanis wrote yesterday that his proposals were never even read because that would mean they’d need to be sent to Bundestag. Whether that automatically implies a vote, I don’t know.

• The Greek Crisis Reveals The EU’s Democratic Deficit (Coppola)

The Greek finance minister, Yanis Varoufakis, has stirred up something of a hornet’s nest. He has spilled the beans on the less-than-transparent negotiating tactics of the EU institutions – the European Commission and the ECB. The Irish finance minister, Michael Noonan, complained that he had not seen the proposals put forward by the EU institutions for consideration by the Greek government. This is a serious criticism. Failure to brief finance ministers adequately before a Eurogroup meeting is negligent, although perhaps understandable in a rapidly-changing situation. It means that the ministers are unable to make informed decisions, so they must either rubber-stamp proposals without considering then properly, or defer everything.

Kicking cans down the road is of course a Eurogroup specialty, but it really shouldn’t be forced on finance ministers through inadequate briefing. Exactly why Mr. Noonan was not briefed is unclear. Did he miss the briefing? Was it an oversight by hard-pressed bureaucrats? Were other ministers briefed? We don’t know. But it is worrying that a mistake like this can be made in such finely balanced negotiations. One false move could spell disaster. The EU negotiators must be more careful. But Mr. Varoufakis added another complaint to Mr. Noonan’s. He said that he had been prevented from briefing EU finance ministers on his own proposal ahead of the meeting. And he blamed the Germans:

In fact, as our German counterpart was later to confirm, any written submission to a finance minister by either Greece or the institutions was “unacceptable”, as he would then need to table it at the Bundestag, thus negating its utility as a negotiating bid.

I find this hard to believe. In effect, it means that anything presented to the Eurogroup in writing is deemed by the Germans to be a firm recommendation requiring a vote by the German Parliament. If this is true, then it makes negotiations far more difficult. Complex proposals have to be written down, even if they are not the final word, because otherwise there is a significant risk of misunderstanding. Even more importantly, it raises serious questions about the role of the Eurogroup. If all the Eurogroup can ever see is a finished product, they can never do more than rubber-stamp decisions made by unelected bureaucrats behind the scenes. This is not a good way of running a supposedly democratic polity. Mr. Varoufakis makes a very similar criticism:

The euro zone moves in a mysterious way. Momentous decisions are rubber- stamped by finance ministers who remain in the dark on the details, while unelected officials of mighty institutions are locked into one-sided negotiations with a solitary government-in-distress. It is as if Europe has determined that elected finance ministers are not up to the task of mastering the technical details; a task best left to “experts” representing not voters but the institutions. One can only wonder to what extent such an arrangement is efficient, let alone remotely democratic.

And in his final paragraphs, he accuses the Eurogroup of being not fit for purpose. Hmm. Whether or not this criticism is justified, I can’t for the life of me see how saying it publicly is helpful to the Greek cause. It’s only going to annoy people.

Shame on you!

• Rising Child Poverty Across Britain ‘Halts Progress Made Since 1990s’ (Observer)

Child poverty is on course for the biggest rise in a generation, reversing years of progress that began in the late 1990s, leading charities and independent experts claimed on Saturday. The stark prognosis comes before the release of government figures which experts believe will show a clear increase for the first time since the start of the decade. It also comes as the chancellor George Osborne and work and pensions minister Iain Duncan Smith announced they had agreed a plan to slash a further £12bn a year from benefits spending. In a joint letter they pledged to attack the “damaging culture of welfare dependency”, and said it would take “a decade” or more to return the welfare budget to what they called “sanity”.

The introduction of the bedroom tax and cuts in benefits between 2013 and last year are blamed for fuelling the rise in the number of families whose income is below 60% of the UK average – the definition of relative poverty. Calculations from the Institute for Fiscal Studies (IFS) have suggested that progress between the late 1990s and 2010 has been reversed and that the number of children living in relative poverty rose from 2.3 million in 2013 to 2.6 million in 2014. The Child Poverty Action Group says that with the government committed to implementing another £12bn of cuts in a new round of austerity, the problem will grow.

As tens of thousands of people joined an anti-austerity march through London on Saturday, Alison Garnham, the charity’s chief executive, said ministers were failing too many children. “The government can no longer claim that deficit reduction is about protecting children’s futures now that it’s being made to confront a child poverty crisis, with the biggest rise in a generation now expected of its own making,” she said. “With child poverty expected to rise by nearly a third in the decade to 2020 as a result of its policies, it’s clear the government’s approach is failing.”

Pretty soon, we’ll all be Greeks.

• ‘It’s Time To Hold Physical Cash’: Senior UK Fund Manager (Telegraph)

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress. Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock. “Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money. The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts.

But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager. His concern is that global debt – particularly mortgage debt – has been pumped up to record levels, made possible by exceptionally low interest rates that could soon end, and he is unsure how well banks could cope with the shocks that may await. He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash. He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10.

The current woes of Greece, which may crash out of the euro, already has many market watchers concerned. Mr Spreadbury’s views are timely, aside from Greece. A growing number of professional investors (see comment, right) and commentators are expressing unease about what happens next. The prices of nearly all assets – property, shares, bonds – have been rising for years. House prices have risen by 26pc since the start of 2009, and by 68pc in London. The FTSE 100 is up by 75pc. Although it feels counter-intuitive, this trend of rising prices should continue if economies remain weak, because it gives central banks licence to keep rates low and to carry on with their “quantitative easing” programmes.

The MO.

• Steal from Taxpayers, Blame the Poor (Paul Buchheit)

It’s a vicious circle of hypocrisy: Americans dependent on the safety net are urged to “get a job” by the same free-market system that pays them too little to avoid being dependent on the safety net. According to the Economic Policy Institute, $45 billion per year in federal, state, and other safety net support is paid to workers in the bottom 20% of wage earners. Thus the average U.S. household is paying almost $400 to employees in low-wage industries such as food service, retail, and personal care. Paul Ryan said that social programs “turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency.” But 63% of eligible working-age poor Americans are employed, and 73% are members of working families.

Yet in a show of hypocrisy by some of the leading safety net critics, Congress has killed or blocked or ignored numerous attempts to create better jobs for underemployed Americans. A Demos study found that raising wages to $25,000 per year (about $12.50 per hour) for full-time retail workers would lift 734,075 people out of poverty. It would probably help a lot more. An analysis of Bureau of Labor Statistics data reveals that about 22 million workers are underpaid (about a sixth of the total), over half of them in food service, cashiering, personal care, and housekeeping. Paying everyone $12.50 (assuming full-time) would cost an extra $80 billion. That’s about 3% of total 2014 corporate profits. Three%, compared to the 95% spent by S&P 500 companies on investor-enriching stock buybacks and dividend payouts.

About two-thirds of low-wage workers are employed by large corporations with over 100 employees. The very worst offender is probably Walmart, which pays its estimated 1.4 million U.S. employees so little that the average Walmart worker depends on about $4,400 per year in taxpayer assistance, for food stamps and other safety net programs. As Walmart was depending on us, the taxpayers, to pay $4,400 a year to each of its employees, the company was spending the equivalent of $5,000 per U.S. employee for price-boosting stock buybacks.

The EU will split on this soon enough.

• Russia Slams Renewed EU Sanctions, Says Measure Is ‘Hopeless’ (RT)

The Russian Foreign Ministry has slammed the EU’s “pushy sanctions strategy” as “political blackmail,” and said it is “absolutely hopeless” as it won’t make Russia give up its “national interests and principled position.” Coming in response to the EU’s extension of sanctions over what Brussels called “the illegal annexation of Crimea and Sevastopol,” the Russian statement said “it was time” to accept that those territories are an “integral part of the Russian Federation” and that the situation “can’t be changed by methods of economic and political blackmail.” Sanctions against Russia are “absolutely hopeless,” the ministry said, adding that “it is a mistake to expect that [the sanctions strategy] will make us sacrifice national interests and [our] principled position on key issues.”

As the prolonged restrictions target Crimea and the city of Sevastopol, the Foreign Ministry sees the sanctions as unacceptable “discrimination” against people in Crimea “on a political and territorial basis.” Recalling “historical examples,” the ministry condemned the move as “a collective punishment” of “the residents of the [Crimean] peninsula who made a free choice” for reunification with Russia. “It was hard to imagine that Europe would face this in the 21st century,” the Foreign Ministry’s statement said. On Friday, the EU extended economic sanctions against Crimea until June 23, 2016, and said it still doesn’t recognize Crimea’s reunification with Russia, calling it an “illegal annexation.”

The restrictions include a ban on imports from Crimea or Sevastopol into the EU, investment and tourism services, as well as the export of certain products and technology to Crimean companies. The EU sanctions against Russia were imposed over the Ukrainian crisis. They targeted access to foreign loans and the oil and gas industry. Moscow responded with countersanctions that hit European food producers. However, the toll the conflict is taking on the EU economy is higher than Brussels initially anticipated.

German media should be way more vocal on this. And the rest of Europe too.

• Ukraine is a ‘Black Hole’ for European Taxpayers’ Money: German Media (Sputnik)

In the coming weeks, Kiev will receive the €600 million tranche of the third EU loan package for Ukraine. It will be a new financial burden for ordinary EU taxpayers because there is no hope that the debt will be paid off, a German business newspaper reports. The €600 million euro tranche of financial aid for Ukraine is taking money from ordinary European taxpayers with no chance to return, the German newspaper Deutsche Wirtschafts Nachrichten reports. Earlier, Johannes Hahn, European Commissioner for European Neighborhood Policy and Enlargement Negotiations, said the EU completed all the procedures for the new tranche. “I’m very glad that the Verkhovna Rada [the Ukrainian Parliament] ratified the memorandum on the third package of financial aid of €1.8 billion.

I’m sure that within several weeks Kiev will receive the first tranche of €600 million,” Hahn said. “Thus, there is a new financial burden for our taxpayers. There is no hope that the money will return,” the newspaper claims. In May, Ukraine’s National Railroad Company declared bankruptcy. Part of its debt is due to be restructured. In total, its debt has reached $500 million. During the last year only, European taxpayers lost €200 million to save the company, the article reads. The Ukrainian protective wall along the border with Russia is also funded by EU taxpayers. The electrified barrier with mines and barbed wire is planned to be 2,000-kilometer-long and will cost nearly €100 million, DWN points out.

“..there is a war party in every capital and even in the White House itself.”

• Powerful People In The West And In Kiev Do Not Want Peace – Stephen Cohen (RT)

RT: A few weeks ago US Vice President Joe Biden said that “everybody wants an end to this conflict in Ukraine, but the question is on whose terms and how will it end.” Are the terms to end this conflict are still being negotiated and if so what options are on offer?

Stephen Cohen: My perspective is different from that of Vice President Biden. We are now after all in almost two years – a year and a half – of a new Cold War between the US and Russia – an exceedingly dangerous confrontation over Ukraine, which I think and I’ve said this for months could easily become as dangerous as the Cuban missile crisis was. The politics of this have now spread far and wide including in Europe. It seems to me, and this is my fundamental analysis, that in almost every capital – Washington, Brussels and certainly in Kiev, and even to some degree in Moscow – there is what I call a peace and a war party.

The Minsk agreements, which were agreed upon by the Chancellor of Germany, the President of France, the President of Ukraine and of course President Putin of Russia represented then a peace party. It set out in addition to a ceasefire in Ukraine very far reaching, fundamental terms of negotiation to end the civil war in Ukraine, to end the proxy war between the West and Russia. It’s clear to me that there are powerful people in the West and in Kiev who do not want a negotiated settlement.

RT: Vice President Biden, who recently said that he talks to either PM Yatsenyuk or President Poroshenko on almost a weekly basis – that’s what he said – do you think that Biden belongs to the peace or war camp when he is on the phone with them? Does he preach reconciliation?

SC: He says he talks to them three times per week not once a week. But we have evidence, something very dramatic just happened. As you know, in late May Secretary of State John Kerry went to Sochi. First he met with Russian Foreign Minister Sergey Lavrov and then, remarkably, he met for four hours with President Putin. It was absolutely clear from what was said in Sochi at the press conferences afterwards that Kerry’s mission had been to say that the US, the Obama administration, now fully backed the Minsk agreement. That would put Kerry in the peace party.

It was kind of a surprise because he had been taking a very hard line. However, look what then happened. Kerry was attacked, literally criticized, for having gone to Sochi by members of the Obama administration. The most vivid example reported in the New York Times last Sunday I think was that a former very close policy aide to Vice President Biden told the reporter they didn’t know why Kerry had gone to Sochi, and that he had sent bad messages and that his trip had been counterproductive. So you conclude from this – and it confirms my thesis – that there is a war party in every capital and even in the White House itself.

For those who still needed confirmation.

• Nomi Prins: There Is No Saving This Global Financial System (KWN)

Eric King: “You mentioned that we are in unprecedented times. And the concern is that when the 2008 collapse unfolded there was all this money printing and the banks were bailed out. It really fell on the shoulders of the taxpayers, but the concern as you said is that this leverage is growing. There are over one quadrillion dollars of derivatives. With the leverage totally ramped up in (terms of) the central banks’ (balance sheets), who will save the financial system (this time around)? Who will save the banks? There are all these bail-ins that have been written into law in the West and it seems like the next move is just to steal money from the public. Who will save the system this time when it implodes?

Nomi Prins: “When it implodes it will implode more dangerously. The IMF and the Fed have different ideas about whether rates should stay low or go up. In this particular round the IMF won. They want rates to stay low because they don’t know what’s going to happen to the global financial system if the availability of cheap money goes away…. “Right now everyone knows, whether they admit it or not, that (cheap money) is the only thing that’s keeping this (global financial) system afloat. It isn’t production. It isn’t savings of individuals because nobody has any money to save. So there is no there, there.

The only policy that these central banks have is to continue to do more of the same. And the only thing that does is continue to push this next crisis, or the second leg of the current crisis as I look at it, down the road. There is no saving this (global financial) system. All they can do is continue to push the current policies to make it look as if things are operating functionally — as if these banks are solvent and as if these markets are somehow elevated on the basis of value and not on the basis of the cheap money that they are infusing into the system. That’s all they can do. They just hope that somewhere along the line this will work out.”

That’s right, might as well elect the biggest dunce.

• Liars, Cowards, Freaks & Fools: Trump for President? (Paul Craig Roberts)

Perhaps it has occurred to you as it has to me that the United States is no longer capable of producing political leadership. In the current issue of Trends Journal, Gerald Celente describes the eight candidates (at the time he went to press) for the US presidential nomination as “Liars, cowards, freaks & fools.” Celente put it well. If you look at the sorry collection that aspires to be the CEO of what continues to be described as the “exceptional, indispensable, most important country with the largest economy and military, the world’s only Superpower, the Uni-power,” you see a collection of nobodies. America is like the last days of Rome when contenting factions fought to put their puppet on the throne.

There is no known politician in America who measures up to Vladimir Putin’s ankle, or to the knee of China’s leaders, or to the waist of Ecuador’s, Bolivia’s, Venezuela’s, Argentina’s, Brazil’s, or to the chests of India’s and South Africa’s. In Europe, the UK, Australia, and Canada, the natural leaders are also frozen out of the corrupt system. In the US, “leadership” positions depend on financial support from the ruling economic interests. American presidents and politicians represent about six powerful private interest groups and no one else. After Celente went to press, Donald Trump announced to much mirth. A “con man” they say, but what else is the President of the United States? Do you think you weren’t conned by Clinton, George W. Bush, and Obama? What universe do you live in?

In actual fact, Trump might be our best candidate to date. By all accounts, he is very rich. Thus, he doesn’t need the office in order to become rich by selling out America to interest groups. By all accounts, Trump has a healthy ego. Thus, he could be capable of standing up to the powerful interest groups that generally determine the governance of the American serfs. Trump’s ego might even be strong enough for him to stand up to the Israel Lobby, something my former colleague, Admiral Thomas Moorer, Chairman of the Joint Chiefs of Staff, said publicly that no American President was capable of doing. As Celente makes clear in the current Trends Journal, all politicians are con men or con women.

We are going to have them regardless, so why not try a rich one who might decide to break with tradition and serve the interests of the citizenry. This would be a unique accomplishment, affording Trump the elevation in history books that would satisfy his ego. When a person reaches Trump’s state, does he need another couple of billion dollars or is historical recognition as the savior, however temporary, more valuable? This is not my endorsement of Trump for President. It is merely my speculations on how we might think of how large egos might be brought into our service. When we put the Clintons in office, they decided to make money so that they could outdo Hollywood and show their arrival with the $3 million they spent on their daughter’s wedding. For Trump, $3 million is pocket change.

Let’s first see where it goes.

• Why the Pope’s Environment Encyclical Is a Big Deal (Newsweek)

The pope’s encyclical on climate change is a big deal. Sure, past popes have written on the importance of protecting the environment, on favoring the poorest and on rethinking our direction as a species. But this is a major piece of work, and an ardent call from one of our world’s major leaders for us to work together to address this existential problem. Most interesting and heartening to me is Francis’s linking of the fate of the poor and the future of climate change. This point is well documented in research on the injustice of climate change. For example, Bradley Parks and I found that the poorest nations of the world are far more likely to suffer the impacts of climate-related disasters, and are also far less responsible for the problem.

The timing of the pope’s remarks is also very important. This year countries are both negotiating to reach a global agreement in Paris in December and also individually putting forward their own pledges on what they will do, called INDCs (Intended Nationally Determined Contributions) in the cumbersome U.N. lingo. The pope’s statement puts it very plainly to those leaders of nations who might be laggards: It’s time to face climate change very thoughtfully, justly and aggressively. Finally, having this strong and very considered statement about the urgency and moral imperative of addressing climate change coming from a religious leader is very proper, and part of an important larger movement.

Just to put you on the wrong paw (do skippys have paws?).

• All Kangaroos Are Left-Handed (Discovery)

All kangaroos are left-handed, according to new research. Previously it was thought that “true”-handedness, meaning predictably using one hand over the other, was a feature unique to primates. The new research, published in the journal Current Biology, not only negates that but also goes one step further: kangaroos are even more true-handed than we are. “According to a special-assessment scale of handedness adopted for primates, kangaroos pulled down the highest grades,” said project leader Yegor Malashichev in a press release. “We observed a remarkable consistency in responses across bipedal species in that they all prefer to use the left, not the right, hand.”

Malashichev, a researcher from Saint Petersburg State University in Russia, and his team observed that wild kangaroos show a natural preference for their left hands when performing particular actions, such as grooming their noses, picking leaves, or bending tree branches. Left-handedness was particularly apparent in eastern grey and red kangaroos. The kangaroos that they studied were at various locations in the wild at Tasmania and Australia. The term “hand” really does apply here, because kangaroos have five-fingered hands that somewhat resemble human hands, save for the kangaroos’ long claws in place of fingernails. Not all marsupials were found to exhibit such handedness. The researchers determined that red-necked wallabies, for example, prefer their left hand for some tasks and their right for others.

Generally speaking, these wallabies use their left forelimb for tasks that involve fine manipulation and the right for tasks that require more physical strength. The researchers also found less evidence for handedness in species that spend their days in the trees. The discovery about kangaroos was unexpected because, unlike other mammals, kangaroos lack the same neural circuitry that bridges the left and right hemispheres of the brain. Now the researchers are very curious about marsupial brains, which differ from those of other mammals in additional respects too. Such studies could yield important insight into neuropsychiatric conditions, including schizophrenia and autism, the researchers said, noting links between those disorders and handedness.

Doesn’t leave much space for ‘interpretation’.

• The Latest Global Temperature Data Are Literally Off The Chart (Guardian)

Just today, NASA released its global temperature data for the month of May 2015. It was a scorching 0.71°C (1.3°F) above the long-term average. It is also the hottest first five months of any year ever recorded. As we look at climate patterns over the next year or so, it is likely that this year will set a new all-time record. In fact, as of now, 2015 is a whopping 0.1°C (0.17°F) hotter than last year, which itself was the hottest year on record. Below, NASA’s annual temperatures are shown. Each year’s results are shown as black dots. Some years are warmer, some are cooler and we never want to put too much emphasis on any single year’s temperature. I have added a star to show where 2015 is so far this year, simply off the chart. The last 12 months are at record levels as well. So far June has been very hot as well, likely to end up warmer than May.

So why talk about month temperatures or even annual temperatures? Isn’t climate about long-term trends? First, there has been a lot of discussion of the so-called ‘pause.’ As I have pointed out many times here and in my own research, there has been no pause at all. We know this first by looking at the rate of energy gain within the oceans. But other recent publications, like ones I’ve written about have taken account of instrument and measurement quality and they too find no pause. Second, there has been a lot of discussion of why models were running hotter than surface air temperatures. There was a real divergence for a while with most models suggesting more warming. Well with 2014 and 2015, we see that the models and actual surface temperatures are in very close agreement.

When we combine surface temperatures with ocean heat content, as seen below, a clear picture emerges. Warming is continuing at a rapid rate.

What we do best.

• The Sixth Mass Extinction Is Here (Stanford.edu)

Stanford biologist Paul Ehrlich calls for fast action to conserve threatened species, populations and habitat before the window of opportunity closes. There is no longer any doubt: We are entering a mass extinction that threatens humanity’s existence. That is the bad news at the center of a new study by a group of scientists including Paul Ehrlich, the Bing Professor of Population Studies in biology and a senior fellow at the Stanford Woods Institute for the Environment. Ehrlich and his co-authors call for fast action to conserve threatened species, populations and habitat, but warn that the window of opportunity is rapidly closing. “[The study] shows without any significant doubt that we are now entering the sixth great mass extinction event,” Ehrlich said.

Although most well known for his positions on human population, Ehrlich has done extensive work on extinctions going back to his 1981 book, Extinction: The Causes and Consequences of the Disappearance of Species. He has long tied his work on coevolution, on racial, gender and economic justice, and on nuclear winter with the issue of wildlife populations and species loss. There is general agreement among scientists that extinction rates have reached levels unparalleled since the dinosaurs died out 66 million years ago.

However, some have challenged the theory, believing earlier estimates rested on assumptions that overestimated the crisis. The new study, published in the journal Science Advances, shows that even with extremely conservative estimates, species are disappearing up to about 100 times faster than the normal rate between mass extinctions, known as the background rate. “If it is allowed to continue, life would take many millions of years to recover, and our species itself would likely disappear early on,” said lead author Gerardo Ceballos of the Universidad Autónoma de México.

Using fossil records and extinction counts from a range of records, the researchers compared a highly conservative estimate of current extinctions with a background rate estimate twice as high as those widely used in previous analyses. This way, they brought the two estimates – current extinction rate and average background or going-on-all-the-time extinction rate – as close to each other as possible. Focusing on vertebrates, the group for which the most reliable modern and fossil data exist, the researchers asked whether even the lowest estimates of the difference between background and contemporary extinction rates still justify the conclusion that people are precipitating “a global spasm of biodiversity loss.” The answer: a definitive yes.

Debt Rattle June 17 2015

Jun 172015

June 17, 2015 Posted by Raúl Ilargi Meijer at 11:09 am Finance Tagged with: aquifer, China, deficit, euro, Greece, Grexit, IMF, pensions, restructuring, Russia, Trojan Horse 1 Response »

Theodor Horydczak Sheaffer fountain pen factory, Fort Madison, Iowa 1935

• The Euro: Portrait Of A Devastating Failure (MarketWatch)

• IMF “Defense” Of Its Actions vs Greeks Is An Unintended Confession (Bill Black)

• Sovereign Debt Restructuring Needs International Supervision (Joseph Stiglitz)

• Many Low-Income Americans Can’t Even Afford To Rent (MarketWatch)

• What Is the Real US Unemployment Rate? (CH Smith)

• US 2040 Deficit To Nearly Double As Percent Of Economy-CBO (Reuters)

• Greek PM Tears Into Lenders As Eurozone Prepares For ‘Grexit’ (Reuters)

• A Greek Paradox: Many Elderly Are Broke Despite Costly Pensions (Reuters)

• Divorce Greece In Haste, Repent At Leisure (Martin Wolf)

• Austrian Chancellor Sides With Greece In Debt Row (Reuters)

• ‘It’s Going To Be Bad, Whatever Happens’: Greeks Stash Cash At Home (Guardian)

• Greek Central Bank Issues ‘Grexit’ Warning If Aid Talks Fail (Reuters)

• Europe Asks the Impossible of Greece (Crook)

• Merkel’s Bavarian Allies Say Greeks Act Like ‘Clowns’ In Debt Talks (Reuters)

• Central Banks Enter The Unknown With Sub-Zero Rates (FT)

• Russia Cuts US Debt Holding By More Than 40% Over Year (RT)

• Five Million Reasons Why China Could Go to War (Bloomberg)

• The Magical Content Tree (Dmitry Orlov)

• Enter Jeb and Hil (Jim Kunstler)

• The American Far-Right’s Trojan Horse In Westminster (Nafeez Ahmed)

• More Than A Third Of The World’s Biggest Aquifers Are In Distress (FT)

The euro has been a devastating failure, costing nations both their independence and their economies.

• The Euro: Portrait Of A Devastating Failure (MarketWatch

There’s a secret fear gripping the powerful across Europe nowadays. It has policy honchos lying awake at nights in Brussels. It has bankers in Berlin tossing feverishly on their silken sheets. It has eurocrats muttering into their claret. The fear? It isn’t that if Greece leaves the euro, the Greeks will then suffer a terrible economic meltdown. The fear is that if Greece leaves the euro, the country will return to prosperity — and then other countries might follow suit. Take a look at the chart. As you can see, Greece with the bad old drachma had double the economic growth of Greece under the euro. Double. And it wasn’t alone. Italy, Spain and Portugal tell similar stories.

Their economic growth back in the 1980s and 1990s, when they were “struggling” with the lira, the peseta, and the escudo, makes a mockery of their performance under the German-dominated euro. Apparently having control of your own national currency and your own monetary policy works well with having your own government and your own national sovereignty. Who knew? The data for this chart come from the IMF’s own database. They show real economic growth in four southern European currencies in the period before they embraced the euro, from 1980 to 1998, and the period since the single currency was launched at the start of 1999. (The numbers show the average annual growth in GDP, measured per capita, and in real, “purchasing power” terms to strip out inflation).

Of course many factors are involved. This isn’t just about the euro. On the other hand, the European single currency was sold to the people of these countries – when they were given a vote at all — as a magical project that would transform their economic fortunes. They were told to give up their sovereignty and independence in return for huge economic benefits. Instead, the euro “financialized” their economies – flooding them with tons of cheap, easy money, and creating gigantic paper Ponzi schemes that have now collapsed. The people of Europe were told the euro would bring stability. It hasn’t. They were told it would bring prosperity. It hasn’t. They were told it would bring growth. It hasn’t.

Are the Greeks really just a bunch of ouzo-sipping layabouts, as the Champagne-sipping layabouts in Brussels like to claim? Prior to embracing the euro, the Greeks managed real growth of 4% a year and an average unemployment rate of 7.7%. Since accepting the warm financial embrace of Brussels, Frankfurt and Berlin, Greece has managed growth of 2% a year and average unemployment rate of 14%. In other words, Greece under the euro has averaged half the growth, and double the unemployment, of Greece under the drachma. Some benefit.

Good definition of what happened so far: “bleed the patient” to “heal” it”.

• IMF “Defense” Of Its Actions vs Greeks Is An Unintended Confession (Bill Black)

The IMF, the heedless horseman of the troika that announced it would stop negotiating with the Greeks and go home, has attempted to justify its position through Olivier Blanchard, its “Economic Counsellor and Director of the Research Department.” Blanchard entitled his defense “Greece: A Credible Deal Will Require Difficult Decisions By All Sides.” That is a “serious person” title, but it is also economically illiterate – and no one knows that better than Blanchard. After all, it is the IMF’s deeply neo-liberal economists whose research has confirmed that the IMF’s austerity policies are self-destructive responses to the Great Recession and that fiscal stimulus programs are even more effective than economists had predicted.

That means that Blanchard and the IMF know that an economically-literate deal does not “require difficult decisions by all sides.” It requires, instead, the troika to cease its destructive demands that Greece “bleed the patient” to “heal” it. The troika’s austerity demands forced Greece into a Great Depression that is worse than the Great Depression of the 1930s in terms of sustained, obscene unemployment rates. And treating Greece in an economically rational manner would set a wonderful precedent that could be extended to Spain and Italy, which also have unemployment rates today that are near or even worse than they suffered in the Great Depression of the 1930s – seven years after the acute phase of the global financial crisis.

As we (UMKC economists and NEP bloggers) and Paul Krugman have explained repeatedly, the fiscal response to a Great Recession does not require “difficult decisions” and “sacrifices.” It requires funding worthwhile projects that provide an enormous “win-win” for the nations suffering from the Great Recession – and it helps their neighbors’ economies. Germany’s economy would be much stronger today if it had not insisted on forcing Greece, Spain, and Italy into Great Depressions. Because of the inherently flawed structure of the euro, this requires the ECB to be used far more aggressively than was contemplated by its inept architects, but it can be done. It would be an awkward, inelegant, bastardized system, but the problem in getting it done isn’t the economics, it’s the toxic interconnection of politics, economic dogmas spread by the troika and the credulous media, and disdain of the EU core for the peoples of the EU periphery that pose the insuperable problems.

Not going to happen. If an attempt is made, it’ll be watered down so much nothing much changes. Plundering entire nations is just too profitable.

• Sovereign Debt Restructuring Needs International Supervision (Joseph Stiglitz)

Governments sometimes need to restructure their debts. Otherwise, a country’s economic and political stability may be threatened. But, in the absence of an international rule of law for resolving sovereign defaults, the world pays a higher price than it should for such restructurings. The result is a poorly functioning sovereign-debt market, marked by unnecessary strife and costly delays in addressing problems when they arise. We are reminded of this time and again. In Argentina, the authorities’ battles with a small number of “investors” (so-called vulture funds) jeopardised an entire debt restructuring agreed to – voluntarily – by an overwhelming majority of the country’s creditors.

In Greece, most of the “rescue” funds in the temporary “assistance” programs are allocated for payments to existing creditors, while the country is forced into austerity policies that have contributed mightily to a 25% decline in GDP and have left its population worse off. In Ukraine, the potential political ramifications of sovereign-debt distress are enormous. So the question of how to manage sovereign-debt restructuring – to reduce debt to levels that are sustainable – is more pressing than ever. The current system puts excessive faith in the “virtues” of markets. Disputes are generally resolved not on the basis of rules that ensure fair resolution, but by bargaining among unequals, with the rich and powerful usually imposing their will on others. The resulting outcomes are generally not only inequitable, but also inefficient.

Those who claim that the system works well frame cases like Argentina as exceptions. Most of the time, they claim, the system does a good job. What they mean, of course, is that weak countries usually knuckle under. But at what cost to their citizens? How well do the restructurings work? Has the country been put on a sustainable debt path? Too often, because the defenders of the status quo do not ask these questions, one debt crisis is followed by another. Greece’s debt restructuring in 2012 is a case in point. The country played according to the “rules” of financial markets and managed to finalise the restructuring rapidly; but the agreement was a bad one and did not help the economy recover. Three years later, Greece is in desperate need of a new restructuring.

Distressed debtors need a fresh start. Excessive penalties lead to negative-sum games, in which the debtor cannot recover and creditors do not benefit from the larger repayment capacity that recovery would entail. The absence of a rule of law for debt restructuring delays fresh starts and can lead to chaos. That is why no government leaves it to market forces to restructure domestic debts. All have concluded that “contractual remedies” simply do not suffice. Instead, they enact bankruptcy laws to provide the ground rules for creditor-debtor bargaining, thereby promoting efficiency and fairness.

You can say there are not enough low-income homes. Or you can say the housing bubble has made too many homes unaffordable.

• Many Low-Income Americans Can’t Even Afford To Rent (MarketWatch)

The poorest Americans, who can’t afford to buy property, are increasingly priced out of rentals. There were only 28 adequate and available to rent homes for every 100 extremely low-income renters in 2013, down from 37 in 2000, according to the Urban Institute, a nonprofit and nonpartisan organization that focuses on social and economic policy. “This gap between supply and demand leaves 72% of the country’s poorest families burdened by the high cost of housing,” it found. Extremely low-income renters are households with incomes at or below 30% of the median income in that region. Not one county in the U.S. has enough affordable housing for all these renters.

Among the 100 largest counties, the number of affordable rental homes ranges from eight per 100 in Denton County, Texas, to 51 in Suffolk County, Mass. This regional disparity is partly due to federal assistance not keeping pace with population growth, says Erika Poethig, a director at the Urban Institute. Only nine of the 100 largest counties increased the number of affordable units for extremely low-income renters from 2000 to 2013. Between 2000 and 2013, the number of extreme low-income renter households soared 38% from 8.2 million to 11.3 million as the Great Recession pushed more families toward the lower end of the income bracket, the report found. Among the 100 largest counties, five of the 10 counties with the smallest affordability gap are in Massachusetts. Only one—San Francisco—is outside the Northeast.

“The geography of poverty is changing and federal housing policy has not kept up,” Poethig says, because the cost of living is so high in these areas. As a result, renters at this income level depend increasingly on programs run by the U.S. Department of Housing and Urban Development. Depending on the area of the country, extremely low-income translates to incomes of between approximately $12,600 and $32,800 for a family of four. Without federal housing assistance, the report found, the share of extremely low-income American households who could afford adequate housing in 2013 would have fallen to 5%.

25% make too little from work to live on.

• What Is the Real US Unemployment Rate? (CH Smith)

The BLS attempts to define a broader definition of under-employment and unemployment in its category U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force: this is 10.8% of the work force. Depending on how we calculate the work force, and if we count everyone with any earnings as employed, we get an unemployment rate of somewhere between 5.6% and 12.5%. If we use the BLS’s metric for including under-employment, this is in the range of 10% to 15%. Common sense suggests that we calculate employment/unemployment based on earnings, not just any income in any amount.

If we reckon that only those with earnings of $15,000 or more annually (roughly speaking, full-time work at minimum wage) are fully employed, then the numbers change dramatically. The $15,000 annual earnings are also a rough benchmark of self-supporting households: two wage-earners making $15,000 each would have a household income of $30,000–enough to get by in much of the country. About 50 million people earn less than $15,000 annually. This includes roughly 10 million self-employed and 40 million with part-time jobs or other sources of earned income. This suggests that only 100 million of the 160 million work force are fully employed in the sense of not just having a job but making enough to be self-supporting.

There are many caveats resulting from the way that government social welfare is not included in earnings: thus a household might have two part-time wage-earners making very modest sums monthly who are getting by because they qualify for Section 8 housing, SNAP food stamps, Medicaid healthcare, school lunch programs, and so on. These programs enable the working poor to support a household despite low earnings. Should we include those depending on social welfare programs as fully employed? By my reckoning, roughly 60% of the civilian work force is fully employed and 40% are marginally employed (i.e. earning less than $15,000 annually) or unemployed. Since full-time workers even at minimum wage earn close to $15,000 annually, I think it is fair to use that as the cut-off for fully employed.

The BLS counts 121 million people as usually work full-time, but given only 100 million workers earn $15,000 or more, this doesn’t add up unless we include self-employed people earning very little who are counted as full-time workers. Based on income, I set the fully employed rate at 60%, and the marginally employed/unemployed rate at 40%. If we accept the BLS’s 121 million full-time jobs (which once again, this doesn’t make sense given even minimum wage full-time jobs earn $14,500, and 50 million people report earnings of less than $15,000), we still get a marginally employed/unemployed rate of 25%: work force of 160 million, 121 million fully employed.

Better start spending, guys!

• US 2040 Deficit To Nearly Double As Percent Of Economy-CBO (Reuters)

The U.S. budget deficit will more than double as a share of economic output by 2040 if current tax and spending laws remain unchanged, the Congressional Budget Office said on Tuesday. The CBO, releasing its annual long-term budget outlook, said however, that overall U.S. debt levels in 2040 will be slightly lower than estimates made a year ago for 2039 because of expectations of lower long-term interest rates. CBO said the 2040 deficit will reach 5.9% of gross domestic product, compared to 2.7% this year and 3.8% in 2025 based on its normal scoring methods. By contrast, the deficit reached nearly 10% of GDP in 2009 during the depths of the recent financial crisis.

“..their aim was to “humiliate not only the Greek government – this would be the least important – but humiliate an entire people”.

• Greek PM Tears Into Lenders As Eurozone Prepares For ‘Grexit’ (Reuters)

Prime Minister Alexis Tsipras lashed out at Greece’s creditors on Tuesday, accusing them of trying to “humiliate” Greeks, as he defied a drumbeat of warnings that Europe is preparing for his country to leave the euro. The unrepentant address to lawmakers after the collapse of talks with European and IMF lenders at the weekend was the clearest sign yet that the leftist leader has no intention of making a last-minute U-turn and accepting austerity cuts needed to unlock frozen aid and avoid a debt default within two weeks. Financial markets, for months indifferent to wrangling over releasing billions of euros of aid for Greece, reacted with mounting alarm.

European stock markets hit their lowest level since February and the risk premium on bonds of other vulnerable euro zone states leapt in one of the sharpest episodes of contagion since the height of Europe’s debt crisis in 2012. As the Austrian chancellor flew to Athens to warn Tsipras of the gravity of the situation and senior German lawmakers openly discussed the once-taboo prospect of a “Grexit” from the single currency area, Tsipras lambasted European and IMF policy. “I’m certain future historians will recognise that little Greece, with its little power, is today fighting a battle beyond its capacity not just on its own behalf but on behalf of the people of Europe,” he said in a televised speech to legislators in his SYRIZA party, drawing rousing applause.

Tsipras charged that the lenders were politically motivated in demanding pension cuts and tax hikes that hurt the poor, and their aim was to “humiliate not only the Greek government – this would be the least important – but humiliate an entire people”. The 40-year-old leader’s rhetoric left unclear whether he is preparing to default and risk economic collapse as the price of standing firm, or betting – wrongly according to the creditors – on a last-minute effort by Europe to save Greece. German Chancellor Angela Merkel, who has held repeated phone calls with Tsipras in recent weeks to press him to agree on reforms with EU/IMF negotiators, struck a despondent note, saying it was unclear if a deal could be found when euro zone finance ministers meet on Thursday in Luxembourg.

“..45% of pensioners receive monthly payments below the poverty line of €665..” Yeah, cuts would be a great idea..

• A Greek Paradox: Many Elderly Are Broke Despite Costly Pensions (Reuters)

The plight of 79-year-old Athenian Zina Razi and thousands like her strikes at the heart of why talks between Greece and its creditors have collapsed. She lives off a pension system that helps to consume a huge proportion of state spending and can appear overly indulgent – but still she’s broke. Razi barely keeps up with her power and water bills, and since her middle-aged son lost his job, supports him as well. “I am always in debt,” she said. “I can’t even imagine going to the cinema or the theatre like I did in the past.” This paradox goes a long way to explain why the leftist-led government and its creditors at the European Union and IMF have failed to bridge their differences over a cash-for-reform deal, leading to Sunday’s breakdown of talks.

Five years of austerity policies imposed at the creditors’ behest have helped to turn a recession into a full-blown depression, and still they want more. Athens has flatly refused to achieve further savings by raising value-added tax on essential items or, crucially, slashing pension benefits. As it inches closer to default and a potentially calamitous exit from the euro zone, the government has dismissed such demands as “absurd” or designed to pummel Greeks’ morale. To the lenders, the pension system is still too generous compared with what the country can afford. Greece spent 17.5% of its economic output on pension payments, more than any other EU country, according to the latest available Eurostat figures from 2012. With existing cuts, this figure has since fallen to 16%. [..]

To many Greeks, not least the Syriza party that stormed to power in January promising to push the clock back on austerity, the creditors’ demands are yet another way to clobber vulnerable people needlessly. The lenders have denied asking for specific pension cuts. But the Greek side said among their suggestions was slashing a top-up payment that supports some of the poorest pensioners. For Razi, that would mean losing €180 out of her €650 monthly pension. The average Greek pension is €833 a month. That’s down from €1,350 in 2009, according INE-GSEE, the institute of the country’s largest labour union. Moreover, 45% of pensioners receive monthly payments below the poverty line of €665, the government says. With more than a quarter of Greek workers jobless, many rely on parents and grandparents for financial support.

Wolf makes sense on some things here, much less on others.

• Divorce Greece In Haste, Repent At Leisure (Martin Wolf)

Some argue that Greece at least would be far better off after a default and exit. It is indeed theoretically possible that a default to its public creditors, combined with introduction of a new currency, a big devaluation (accompanied by sound monetary and fiscal policies), maintenance of an open economy, structural reforms and institutional improvements would mark a turn for the better. Far more likely is a period of chaos and, at worst, emergence of a failed state. A Greece that could manage exit well would have also avoided today’s plight. Neither side should underestimate the risks. It is also crucial to avoid the contempt so characteristic of the frayed nerves caused by failing negotiations.

Fecklessness may be a grievous fault, but grievously have the Greeks answered it. As the Irish economist, Karl Whelan, points out in a blistering response to Mr Giavazzi, the Greek economy has suffered a staggering collapse. From peak to trough, aggregate real gross domestic product fell by 27%, while real spending in the economy fell by a third. The cyclically-adjusted fiscal balance improved by 20% of GDP between 2009 and 2014 and the current account balance improved by 16% of GDP between 2008 and 2014. The unemployment rate reached 28% in 2013, while government employment fell by 30% between 2009 and 2014. Such a brutal adjustment would have shredded the politics of any country.

Europeans are now dealing with Syriza because of this calamity. But they are also dealing with Syriza because of the refusal to write down more of the debt in 2010. This was a huge error, made far worse by the subsequent collapse of the Greek economy. Indeed, the vast bulk of the official loans to Greece were not made for its benefit at all, but for that of its feckless private creditors. Creditors, too, have a duty to take care. If they are careless, they risk big losses. If governments want to save them, their own taxpayers should be told to pay up.

A voice of reason from an unexpected corner.

• Austrian Chancellor Sides With Greece In Debt Row (Reuters)

Austrian Chancellor Werner Faymann expressed solidarity with Greek Prime Minister Alexis Tsipras before meeting the leader in Athens on Wednesday in a bid to end a standoff with international creditors over a rescue package. Faymann, a Social Democrat who has taken a relatively lenient line with Greece, told broadcaster ORF that Athens had to live up to commitments under its current bailout plan but needed support to keep it from leaving the euro zone. “I know there were a number of proposals, also from the (creditor) institutions, that I also don’t find in order,” Faymann said in the radio interview.

“High joblessness, 30-40% (with) no health insurance and then raising VAT on medicines. People in this difficult situation cannot understand that.” Faymann seemed to be wading into a row over what European Commission President Jean Claude Juncker has called misrepresentations by the Greek government over just what reforms the EU wants from Athens to unlock frozen loans. Faymann said the alternative was fighting fraud and ensuring all Greeks pay their fair share of taxes. Greece and Brussels have been locked in an increasingly bitter war of words as the clock ticks toward the end of June, when the current bailout accord runs out, exposing Greece to potential default that could usher it out of the currency bloc.

Faymann said it was never helpful when insults fly, adding: “I stand on the side of the Greek people who in this difficult position are being proposed more things detrimental to society.” He said he was confident he could support Juncker’s efforts to forge an agreement by using Austria as an example of a country where workers and pensioners get affordable health care. He acknowledged nerves were frayed but said the task was to “avoid a catastrophe.” Asked whether Greek leaders could be brought on board, he said: “I assume that someone who is elected lives up to his responsibility.”

Troika-induced fear and panic.

• ‘It’s Going To Be Bad, Whatever Happens’: Greeks Stash Cash At Home (Guardian)

“Everybody’s doing it,” said Joanna Christofosaki, in front of a Eurobank cash dispenser in the leafy Athens neighbourhood of Kolonaki. “Our friends have all done it. Nobody wants their money to be worthless tomorrow. Nobody wants to be unable to get at it.” A researcher in the archaeology department at the Academy of Athens, Christofosaki said she knew plenty of people who had “€10,000 somewhere at home” and plenty of others who chose to keep their stash at the office. Was she among them? “If I was, I certainly wouldn’t tell you.” It was not too hard, in central Athens’ plushest district on Tuesday, to find people worried that the latest breakdown of talks between Greece and its creditors over a new aid-for-reforms deal may have implications for the security – and accessibility – of their savings.

With time fast running out to secure a desperately needed €7.2bn in new rescue funds before the end of the month, when Athens is due to repay €1.5bn in loans to the IMF, anxious Greeks have begun withdrawing money from their country’s banks at an unprecedented rate. Bank deposits have been falling steadily since October and now stand at their lowest level since 2004. Withdrawals in recent weeks have averaged €200-250m a day, but on Monday – after the shock collapse of last-ditch talks between the Greek government and its eurozone and international lenders – withdrawals surged to €400m. “People are very concerned,” said the owner of a small company who asked not to be named. “I think those who could, have already transferred some money abroad. And lots of others have taken out a few thousand, enough to see them through any immediate crisis. I have.”

Broad strokes?!

• Greek Central Bank Issues ‘Grexit’ Warning If Aid Talks Fail (Reuters)

The Greek central bank warned on Wednesday that the country would be put on a “painful course” towards default and exiting the euro zone if the government and its international creditors failed to reach an agreement on an aid-for-reforms deal. It also said Greece risked a renewed bout of recession and predicted that the current economic slowdown would accelerate in the second quarter of this year. The Greek economy had started growing again last year after being pounded by years of austerity, but fell back into negative growth in the first quarter of 2015, contracting by 0.2% y-o-y. The ongoing crisis has prompted an outflow of deposits of about €30 billion from Greek lenders between October and April, the central bank said.

Time is fast running out for Athens and its creditors to reach a deal before a €1.6 billion repayment by Greece to the IMF falls due at the end of the month. But neither side appears willing to give ground, with Greek Prime Minister Alexis Tsipras accusing the creditors of trying to “humiliate” his country by demanding more cuts. Despite the heated rhetoric, the central bank said that the two sides appeared to have reached a compromise on the main conditions attached to an aid agreement, and that little ground remained to be covered for a deal to stick. “Failure to reach an agreement would … mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and, most likely, from the EU,” the Bank of Greece said in a monetary policy report. “Striking an agreement with our partners is a historical imperative that we cannot afford to ignore.”

“Yet with Tsipras gone, would the next Greek government be any more pliable – any more inclined to maintain the new rate of VAT or persist with the new round of pension cuts? I see no reason to think so.”

• Europe Asks the Impossible of Greece (Crook)

Suppose for a moment that the European Union gets what it’s demanding from Greek Prime Minister Alexis Tsipras. It doesn’t look as though that will happen, but let’s imagine that Tsipras surrenders. How long, I’m wondering, would this smell like victory? Tsipras has agreed to the EU’s new, less demanding targets for Greece’s primary budget surplus over the next few years. The sticking point is that the measures he would use to hit those targets aren’t enough. Instead of raising the rate of value-added tax (a kind of sales tax) and/or collecting it on a wider range of goods, Tsipras says he’ll attack tax evasion and fraud. That’s won’t raise enough money, says Europe. The EU wants more cuts to public spending on pensions as well, which Tsipras refuses to consider.

For some reason, Europe has also been insisting on further labor-market reforms. These would doubtless be desirable, but they’re unlikely to yield extra growth in the short term and therefore have no fiscal implications in the relevant timescale. Tsipras’s numbers don’t add up, says Europe: They aren’t credible. Suppose, as I say, he did agree to raise VAT and cut pension spending. How credible would that be? Chances are good that it would be his last act as prime minister. He’d be breaking election promises and, aside from that, would enrage the faction of his own party that thinks he’s already conceded too much. Good riddance, you might say.

Yet with Tsipras gone, would the next Greek government be any more pliable – any more inclined to maintain the new rate of VAT or persist with the new round of pension cuts? I see no reason to think so. In short, if Tsipras capitulated and gave the EU what it wants, that wouldn’t be credible either. Let’s pursue this “Europe wins” thought experiment one step further. Suppose that Tsipras capitulated, and that he was able somehow to stay in power long enough to keep his promises – or that the successor government was reliably conservative on fiscal policy. Would this be sufficient to put Greek public finances on the path to sustainability? The sustainability of Greek debt, you may recall, is Europe’s main purpose in all this.

Germans think it’s about money. Well, maybe it’s time for Deutsche to crash. And/or the Landesbanken.

• Merkel’s Bavarian Allies Say Greeks Act Like ‘Clowns’ In Debt Talks (Reuters)

German Chancellor Angela Merkel’s Bavarian allies have accused the Greek government of not having grasped the seriousness of the situation in the debt talks yet, with CSU Secretary-General Andreas Scheuer calling ruling politicians in Athens “clowns”. The remarks were the latest sign of hardening positions towards Greece among European politicians, on the eve of a meeting of euro zone ministers that could be the last chance to rescue Greece from default at the end of the month. Scheuer said in an interview with Rheinische Post newspaper published on Wednesday that Greece had done too little so far to stay in the euro and there would be no “careless compromises” just for the sake of keeping Greece in the single currency bloc.

“The Greek government apparently hasn’t realized the seriousness of the situation yet,” Scheuer said. “They are behaving like clowns sitting in the back of the class room, although they have received explicit warnings from all sides that they might fail to pass to the next grade.” German Chancellor Angela Merkel said on Tuesday she was willing to do all she could to keep Greece in the euro zone but insisted the onus remained on Athens and its creditors to break a deadlock and reach a deal. Merkel is facing growing opposition among her ruling conservatives to granting Greece any further bailout funds. Germany is Greece’s biggest creditor and the biggest contributor to the EU budget and the euro zone bailout fund.

All the central bankers have left is uncharted territory. And that’s a scarier thought than anyone cares to admit.

• Central Banks Enter The Unknown With Sub-Zero Rates (FT)

For years, central bankers have treated the fabled interest rate known as the “zero lower bound” as if it were a physical barrier. Like the notion that temperatures cannot fall below absolute zero, policy makers thought they could not impose negative borrowing costs, as depositors would simply withdraw their money and hoard the cash. However, as the risk of deflation has pushed central banks in the eurozone, Denmark, Sweden and Switzerland to venture below zero, the question has shifted from whether negative rates are possible to how low they can go. Critics fear the unprecedented experiment of negative rates could have unwarranted side effects, including the formation of asset bubbles and deep disruption to the operation of the banking system.

“Negative rates are the policy for which we know least,” said Lucrezia Reichlin, an economist at London Business School. “They may create distortions and have undesirable distributional effects, so they should be considered an emergency, temporary measure.” Denmark’s Nationalbanken was the first central bank in Europe to experiment properly with negative rates after the global financial crisis. In July 2012, the DNB began charging lenders 0.2% for some of the cash parked in its deposit facility – a measure needed to defend the longstanding peg between the krone and euro. But this experiment acquired a whole different scale at the start of the year, when the ECB launched a programme of quantitative easing, having already cut its deposit rate to -0.2%.

This forced neighbouring central banks to slash their own rates deep into negative territory to stem the risk of large-scale capital inflows. In January, Switzerland dropped its deposit rate to as low as -0.75%, while Sweden’s Riksbank moved its main repo rate to -0.25% in March. The DNB, which had briefly raised the deposit rate back into positive territory, is now charging banks 0.75% for their excess reserves. Economists say that the possibility of negative rates arises because there are costs to storing and insuring cash. Savers will continue to keep their money in a deposit so long as this costs less than moving it into a safe. In fact, depositors may be willing to pay even more than that, as it is far easier to handle money from a bank account than it is from a vault.

“Yuan-ruble trade in Russia has grown 800% between January and September 2014..”

• Russia Cuts US Debt Holding By More Than 40% Over Year (RT)

Russia held US Treasury bills worth $66.5 billion as of April this year, according to the latest monthly report from the US Treasury. That compares with the $116.4 billion held a year ago. From March to April 2015, Russia sold $3.4 billion in US Treasury bonds,reported US Department of the Treasury Monday. Since August 2014, the value of US bonds in the Russian government portfolio has been steadily declining and the volume of Russian investments in US bonds dropped dramatically. Russia is now only 22nd on the list of the major US debt holders, compared to twelfth place in April 2014.

The Western sanctions imposed against Russia last year over re-unification with Crimea and its position in Ukrainian crisis have pushed Moscow to cut its dependence on the US dollar and build a more self-sufficient financial system. Western sanctions have encouraged Russia to work more actively with Asia, as the Asia-Pacific region and BRICS, as they make up 60% of the world GDP, said Russian Prime Minister Dmitry Medvedev last week. The BRICS summit in Russia this July will see the opening of the $100 billion New Development Bank, intended to compliment the World Bank and sponsor infrastructure projects within the group. Another project to be launched is currency pool worth another $100 billion, expected to guard the group from exchange rate volatility, said Russian President Vladimir Putin in May.

More than 40 countries and associations have said they would like to boost trade with the Russia-led economic block known as the Eurasian Economic Union (EEU). Vietnam became the first country out of the EEU to sign a free trade zone deal with the block in May and is considering switching to local currencies in bilateral trade. Russian Prime Minister Dmitry Medvedev said Moscow was ready to consider a currency union across the EEU. Russia s largest bank, Sberbank, issued its first credit guarantees in yuan this June, which marked another step in its de-dollarizing policy. Yuan-ruble trade in Russia has grown 800% between January and September 2014, and accounts for 7% of bilateral trade, with a huge potential to grow, according to May data.

World power.

• Five Million Reasons Why China Could Go to War (Bloomberg)

With five million citizens to protect and billions of investment dollars at stake, China is rethinking its policy of keeping out of other countries’ affairs. China has long made loans conditional on contracts for its companies. In recent years it has sent an army of its nationals to work on pipelines, roads and dams in such hot spots as South Sudan, Yemen and Pakistan. Increasingly, it has to go across borders to protect or rescue them. That makes it harder to stick to the policy espoused by then-premier Zhou Enlai in 1955 of not interfering in “internal” matters, something that has seen China decline to back international sanctions against Russia over Ukraine or the regime of Syrian President Bashar al-Assad.

As President Xi Jinping’s “Silk Road” program of trade routes gets under way, with infrastructure projects planned across Central Asia, the Indian Ocean and the Middle East to Europe, China’s footprint abroad will expand from the $108 billion that firms invested abroad in 2013, up from less than $3 billion a decade earlier. That is forcing China to take a more proactive approach to securing its interests and the safety of its people. With more engagement abroad there’s a risk that China, an emerging power with a military to match, is sucked into conflicts and runs up against the U.S. when tensions are already flaring over China’s disputed claims in the South China Sea.

“It is going to be a long, hard haul,” said Kerry Brown, director of the University of Sydney’s China Studies Centre. “You either have disruption as a new power rips up the rule book and causes bedlam or you’ve got a gradual transition where China is ceded more space but also expected to have more responsibility.” For more than a half century China stuck to Zhou’s policy predicated on non-interference and respect for the sovereignty of others. The policy partly reflected a focus on domestic stability and economic development by governments that lacked the means or interest to play a more active role offshore. It also led President Barack Obama to last year describe China’s leaders as “free riders” while others carried the global security burden. [..]

Parello-Plesner and Mathieu Duchatel, who co-wrote “China’s Strong Arm: Protecting Citizens and Assets Abroad” estimate there are five million workers offshore, based on research and interviews with officials, a figure that’s about five times larger than that given by the Ministry of Commerce. The official data reflect a lack of systemic consular registration and the absence of formal reporting by subcontractors sending workers abroad, according to the writers, who estimate about 80 Chinese nationals were killed overseas between 2004 and 2014. “There are now several countries that – in terms of the number of Chinese citizens there – are ‘too big to fail’,” said Parello-Plesner. “The business-oriented ‘going-out’ strategy now has to be squared with broader strategic calculations.”

Great angle, great insight.

• The Magical Content Tree (Dmitry Orlov)

A long, long time ago books were very expensive. They were produced by copying them by hand, page by page, onto parchment, by very poor monks toiling in their monastic scriptoria, but the books they produced turned out to be expensive anyway. The aristocracy could afford them, and, of course, the clergy, but the laymen had little access to the written word. Things were somewhat better in other, more technologically advanced parts of the world. The Chinese invented paper shortly before 200 BC, and by 200 AD lots of Buddhist texts were being mass produced using wood block printing. This know-how slowly diffused west, reaching Moslem Spain a few centuries later. By 1400 AD the art of paper-making made it all they way to the most backward of European provinces—Germany.

But then came a surprise: a German craftsman by the name of Johannes Gutenberg introduced moveable type: the ability to compose printed pages using reusable letters cast from lead. His legacy is still with us: the people who compose text for printing are still called “typesetters,” because once upon a time they physically set type, and the gaps between lines of text are still referred to as “leading,” because they used to be produced by inserting thin strips of lead. This innovation reduced the cost of producing books by orders of magnitude, making it possible for people of modest means to acquire a library. Gutenberg’s breakthrough is one of the most important bits of disruptive technology to come around, along with the steam engine and the nuclear bomb.

But an even bigger disruptive transformation occurred with the advent of the internet, which entirely decoupled the act of reproducing a work from the act of producing it in the first place. In effect, by investing in computing hardware and by paying for an internet connection, everybody gets access to a printing press. Once the equipment has been paid for, the incremental cost of producing another copy of something is zero. The overall cost is, of course, higher than ever; there is a good reason why Microsoft made fantastic fortunes with their mediocre, buggy products, or why Apple Computer is the public company with the highest market capitalization.

If you look at cost versus utility, many families now spend hundreds of dollars a month on smartphones, tablet computers, laptops, e-book readers, internet services, cellular phone services and so on. Were they to spend an equivalent amount on paper books and periodicals, they would amass a fantastically huge library in no time. Some people also pay for content—they purchase e-books, subscribe to premium services and so on—but most of the “content” they “consume” is free, paid for by advertising, or by promises of future revenue or increased market share, or by some other intangible, or—the most important category of all—by nothing at all.

Jim in fine form.

• Enter Jeb and Hil (Jim Kunstler)

The Floridian clod seeking to don the mantle of Millard Fillmore made an amazing foreign policy speech at an economic conference in Berlin last week. Inveighing against Russian President Vladimir Putin, he gave a very vivid impression of a man who has no idea what he is talking about.

“Russia must respect the sovereignty of all of its neighbors. And who can doubt that Russia will do what it pleases if its aggression goes unanswered?”

Jeb Bush was averring elliptically to the failed state formerly known as Ukraine, trying to put over the shopworn story that Russia was needlessly making war on its neighbor (and former province).

“Bush called for increased clarity on what type of sanctions would be imposed on the country if Prime Minister Vladimir Putin does not back down against a united international front…. ‘I don’t think we should be reacting to bad behavior [Bush said]. By being clear what the consequences of “bad behavior” is in advance, I think we will deter the kind of aggression that we fear from Russia. But always reacting, and giving the sense we’re reacting in a tepid fashion, only enables the bad behavior of Putin.’”

Note, by the way, that here is yet another scion of the Bush clan who was inexplicably brought up speaking Ebonics: “What the consequences… is?” Say what?

Ukraine became a failed state due to a coup d’état engineered by Barack Obama’s state department. US policy wonks did not like the prospect of Ukraine joining Russia’s regional trade group called the Eurasian Customs Union instead of tilting toward NATO and the European Union. So, we paid for and enabled a coalition of crypto-fascists to rout the duly elected president. One of the first acts of the US-backed new regime was to declare punishment of Russian language speakers, and so the predominately Russian-speaking people in eastern Ukraine revolted. Russia reacted to all this instability by seizing the Crimean peninsula, which had been part of Russia proper both before and through the Soviet chapter of history. The Crimea contained Russia’s only warm water seaports and naval bases. What morons in the US government ever thought Russia would surrender those assets to a newly-failed neighbor state?

A look behind the Sunday Times Snowden article.

• The American Far-Right’s Trojan Horse In Westminster (Nafeez Ahmed)

There is a violent extremist fifth column operating at the heart of power in Britain, and they stand against everything we hold dear in Western democracies: civil liberties, equality, peace, diplomacy and the rule of law. You wouldn’t think so at first glance. In fact, you might be taken in by their innocuous-looking spokespeople, railing against the threat of Muslim extremists, defending the rights of beleaguered Muslim women, championing the principle of free speech – regularly courted by national TV and the press as informed experts on global policy issues. But peer beneath the surface, and an entirely different picture emerges: a web of self-serving trans-Atlantic elites who are attempting to warp public discourse on key issues that pose a threat not to the public interest, but to their own vested interests.

One key organisation at the centre of this web is the Henry Jackson Society (HJS), an influential British think-tank founded a decade ago, ostensibly to promote noble ideals like freedom, human rights and democracy. But its staff spend most of their energies advancing the very opposite. More recently, HJS has turned to demonising Edward Snowden supporters and privacy advocates as accomplices with al-Qaeda and Islamic State (IS) – as is also being done by Rupert Murdoch s Sunday Times, with its hole-ridden story claiming Snowden’s revelations had allowed Russia and China to identify active MI6 agents. Journalists who have reviewed the Snowden files say that there was nothing in them that would permit MI6 operatives to be identified.

Former senior CIA official Robert Steele, whose books have received endorsements from the past and then serving Chairman of the Select Committee on Intelligence, said: “I can state categorically that there could not have been names of either intelligence officers or agents in the Snowden materials. The system simply does not work that way.” But the two-week time period between the publication of HJS report, and the Sunday Times hit-piece, is unlikely to be a coincidence. Like the Times piece, the latest HJS report damning Snowden draws almost entirely on anonymous intelligence sources along with unsubstantiated claims from the very officials responsible for mass surveillance, to claim that Snowden’s revelations had crippled the war on terror.

Lots of places are going to be uninhabitable for lack of water.

• More Than A Third Of The World’s Biggest Aquifers Are In Distress (FT)

More than a third of the world’s biggest aquifers, a vital source of fresh water for millions, are “in distress” because human activities are draining them, according to satellite observations. Scientists from Nasa, the US space agency, and the University of California, Irvine, analysed 10 years of data from the twin Grace satellites, which measure changes in groundwater reserves by the way they affect Earth’s gravitational pull. “Twenty-one of the world’s 37 biggest aquifers have passed sustainability tipping points … they are being depleted,” said Jay Famiglietti, the study leader. “Over a third [13] are so bad that they are experiencing exceptionally high levels of stress.” The problem is most serious in regions where rainfall and snowmelt cannot make up for water extracted for agriculture, industry, drinking and other human purposes.

The scientists determined aquifers’ overall stress rates on the basis of their depletion over 10 years of satellite measurements, together with their potential for replenishment, taking account of regional climate and human activities. The results, published in the Water Resources Research journal, show that the Arabian Aquifer System, an important water source for more than 60 million people, is the most “overstressed” in the world. It is followed by the Indus Basin aquifer of India and Pakistan and the Murzuq-Djado Basin in northern Africa. California’s Central Valley, currently at the center of a political battle over water rights, was classed as “highly stressed” and suffering rapid depletion mainly for agriculture.

Although many of the world’s great aquifers are being drained rapidly, there is “little to no accurate data about how much water remains in them,” the researchers added. Professor Famiglietti said: “Available physical and chemical measurements are simply insufficient. Given how quickly we are consuming the world’s groundwater reserves, we need a co-ordinated global effort to determine how much is left.” By comparing their satellite-derived groundwater loss rates to the limited data on groundwater availability, the researchers found huge discrepancies in projected times to total depletion of the aquifers. In the Northwest Sahara Aquifer System, for example, such times fluctuated between 10 and 21,000 years. The study noted that a dearth of groundwater was leading to severe ecological damage, including rivers running dry, water quality deteriorating and land subsiding.

Debt Rattle March 2 2015

Mar 022015

March 2, 2015 Posted by Raúl Ilargi Meijer at 10:01 am Finance Tagged with: Austria, Catalonia, deficit, deflation, ECB, Greece, pollution, purgatory, QE, Stockman, Uruguay 4 Responses »

Christopher Helin Flint auto, Ghirardelli Square, San Francisco 1924

• Austria On Track to Bail in Heta Creditors After Aid Stop (Bloomberg)

• ‘What Is Desirable For The Eurozone May Not Be Feasible’ (Reuters)

• David Stockman Warns ‘It’s One Of The Scariest Moments In History’ (Zero Hedge)

• Are Central Banks Creating Deflation? (Zero Hedge)

• Negative Yields: What Could Go Wrong? (CNBC)

• Greek Debt Becoming Less Sustainable (Kathimerini)

• German Finance Chief Schaeuble Softens Tough Tone Against Greece (Telegraph)

• Greece Is Being Forced Into Purgatory To Save The Euro (Telegraph)

• How Jeroen Dijsselbloem Did The Deal To Extend The Greece Bailout (FT)

• Alexis Tsipras Comes Under Fire From Spanish Prime Minister (Guardian)

• Catalonia Prepares To Set Up Own Foreign Missions, Tax System (RT)

• ECB Braces For QE As Others Shift Rates (Reuters)

• Merkel’s Bavarian Allies Criticise EU Exception For French Deficit (Reuters)

• Bells Toll For Europe’s Largest Gas Field (Reuters)

• Ukrainian Economy Starts to Buckle Behind Cloak of Calm in Kiev (Bloomberg)

• Ex-Guerrilla, Champion Of The Poor: Uruguay President Steps Down (RT)

• Documentary on Air Pollution Grips Over 30 Million Chinese in 1 Day (NY Times)

Once this gets started, it’ll be hard to stop it from spreading.

• Austria On Track to Bail in Heta Creditors After Aid Stop (Bloomberg)

Austria won’t give fresh capital to Heta Asset Resolution making the “bad bank” of failed Hypo Alpe-Adria-Bank the first case under new European Union rules imposing losses on bank bondholders. Austria cut off support for Heta, which has already cost Austrian taxpayers about €5.5 billion in aid, after Heta notified the government it may need as much as €7.6 billion euros on top of that, the Finance Ministry said in a statement on Sunday. The Finanzmarktaufsicht regulator put Heta into resolution and ordered an immediate debt moratorium. “The decision was triggered by information from Heta’s management about the first results of an asset review,” the ministry said.

“Because of that dramatic change of the asset evaluation, the ministry together with the entire government decided not to invest any more tax money into Heta.” Heta’s predecessor Hypo Alpe was nationalized in 2009 after it was close to collapse because of bad loans in the western Balkans and shareholders led by Bayerische Landesbank walked away from the bank. Its rescue and wind-down has been complicated by a string of court cases and by the fact that a large part of its debt is guaranteed by the Carinthia province, a former owner of the bank. The FMA is taking over the wind-down of Heta, which kept around €18 billion of Hypo’s assets when it was set up last year.

While it works out a resolution plan it won’t repay Heta’s liabilities under an Austrian law that came into force Jan. 1 to implement the EU Bank Recovery and Resolution Directive, the authority said in a statement. The immediate debt moratorium means €950 million of bonds due March 6 and March 20 won’t be repaid. It affects €9.8 billion in outstanding bonds, supplementary capital and Schuldschein loans, €1.24 billion debt to Pfandbriefbank, a bank that handles bond issues for Austrian provinvial banks, as well as loans from BayernLB, according to the FMA’s decree published on its website.

“Austerity has fueled radical forces of political protest and may be running out of democratic road..”

• ‘What Is Desirable For The Eurozone May Not Be Feasible’ (Reuters)

The latest episode of Greece’s debt crisis has revived doubts about the long-term survival of the euro, nowhere more so than in London, Europe’s main financial center and a hotbed of Euroskepticism. The heightened risk of a Greek default and/or exit comes just as there are signs that the euro zone is turning the corner after seven years of financial and economic crisis and that its perilous internal imbalances may be starting to diminish. To skeptics, the election of a radical leftist-led government in Athens committed to tearing up Greece’s bailout looks like the start of an unraveling of the 19-nation currency area, with southern countries rebelling against austerity while EU paymaster Germany rebels against further aid.

A last-ditch deal to extend Greece’s bailout for four months after much kicking and screaming between Athens and Berlin did little to ease fears that the euro zone’s weakest link may end up defaulting on its official European creditors. U.S. economist Milton Friedman’s aphorism – “What is unsustainable will not be sustained” – is cited frequently by those who believe market forces will eventually overwhelm the political will that holds the euro together. Countries that share a single currency cannot devalue when their economies lose competitiveness, as occurred in southern Europe in the first decade of the euro’s existence. There is no mechanism for large fiscal transfers between member states.

So the only option has been a wrenching “internal devaluation” by countries on the periphery of the euro area, involving real wage, pension and public spending cuts and mass unemployment that has caused deep social distress. Austerity has fueled radical forces of political protest and may be running out of democratic road – not just in Greece – but none of the alternative ways out of the euro zone’s economic divergence dilemma looks remotely plausible. “The history of the gold standard tells us that an asymmetric adjustment process involving internal devaluation in debtor countries, with no corresponding inflation in the core, is unlikely to be economically or politically sustainable,” economic historians Kevin O’Rourke and Alan Taylor wrote in the Journal of Economic Perspectives in 2013. “What is desirable for the euro zone may not be feasible.”

Can’t say it enough: “Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets.”

• David Stockman Warns ‘It’s One Of The Scariest Moments In History’ (Zero Hedge)

“The Fed is out of control,” exclaims David Stockman – perhaps best known for architecting Reagan’s economic turnaround known as ‘Morning in America’ – adding that “people don’t want to hear the reality and the truth that we’re facing.” The following discussion, with Harry Dent, outlines their perspectives on the looming collapse of free market prosperity and the desctruction of American wealth as policymakers “take our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that’s been built up and created by the American people over decades and decades.” The Fed, Stockman concludes, “is a rogue institution,” and their actions have led us to “one of the scariest moments in our history… it’s a festering time-bomb and we’re not sure when it will explode.”[..]

David Stockman: People don’t want to hear the reality and the truth that we’re facing. But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say the fed is out of control. Its balance sheet is exploded. It’s printing money like never before. Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets. I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt.

I’m an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it’s 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that’s been built up and created by the American people over decades and decades. So people don’t want to hear the warning. They don’t want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must.

(Click link for video)

That would be a yes: “David Stockman: … massive money printing by central banks on a worldwide basis is inherently deflationary..”

• Are Central Banks Creating Deflation? (Zero Hedge)

Last week we noted that with the start of Q€ just around the corner, the ECB finds itself in a rather absurd situation. In what we called the ultimate easy money paradox (or the ultimate Keynesian boondoggle), Mario Draghi and crew are doomed to trip over their own policies as they (literally) attempt to monetize twice the net supply of eurozone fixed income this year. The problem is two-fold: 1) the central bank’s adventures in NIRP-dom mean anyone willing to sell their EGBs would face the truly silly prospect of sending the proceeds right back where they came from, except at a cost of 20 bps (negative deposit facility rate), and 2) because the central bank’s easy money policies have compressed credit spreads, sellers who wanted to reinvest the cash they would theoretically receive for their EGBs would have to do so at ridiculously low rates, a scenario that would compound QE’s already negative effect on NIM for banks and would be absolutely untenable for insurers.

So what we have “is one deflation-fighting policy stymying another [and] the central bank’s previous efforts to drive down rates thwarting its current plans to … drive down rates.” Now, courtesy of Citi’s Matt King, it’s our distinct pleasure to present yet another wonderfully ridiculous paradox inadvertently created by central banks who apparently aren’t capable of understanding when they’re just pushing on a string: manufactured deflation or, more poignantly, just what the doctor did not order. Here’s Citi:

It’s that linkage between investment (or the lack of it) and all the stimulus which we find so disturbing. If the first $5tn of global QE, which saw corporate bond yields in both $ and € fall to all-time lows, didn’t prompt a wave of investment, what do we think a sixth trillion is going to do? Another client put it more strongly still. “By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”

Ultimately, the question is whether the ceaseless printing of money is actually creating any demand, and for King, the answer is pretty clearly “no”: “QE, and stimulus generally, is supposed to create new demand, improving capacity utilization, not reducing it. But … it feels ever more as though central bank easing is just shifting demand from one place to another, not augmenting it.”

A lot.

• Negative Yields: What Could Go Wrong? (CNBC)

Some central banks have cut interest rates into negative territory in an effort to eke out some economic growth, but the step could spur unintended, counterproductive outcomes. “Negative rates could backfire,” Francesco Garzarelli, co-head of macro markets research at Goldman Sachs, said in a note Friday. “At least some segments of the population could feel poorer, and less secure,” he said. “Rather than lifting consumption and borrowing, ultra-loose monetary policy could perversely lead to an increase in precautionary savings and a slower economic recovery.” In an effort to ward off potential deflation and bolster nearly flat-lined economic growth, some central banks – including the ECB, the Swiss National Bank and central banks in Sweden and Denmark – have cut rates into negative territory.

A big chunk of the government bond market has gone negative: JPMorgan estimated that in January, around $3.6 trillion worth of developed market government bonds—or 16% of its Global Bond Index—was at a negative yield. That’s something that can spur new problems, Goldman said, noting concerns that pension funds and insurance companies may struggle to meet guaranteed payouts. “Today’s very low or even negative fixed income yields often are not large enough to match future liabilities,” Goldman said, noting insurance companies are generally assuming forward rates will be positive and above current rates. If low or negative yields persist, making guaranteed products work will become increasingly difficult, it said. In addition, if banks’ profitability takes a hit from negative rates, it could actually discourage bank lending, hurting efforts to revive economic activity, Goldman said.

There’s also the risk of asset bubbles forming, Garzarelli said, adding the risk is especially high for “high duration” assets such as technology stocks and high-dividend-paying stocks, which already have “eye-watering” valuations. Others also believe ZYNY, or zero-yield to negative-yield, may not follow the theoretical playbook in the real economy. “Traditional economic theory suggests that low interest rates will encourage households to borrow more, both to acquire housing and also to favor present consumption over future consumption,” Michala Marcussen at SocGen said in a note dated Sunday. But in practice, it may not work as households are already relatively highly indebted, labor markets remain fragile and regulations have become more demanding, she said. “Indeed, households may even opt to save more to compensate for low yields, and all the more so in ageing populations,” Marcussen said.

Ironically, Ukrainians are spending like crazy just so they have things, and not a rapidly falling currency, in their hands. The Greeks do the opposite: they spend even less.

• Greek Debt Becoming Less Sustainable (Kathimerini)

The agreement between the Greek government and its lenders, which was sanctioned by the Eurogroup last Tuesday, appears to be more of a respite and less of a sea change in the relationship between the two sides. The apparent confidence gap is bound to aggravate economic conditions and undermine talks on debt relief unless it is bridged fast. Refraining from adversarial statements is the least they can do at this point, especially some ministers. According to the latest revision of gross domestic product data, based on seasonally adjusted figures, the Greek economy shrank by a revised 0.4% in the last quarter of 2014 compared to the previous quarter as opposed to a 0.2% drop in the flash estimate. This brought the real GDP growth rate to 0.75% for the whole year, still better than earlier forecasts, ranging between 0.4 and 0.6%.

Political uncertainty appears to have taken its toll as households and businesses cut back on spending. Unfortunately, businessmen and others think this trend has continued in the first months of 2015. If they are right, real GDP will dip again in the first quarter of this year, compared to the last one in 2014. This will make it unlikely to reach the budget goal of 2.9% annual growth in 2015. Moreover, international investment banks and others are downgrading this year’s economic growth forecasts, ranging between 0.6 and 2%. With the consumer price index continuing to decline, the prospects for an end to deflation do not look promising at this point. In the 12-month period from February 2014 to January 2015, average prices as measured by the CPI decreased by 1.4% year-on-year.

Even if deflation settles closer to a 1% average decline, nominal GDP is likely to be little changed and may even shrink, assuming real economic activity disappoints. This is not a good omen for the sustainability of the Greek public debt, bankers and others point out. This is even more the case if one thinks the country’s official creditors will accept the government’s arguments and economic reality, lowering the target of the primary budget surplus to 1.5% of GDP for 2015. Readers are reminded that the surplus target has been set at 3% of GDP in the program for this year and 4.5% next year. The country is projected to pay about 6 billion euros, or more than 3% of GDP, in interest payments to its creditors in 2015. In other words, interest payments will exceed the likely primary budget surplus, adding to the public debt stock.

Merkel told him to.

• German Finance Chief Schaeuble Softens Tough Tone Against Greece (Telegraph)

German finance minister Wolfgang Schaeuble has softened his hard-line attitude towards Greece, saying its new Left-wing Syriza government needs “a bit of time” but appears to be able to work towards resolving its debt crisis. “The new Greek government has strong public support,” Mr Schaeuble told German newspaper Bild am Sonntag. “I am confident that it will put in place the necessary measures, set up a more efficient tax system and in the end honour its commitments. You have to give a little bit of time to a newly elected government,” he told the Sunday paper. “To govern is to face reality.” Mr Schaeuble added that his Greek counterpart, Yanis Varoufakis, despite their policy clashes, had “behaved most properly with me” and had “the right to as much respect as everyone else”.

It was an abrupt change in tone for Mr Schaeuble, who has repeatedly exchanged jibes with Mr Varoufakis since the Greek election in January brought in an anti-austerity government. Ahead of Friday’s crucial parliamentary vote in Germany, where MPs voted overwhelmingly to extend Greece’s existing financial aid programme until June, Mr Schaeuble had warned that Greece would not receive “a single euro” until it meets the pledges of its existing €240bn bail-out programme. “If the Greeks violate the agreements, then they have become obsolete,” a visibly angry Mr Schaeuble said at a meeting on Friday to persuade German MPs to support the deal ahead of the parliamentary vote. “Mr Varoufakis had not done anything to make our lives easier,” he added. After German MPs voted for the four-month bail-out extension, which Mr Schaeuble insisted was not a new finance deal for the troubled country, Greece pledged to implement reforms and savings.

Nothing can save the euro.

• Greece Is Being Forced Into Purgatory To Save The Euro (Telegraph)

The nickname for the IMF in the markets is “It’s mostly fiscal”, reflecting the IMF’s view that when a country gets into trouble, the manifestation is a huge government budget deficit. And the cure involves spending cuts and higher taxes. That is exactly what happened in Greece. But there was a difference. In most cases, the traditional IMF medicine counter-balances fiscal tightening with a devaluation of the exchange rate. The idea is that as the fiscal tightening squeezes domestic demand and threatens to cause higher unemployment, then a more competitive currency encourages net exports. Essentially, exports fill the hole left by the retreating government But this was not possible in the Greek case because the country does not have its own currency – because it joined the euro.

The only way of compensating for this absence was to allow domestic deflation of prices to produce an “internal devaluation”. What a laugh! We learned in the 1930s that this does not work. Deflation is extremely slow and painful and, even if it succeeded in improving competitiveness, it would worsen the debt ratio because it reduces the money value of GDP (the denominator of the ratio). The result is that Greece is on the road to misery, with no obvious escape. Why don’t the Germans understand the logic of this argument? They tend to look at matters with regard to debt – and economic policy more generally – moralistically. The Greek public sector has been wasteful in the extreme and Greek taxpayers have treated paying tax as near-voluntary. Accordingly, they have had it coming to them.

When they reform themselves, then the economy will bounce back. I am speechless at this attitude. Yes, the Greek public sector has been appallingly wasteful and making it less so is an important part of boosting Greece’s sustainable growth rate. But the current priority is not that, but boosting Greece’s actual growth rate now – and that is all about demand. There is no such thing as a free spending cut. Even tax evaders and under-employed public servants go shopping. Why do the IMF and the other lenders persevere with this destructive path? The answer is IMP: “It’s mostly political.” That is to say, it is driven by the overriding will to keep the euro on the road. By now you should know my answer. Greece should come out of the euro and allow its new currency to depreciate sharply, perhaps by 30pc to 40pc.

Curious how several parts of the ‘EU’ act independently from each other.

• How Jeroen Dijsselbloem Did The Deal To Extend The Greece Bailout (FT)

A first eurogroup meeting to start the process broke up in acrimony. Mr Dijsselbloem tried again five days later but the ensuing bust-up proved even more spectacular: Mr Varoufakis marched out of the session accusing the Dutchman of reneging on a deal Athens had struck with Pierre Moscovici, the European Commission s economic chief. Mr Dijsselbloem blames the commission, which has typically been more lenient towards Greece than its other creditors, saying its intervention had short-circuited proper procedure and that he had been kept in the dark. The Greeks then thought they had an agreement, Mr Dijsselbloem said. I was not involved in that, and that s not very smart.

If you want to get an agreement with the eurogoup, it would help to inform me of what you re trying to do. Instead, Mr Dijsselbloem issued his own, far tougher proposal, which quickly leaked to the press. He put his head in his hands to mimic his reaction upon learning of the leak, presumably orchestrated by Mr Varoufakis. I know in politics it’s all about the frame and who gets to frame first, he said. But if you’re in such a delicate process, trying to rebuild trust, trying to get a process going, to then .. walk into the press room and say: Oh, these guys can’t be trusted, look what they re trying to push down our throats. That was just not very helpful.

A third and final eurogroup session was held the day after Athens finally sent its request for an extension, and Mr Dijsselbloem changed strategy. The key players in the debate were all present: the three institutions that monitor Greece s bailout (the commission, the European Central Bank and the International Monetary Fund) along with the Greeks and the Germans, to put it quite bluntly , Mr Dijsselbloem said. Each was brought in for pre-meeting negotiations. But instead of dealing with Mr Varoufakis, Mr Dijsselbloem spoke only to Mr Tsipras over the phone. I didn’t see Varoufakis at all that morning, he said. I didn’t speak to him. I said to Tsipras, this had to be it. And I think after 15 minutes he called me back, and there was one more word we managed to change. And that was it.

Nice scuffle…

• Alexis Tsipras Comes Under Fire From Spanish Prime Minister (Guardian)

Greece’s anti-austerity government has denied that it sees Europe through the prism of “hostile and friendly countries” as the Spanish prime minister Mariano Rajoy hit back at accusations that Spain and Portugal had deliberately tried to topple the new leftist-led administration. The war of words erupted when Greek premier Alexis Tsipras attacked the sabotage tactics that had, he said, been employed by Lisbon and Madrid in an effort to scupper the chances of a successful end to the negotiations over the eurozone’s extension of the Greek bailout programme. He accused the Iberian partners of deliberately taking a hard line in the talks because they feared the rise of radical forces in their own countries.

“We found opposing us an axis of powers … led by the governments of Spain and Portugal which, for obvious political reasons, attempted to lead the entire negotiations to the brink,” Tsipras told party members on Saturday. “Their plan was, and is, to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries… And mainly before the elections in Spain.” Rajoy responded angrily on Sunday, saying that Spain had stood by Greece in solidarity by contributing to the debt-stricken country’s €240bn bailout. “We are not responsible for the frustration generated by the radical Greek left that promised the Greeks something it couldn’t deliver on,” he said.

Aides close to Tsipras insisted that Athens had little desire to “seek enemies abroad,” but the leftist leader had a duty to disclose the details of last month’s dramatic negotiations with creditors to keep the bankrupt country afloat. “Prime minister Alexis Tsipras was obliged to relate in detail to the Greek people the hard negotiations at the crucial eurogroup that led to the agreement,” said the insiders. “The attitude [shown by] governments towards the deal isn’t a secret – after all such views had become publicly known from the first moment, which is only right.”

More threats for Rajoy. Beware, the Spanish army stands ready to occupy Barcelona.

• Catalonia Prepares To Set Up Own Foreign Missions, Tax System (RT)

Catalonia is preparing its own tax system, and creating a network of foreign missions as it prepares for a snap regional vote on independence. Recently Spain’s top court ruled that the region’s symbolic referendum vote in November was unconstitutional. Nationalist leaders in the northeastern region have urged a snap local vote on the issue of independence on September 27, AFP reported. Catalan president Artur Mas and his government are reportedly working on tax, diplomacy, and social security restructuring in case Catalonia becomes an independent state. The focus is on taxation as the Catalan authorities now collect only 5% of the taxes raised in the region.

Last November, Catalan president Artur Mas organized a symbolic vote on independence, with 80% voting in favor. However, the turnout was only 40%. Catalonia has 7.5 million residents (16% of Spain’s population), and represents some 20% of the country’s GDP. Alone, the region could collect €100 billion in taxes yearly, much more than Catalonia would need if it becomes independent, said Joan Iglesias, a former Spanish tax inspector, who is now behind the Catalan tax reform. “Everyone knows that Catalonia would be viable economically. It is the most economically productive territory in Spain,” Iglesias told AFP. Apart from the tax reform, Catalonia would need to establish its own central bank, upgrade computer systems and employ more civil servants.

Also, the region says it needs to open more foreign offices. Currently, Catalonia is represented in the UK, France, Germany, the US, Belgium and has recently set up missions in Austria and Italy. In February, Mas set up a commission responsible for carrying out the tasks essential for an independent state. Plus, he ordered a study into the steps Catalonia needs to take to make sure the services like telecommunications would function in case of secession. However, “work is advancing too slowly,” Catalan lawmaker with the separatist Esquerra Republicana de Catalunya (ERC) party, Lluis Salvador, told AFP. “We need to streamline our efforts so we arrive at the elections in September at a much more advanced state.”

The ECB QE will be the worst central bank failure in a long time.

• ECB Braces For QE As Others Shift Rates (Reuters)

Greek funding and quantitative easing in Europe, an expected rate cut in Australia and the buoyant U.S. labor market are set to be the focus of an economic week dominated by a host of central bank meetings. Greece may have secured an extension of its bailout last week, but it remains reliant on emergency funding.The European Central Bank’s Governing Council convenes in Cyprus on Thursday and may take a decision on whether to accept Greek government bonds as collateral for its direct ECB funding, which it stopped doing at the start of February.If the ECB does not – and it most likely will not – it could be forced to prolong the provision of Emergency Liquidity Assistance (ELA) to the Greek central bank.

“The Greek question will be a hot topic,” said ING Chief Eurozone Economist Peter Vanden Houte. “(Greek Finance Minister Yanis) Varoufakis has been saying the country is counting on the ECB for finances over the next few months.”ECB President Mario Draghi is also expected to provide further details on the bank’s €1 trillion government bond buying program, which begins in March. He may face questions about the program’s ability to reach its target, such as how the ECB intends to convince domestic banks to sell their government debt, with the prospect of then parking the money with the ECB at a negative interest rate. The ECB will also release new economic forecasts. Chief Economist Peter Praet said last week that it was likely to revise upward its expectations for growth in the euro zone, with low oil prices and a weak euro helping.

Yeah! Let’s go after France.

• Merkel’s Bavarian Allies Criticise EU Exception For French Deficit (Reuters)

A leading member of German Chancellor Angela Merkel’s conservative allies in Bavaria has criticised the European Commission’s decision to give France two extra years to cut its deficit, a letter seen by Reuters shows. On Wednesday Brussels said it would give France until 2017 to bring its deficit below the EU limit of 3% of GDP, sparing Paris a fine and giving it a new grace period after it missed a second deadline to put its finances in order. The decision has been condemned by some euro zone policymakers, who said it undermines the credibility of EU budget rules which were tightened in recent years to prevent overspending and a future sovereign debt crisis. Gerda Hasselfeldt, head of the Christian Social Union (CSU) parliamentary group, wrote to European Commission President Jean-Claude Juncker in a letter dated Feb. 27 to say that the timing of Brussels’ decision left a “bad aftertaste”.

Hasselfeldt wrote: “Right now, at a time when we’re facing big challenges in our responsibility for the European Union and the euro zone and when we’re working on the principle of solidarity in return for solidity, it’s extremely important not to allow any exceptions.” She said the euro zone was vehemently urging Athens to stick to rules set by the Eurogroup of euro zone finance ministers despite significant domestic resistance, and that while she did not want to compare Greece with France, “stringent action” was the only way to ensure Europe and the euro zone remain credible. “We should not create the dangerous impression that we want to apply double standards,” Hasselfeldt said, adding that the same rules needed to apply to all countries whatever their size.

Scary story. Since I spent the better part of the past two years in Holland, I’ve heard a lot about it.

• Bells Toll For Europe’s Largest Gas Field (Reuters)

Dutch church bells that for centuries have tolled to warn of floods across the low-lying countryside are sounding the alarm for a new threat: earthquakes linked to Europe’s largest natural gas field. “Money can buy a lot of things, but a building like this cannot be replaced,” said Jur Bekooy, a civil engineer with the Groningen Old Churches Association, pointing to cracks in the ceiling and walls of the 13th-century Maria Church in the village of Westerwijtwerd. Long ignored, voices like Bekooy’s are being heard as elections loom this month and following a damning report from the independent Dutch Safety Board. It accused the government and the field’s operators, Shell and Exxon Mobil, of ignoring the threat of earthquakes linked to the massive Groningen gas field for years.

There are now questions about the future exploitation of the field that lies under the northern province of Groningen, with implications that reach well beyond its significance for Dutch state coffers. Lessons from Groningen, which lies far from any natural fault line, feed into a debate over the threat posed by hydraulic fracturing in the United States, China, Britain and elsewhere. The world’s 10th largest gas field, Groningen is expected to supply the bulk of the Netherlands’ annual gas needs of 20-30 billion cubic meters (bcm) until the mid-2020s. The Dutch also have contracts to sell 40-60 bcm annually to buyers in Germany, Britain, Italy, Belgium and France. In all, Groningen and a few smaller Dutch fields supply 15% of Europe’s gas consumption, providing one alternative to Russian supply. When Economic Affairs Minister Henk Kamp recently ordered production at Groningen cut by 16%, gas prices jumped across Western Europe.

Groningen has been in continuous production since 1963. As far back as 1993 small quakes were definitively linked to its output. But in the late 2000s, they suddenly became more frequent and stronger. With government finances under pressure from the 2008 financial crisis, production at Groningen had been ramped up from around 30 bcm in 2007 to more than 50 bcm by 2010. The money generated helped the Dutch cushion the blow of austerity policies championed by the Cabinet. As Prime Minister Mark Rutte publicly pressed southern European governments to bring their spending under control, Dutch government gas revenues of €15 billion by 2013 were about the size of the national deficit.

Without gas, the deficit that year would have doubled from 2.5% to 5%, violating eurozone budget rules. But on Aug. 16, 2012, an earthquake with its epicenter under the town of Huizinge marked the beginning of the end for aggressive output from Groningen. It registered 3.6 on the Richter scale, larger than any predicted by engineers at NAM, the joint venture field operator between Shell and Exxon. “Until the Huizinge earthquake, we had 1,100 damage claims in 20 years,” said NAM spokesman Sander van Rootselaar. “After the quake we had more than 30,000.” Earthquakes caused by gas production are usually small, unless they happen near a fault line and can trigger a larger natural quake. But in Groningen they occur close to the surface, damaging stone and brick buildings never designed to withstand shaking. Of the 50 churches located above the field, some 40 have been affected, said Bekooy.

Getting worse fast.

• Ukrainian Economy Starts to Buckle Behind Cloak of Calm in Kiev (Bloomberg)

Ukrainians are seeing signs the economy is cracking under the weight of war and the risk of default. While restaurants and cafes are bustling and shelves are full in Kiev, a city of 3 million, a recession stretching into a second year is igniting angst about the return of the disarray unleashed by the Soviet Union’s collapse in 1991. Especially outside the capital, that era of food shortages, hyperinflation and mass unemployment doesn’t seem so far away.= “My business is about to close and there are many more like it,” said Valentyna Lozova, a 65-year-old accountant in Kiev. “Salaries aren’t rising, inflation is galloping and the hryvnia’s in freefall. I’m afraid of the future.”

It’s becoming harder for Ukrainians, mindful of the thousands who’ve died in a 11-month insurgency near the nation’s border with Russia, to put a brave face on their economic woes. With much of the country’s industrial base in ruins and a looming debt restructuring, the effect may be felt for years. The economy is set to plunge 12% in 2014-15 and the inflation rate jumped to 28.5% in January, the world’s second-highest behind Venezuela. As the economy deteriorated, the hryvnia has sunk 70% in the past year, the most in the world, sparking panic in some towns. “I see people every day in supermarkets buying sacks of flour and cereals as prices grow,” said Iryna Lebiga, a 31-year-old mother of three who’s struggling to find a buyer for her unprofitable sheep farm in Poltava, a 350-kilometer (220-mile) drive east of Kiev. “People don’t have money. Someone approached us last year but my husband thought he offered too little. Now, nobody offers even half of that.”

Even in Kiev, some people were spooked into stocking up on staples after the central bank banned foreign-currency trading for one day last week and the hryvnia’s street price plunged. The Silpo supermarket chain rearranged delivery to its outlets to keep up with growing demand, its press office said in an e-mail. While the recession isn’t yet as deep as the last one in 2009, this contraction is longer-lasting and Ukraine entered it after two years of almost zero-growth. The scale of the malaise risks triggering disquiet among some Ukrainians who helped unseat their Russian-backed leader last year with the hope of rebuilding the nation, according to Citibank in Moscow.

“But when you carry a life in you, what she breathes, eats and drinks are all your responsibility, and then you feel the fear.”

• Documentary on Air Pollution Grips Over 30 Million Chinese in 1 Day (NY Times)

Millions of Chinese, riveted and outraged, watched a 104-minute documentary video over the weekend that begins with a slight woman in jeans and a white blouse walking on to a stage dimly lit in blue. As an audience looks on somberly, the woman, Chai Jing, displays a graph of brown-red peaks with occasional troughs. “This was the PM 2.5 curve for Beijing in January 2013, when there were 25 days of smog in that one month,” explains Ms. Chai, a former Chinese television reporter, referring to a widely used gauge of air pollution. Back then, she says, she paid little attention to the smog engulfing much of China and affecting 600 million people, even as her work took her to places where the air was acrid with fumes and dust.

“But,” Ms. Chai says with a pause, “when I returned to Beijing, I learned that I was pregnant.” She has said her concerns about what the filthy air would mean for her infant daughter’s health prompted her to produce the documentary, “Under the Dome.” It was published online Saturday, and swiftly inspired an unusually passionate eruption of public and mass media discussion. The newly appointed minister of environmental protection even likened the documentary to “Silent Spring,” Rachel Carson’s landmark exposé of chemical pollution. “I’d never felt afraid of pollution before, and never wore a mask no matter where,” Ms. Chai, 39, says in the video. “But when you carry a life in you, what she breathes, eats and drinks are all your responsibility, and then you feel the fear.”

By early Monday morning, “Under the Dome” had been played more than 20 million times on Youku, a popular video-sharing site, and it was also being viewed widely on other sites. Tens of thousands of viewers posted comments about the video, many of them parents who identified with Ms. Chai’s concern for her daughter. Some praised her for forthrightly condemning the industrial interests, energy conglomerates and bureaucratic hurdles that she says have obstructed stronger action against pollution. Others lamented that she was able to do so only after leaving her job with the state-run China Central Television.

Debt Rattle November 23 2014

Nov 232014

November 23, 2014 Posted by Raúl Ilargi Meijer at 11:30 am Finance Tagged with: Black Friday, central bankers, China, debt, deficit, food bank, holiday sales, oil, OPEC, rate cut Comments Off

Hans Behm Windy City tourists at Monroe Street near State 1908

• China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)

• The End of China’s Economic Miracle? (WSJ)

• Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)

• Central Banks in New Push to Prime Pump (WSJ)

• Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)

• “I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)

• UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)

• Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)

• Pension Funds Lambaste Private-Equity Fees (WSJ)

• Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)

• Google Break-Up Plan Emerges From European Parliament (FT)

• European Season of Political Discontent Rung In by UKIP (Bloomberg)

• The Curse Of Black Friday Sales (NY Post)

• UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)

• Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)

• Food Banks Face Record Demand As Low-Income Families Look For Help (PA)

• Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)

• Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)

• We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

“The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast. Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth .. ”

• China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)

Earlier [this week], the People’s Bank of China slashed the benchmark lending rate by 40 basis points, to 5.6%, and pushed down the 12-month deposit rate 25 basis points, to 2.75%. Few analysts expected this. The PBoC—which, unlike many central banks, is very much controlled by the central government—generally cuts rates only as a last resort to boost growth. The government has been rigorously using less broad-based ways of lowering borrowing costs (e.g. cutting reserve requirement ratios at small banks, and re-lending to certain sectors). The fact that the government finally cut rates suggests that these more “targeted” measures haven’t succeeded in easing funding costs for Chinese firms. The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast.

Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth, given that the economy grew only 7.3% in the third quarter, its slowest pace in more than five years. But wait. Isn’t the Chinese economy supposed to be losing steam? Yes. The Chinese government has acknowledged many times that in order to introduce the market-based reforms needed to sustain long-term growth and stop piling on more corporate debt, it has to start ceding its control over China’s financial sector. Things like, for instance, setting the bank deposit rate artificially low, which generally punishes savers to benefit state-owned enterprises (SOEs). But clearly, the economy’s not supposed to be decelerating as fast as it is. Tellingly, it’s been more than two years since the central bank last cut rates, when the economic picture darkened abruptly in mid-2012, the critical year that the Hu Jintao administration was to hand over power to Xi Jinping.

The all-out push to boost growth that followed made 2013 boom, but also freighted corporate balance sheets with dangerous levels of debt. But this could only last so long; things started looking ugly again in 2014. Up until now, attempts to buoy the economy have mainly focused on helping out small non-state companies, says Mark Williams, chief economist at Capital Economics, in a note. Often ineligible for state-run bank loans, small firms have mostly been paying steep rates for shadow financing. Since the benchmark rate cut affects official loans given out by mostly state-run banks, today’s cut will mainly benefit SOEs, hinting that the authorities “apparently feel larger firms are now in need of support too,” writes Williams. In addition, lowering the amount banks charge for capital makes them less likely to lend. Though that should in theory be offset by the lowering of the deposit rate, savers have been shunting their money into higher-yielding wealth management products, making deposits increasingly scarce.

“I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation.”

• The End of China’s Economic Miracle? (WSJ)

On a trip to China in 2009, I climbed to the top of a 13-story pagoda in the industrial hub of Changzhou, not far from Shanghai, and scanned the surroundings. Construction cranes stretched across the smoggy horizon, which looked yellow in the sun. My son Daniel, who was teaching English at a local university, told me, “Yellow is the color of development.” During my time in Beijing as a Journal reporter covering China’s economy, starting in 2011, China became the world’s No. 1 trader, surpassing the U.S., and the world’s No. 2 economy, topping Japan. Economists say it is just a matter of time until China’s GDP becomes the world’s largest. This period also has seen China’s Communist Party name a powerful new general secretary, Xi Jinping , who pronounced himself a reformer, issued a 60-point plan to remake China’s economy and launched a campaign to cleanse the party of corruption.

The purge, his admirers told me, would frighten bureaucrats, local politicians and executives of state-owned mega companies—the Holy Trinity of vested interests—into supporting Mr. Xi’s changes. So why, on leaving China at the end of a nearly four-year assignment, am I pessimistic about the country’s economic future? When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years—a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast. My own reporting suggests that we are witnessing the end of the Chinese economic miracle.

We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok. Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors. I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales. From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

“China’s had a decade which has been very, very similar to that of the US in the 1920s.”

• Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)

Merryn Somerset Webb: That brings us, I guess, to China. You were one of the first to point out the native problems in China. Your rather amazing video wandering around empty housing estates, etc, which I think was pretty well watched. What’s your view now?

Hugh Hendry: I think my view would surprise you. Before I surprise you, I would like to seek legitimacy of my view by telling you that I have made money. It’s been my most successful profit centre in the year to date, and we’ve made over 5% trading in China-related macro themes. In terms of surprising you, I am more sanguine about China. Actually I’ve been rather impressed by their policy responses over the last two years. When I look at China, China has got two components. It’s got this manic investment gross capital formation and in something which has been deepening these global deflationary fears, because they kept expanding over capacity industries such as cement and steel and undermining prices in the rest of the world. That in itself lowers these inflation figures below Central Bank targets. It becomes reflexive and then the central bank says “Crikey, I’ve got to be radical here. I’ve got to buy equities”. So there’s been that going on.

On the other hand, there’s been a robbing Peter to pay Paul, and China’s had a decade which has been very, very similar to that of the US in the 1920s. The US, people forget this, but Liaquat Ahamed – I’ve just destroyed his name, forgive me, but the Lords of Finance author – I reread it recently and I was very taken by the notion of how mean the Fed had been in the 1920s. Again, I say it to you with cathartic crisis, the response of the rest of the world is to be long dollars invested in America and that was certainly the case in the 1920s. But America was recovering nicely from the Great War and it had this incredible productivity revolution. There was great demand for credit and so it was fine on its own.

What can you expect from Jon Hilsenrath?

• Central Banks in New Push to Prime Pump (WSJ)

Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems. The People’s Bank of China announced a surprise reduction in benchmark lending and deposit rates, the first cuts since 2012, after other measures to boost faltering growth fell short. Hours later, European Central Bank President Mario Draghi said the bank might take new measures to boost inflation, now near zero, his strongest signal yet that the ECB is getting closer to buying a broader swath of eurozone bonds.

The moves came less than two weeks after the Bank of Japan said it would ramp up its own securities-purchase program known as quantitative easing, or QE, as the Japanese economy fell into recession. The twin steps Friday, half a world apart, sent global stock prices sharply higher, bolstered the U.S. dollar and boosted oil prices. The Shanghai Composite Index rose 1.4%, while Germany’s DAX index jumped 2.6%. The Dow Jones Industrial Average finished up 0.51%, and at 17810.06 is now closing in on the 18000 threshold that has never been surpassed. The Nikkei rose 0.3%. Amid the flurry of central bank activity, the dollar was the winner among global currencies, rising 0.27% against a broad index of other currencies to put it up 9% for the year.

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix. The steps, particularly in Europe, represent a subtle endorsement of the Federal Reserve’s easy-money approach to postcrisis economics, but come as the U.S. central bank shifts its own low-interest-rate policies. The Fed last month ended a six-year experiment with bond purchases, and it has begun talking about when to start raising short-term interest rates as the U.S. economy improves, though those discussions are early and rate increases are likely months away, at the earliest.

“Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending.” Makes you wonder about Christmas sales.

• Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)

The European Central Bank might like to update its website – specifically, its educational video to teach teenagers about the importance of keeping prices in check. In it, a spotted, fanged, snarling “inflation monster” floods money into the marketplace, making vivid the perils of prices rising too quickly. Near the end of the cartoon a much smaller, smiling, pink creature makes a brief appearance – the “deflation monster”. Fear of inflation is understandable in a continent that saw devastating hyperinflation last century – a shock seen by some as pivotal in the rise of Hitler. But look around the eurozone now and the bigger threat is deflation. Even in the UK, inflation is well below the Bank of England’s target and the central bank expects it to fall further over coming months.

Oil prices have been falling, as have other commodity prices. In Britain a supermarket price war is pushing food prices down further still. Wages are barely budging and a price freeze for energy bills should also help to keep inflation low this winter. The Bank fully admits it failed to forecast this significant drop below the government-set 2% target for inflation. Governor Mark Carney used the Bank’s latest forecasts earlier this month to warn of “some pretty big disinflationary forces”, largely coming from abroad. He predicted inflation would fall even further, to below 1% over the next six months. If it does, he will face the unenviable task of being the first governor since BoE independence in 1997 to write a letter to the chancellor explaining why inflation is so low.

All of the 14 letters written until now have been because inflation missed the target too far in the other direction, overshooting by more than 1 percentage point. Aside from the awkwardness of the Dear George moment, there are very real reasons why Carney is saying the Bank needs to get inflation back to target. The inflation monster may be scary, but the deflation monster is by no means harmless. Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending. Economic stagnation and rising unemployment can follow.

Why would anyone doubt that?

• “I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)

I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets, and have stayed in the alternative investment space ever since, and now run a small fund. I understand better than most I would think, the “mechanics” of the markets and how they have evolved over time from the auction market to ‘upstairs”. I am a self-taught, top down global macro economist, and historian of “money” and the Fed and all economic and governmental structures in the world. One thing so many managers don’t understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly.

Most sophisticated investors know to be successful, one must be a contrarian, and this philosophy is in parallel. Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself. Why was I so bearish on gold at its peak a few years back for instance? Because of the ascent of non-linearity of price, and the massive consensus buildup of bulls. Didier Sornette, author of “Why Stock Markets Crash”, I believe correctly summarizes how Power Law Behavior, or exponential consensus, and how it lead to crashes. The buildup of buyers’ zeal, and the squeezing of shorts, leads to that “complex system” popping. I have traded as a contrarian with these philosophies for some time.

The point here is, our general indices have been at that critical point now for a year, without “normal” reactions post critical points in time, from longer term time scales to intraday. This suggests that many times, there is only an audience of one buyer, and as price goes up to certain levels, that buyer extracts all sellers. After this year and especially this last 1900 point Dow run up in October, and post non-reaction, that I am 100% confident that that one buyer is our own Federal Reserve or other central banks with a goal to “stimulate” our economy by directly buying stock index futures. Talking about a perpetual fat finger! I guess “don’t fight the Fed” truly exists, without fluctuation, in this situation. Its important to note the mechanics; the Fed buys futures and the actual underlying constituents that make up the general indices will align by opportunistic spread arbitragers who sell the futures and buy the actual equities, thus, the Fed could use the con, if asked, that they aren’t actually buying equities.

“Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product. Britain’s debt pile has increased by almost £100bn over the past year alone .. ”

• UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)

The Government’s ability to reduce the deficit this year and tame Britain’s huge debt mountain is in doubt, despite a slight fall in borrowing last month. Public sector net borrowing, excluding public sector banks, fell to £7.7bn in October, from £7.9bn in the same month a year ago. The deficit was also in line with economists’ expectations. While an across-the-board rise in tax receipts, including a 1.5pc increase in income tax to £10.5bn in October, helped to reduce borrowing last month, the deficit remains £3.7bn – or 6pc – higher this year than in 2013. The Office for Budget Responsibility had forecast a 7pc increase in income tax receipts this year, which are currently down 0.4pc compared with the same period in 2013, at £81.5bn. Income from VAT and stamp duties increased by 4.9pc and 3.6pc, to £10.3bn and £1.3bn respectively in October, while corporation tax payments also edged up, despite weak oil and gas revenues.

The OBR is expected to revise up the Government’s borrowing forecasts on December 3, when the Chancellor will present the Autumn Statement. This will reduce the likelihood of any big tax giveaways before the next election. Samuel Tombs at Capital Economics said: “This year’s poor borrowing figures limit the Chancellor’s room for manoeuvre and undermine his argument that the public finances can be restored to a sustainable position after the next election through spending cuts alone.” Robert Chote, the chairman of the OBR, said last month that the Government was likely to miss its income tax targets this year as weak pay growth and a surge in low paid jobs means the Treasury rakes in less revenue than predicted. A Treasury spokesperson said borrowing remained “in line with the Budget forecast” and stressed that the Government would continue to take steps to “build a resilient British economy”.

The Treasury and OBR expect a “sizeable” increase in income tax receipts from self-employed workers in January 2015 as distortions related to the reduction of the top rate of tax unwind. Economists were sceptical that any January boost would make up the current shortfall. Michael Saunders, chief UK economist at Citibank, expects the deficit to overshoot the OBR’s forecast by £13bn this fiscal year, taking borrowing up to £100bn this year. “The tax and benefit reforms of the last 15 years have proved very successful in boosting employment and workforce participation, but also have eroded the extent to which economic recovery generates a fiscal windfall,” he said. The size of Britain’s debt pile also continued to balloon in October. Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product.

Britain’s debt pile has increased by almost £100bn over the past year alone, and the Treasury is expected to pay almost £1bn a week in debt interest payments this year. Debt interest payments are now close to the Goverment’s combined transport and defence budget, with payments expected to rise to £75bn in 2018-19.

Noted this before: as capital fless junk bonds, big bad things can happen.

• Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)

Junk bond investors have a bad case of the jitters. Every bit of bad news is whipsawing prices, with bonds tumbling as much as 50% in a single day. “We’ve seen some flash crashes in the market,” said Henry Craik-White, analyst at ECM Asset Management. “If you get caught on the wrong side of a name, you can get severely punished in this market.” Investors are rattled because they’re concerned that a lack of liquidity in the bond market will make it impossible for them to sell holdings in response to negative headlines. Trading dropped about 70% since 2008, with a corporate bond that changed hands almost five times a day a decade ago now only being sold once a day on average, according to Royal Bank of Scotland. Alarms started ringing in September with the collapse of British retailer Phones 4u after Vodafone and EE refused to renew contracts. The retailer shut its business and sought creditor protection on Sept. 15, sending the company’s payment-in-kind bonds down to 1.9 pence on the pound, according to data compiled by Bloomberg.

A month later, notes of Spanish online travel service EDreams Odigeo fell 57% in one afternoon when Iberia Airlines and British Airways said they were withdrawing tickets from the company’s websites. The 10.375% bonds almost fully recovered the following trading day when the airlines reinstated the tickets. Abengoa’s debt plunged as much as 32% last week amid investor confusion about how the Spanish renewable energy company accounted for $632 million of green bonds. The Seville-based company’s 8.875% notes dropped to 74 cents on the euro from 107 cents in two days and rebounded to 95 cents after Abengoa held a conference call to reassure bondholders.

” .. a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013..”

• Pension Funds Lambaste Private-Equity Fees (WSJ)

Pension-fund managers from the Netherlands to Canada, searching for new ways to invest, lambasted private-equity executives at a conference in Paris this week for charging excessive fees. Ruulke Bagijn, chief investment officer for private markets at Dutch pension manager PGGM, said a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013. The amount accounted for half the fees paid by the PFZW pension fund, even though private-equity firms managed just 6% of its assets last year, she said. “That is something we have to think about,” Ms. Bagijn said.

The world’s largest investors, including pension funds and sovereign-wealth funds, are seeking new ways to invest in private equity to avoid the supersize fees. Some investors are buying companies and assets directly. Others are making more of their own decisions about which funds to invest in, rather than giving money to fund-of-fund managers. Big investors are also demanding to invest alongside private-equity funds to avoid paying fees. Jane Rowe, the head of private equity at Ontario Teachers’ Pension Plan, which manages Can$141 billion (US$124.4 billion), is buying more companies directly rather than just through private-equity funds. The plan invests with private-equity firms including Silver Lake Partners and Permira, according to its annual report. Ms. Rowe told executives gathered in a hotel near Place Vendome in central Paris that she is motivated to make money to improve the retirement security of Canadian teachers rather than simply for herself and her partners.

“You’re not doing it to make the senior managing partner of a private-equity fund $200 million more this year,” she said, as she sat alongside Ms. Ruulke of the Netherlands and Derek Murphy of PSP Investments, which manages pensions for Canadian soldiers. “You’re making it for the teachers of Ontario. You know, Derek’s making it for the armed forces of Canada. Ruulke’s doing it for the social fabric of the Netherlands. These are very nice missions to have in life.”

That’ one cute graph. But any article that quotes Yergin is dead in the water.

• Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)

It wouldn’t be the first time that a meeting of OPEC has taken place in an atmosphere of deep division, bordering on outright hatred. In 1976, Saudi Arabia’s former oil minister Ahmed Zaki Yamani stormed out of the OPEC gathering early when other members of the cartel wouldn’t agree to the wishes of his new master, King Khaled. The 166th meeting of the group in Vienna next week is looking like it could end in a similarly acrimonious fashion with Saudi Arabia and several other members at loggerheads over what to do about falling oil prices. Whatever action OPEC agrees to take next week to halt the sharp decline in the value of crude, experts agree that one thing is clear: the world is entering into an era of lower oil prices that the group is almost powerless to change This new energy paradigm may result in oil trading at much lower levels than the $100 (£64) per barrel that consumers have grown used to paying over the last decade and reshape the entire global economy.

It could also trigger the eventual break-up of OPEC, the group of mainly Middle East producers, which due to its control of 60pc of the world’s petroleum reserves has often been accused of acting like a cartel. Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world. “We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.” Mr Yergin spoke exclusively to The Sunday Telegraph ahead of what is being called the most important gathering of OPEC in more than 20 years.

Don’t think the Financial Times finds it a good idea.

• Google Break-Up Plan Emerges From European Parliament (FT)

The European parliament is poised to call for a break-up of Google, in one of the most brazen assaults so far on the technology group’s power. The gambit increases the political pressure on the European Commission, the EU’s executive arm, to take a tougher line on Google, either in its antitrust investigation into the company or through the introduction of laws to curb its reach. A draft motion seen by the Financial Times says that “unbundling [of] search engines from other commercial services” should be considered as a potential solution to Google’s dominance. It has the backing of the parliament’s two main political blocs, the European People’s Party and the Socialists.

A vote to effectively single out a big US company for censure is extremely rare in the European parliament and is in part a reflection of how Germany’s politicians have turned against Google this year. German centre-right and centre-left politicians are the dominant force in the legislature and German corporate champions, from media groups to telecoms, are among the most vocal of Google’s critics. Since his nomination to be the EU’s digital commissioner, Germany’s Günther Oettinger has suggested hitting Google with a levy for displaying copyright-protected material; has raised the idea of forcing its search results to be neutral; and voiced concerns about its provision of software for cars.

Google has become a lightning rod for European concerns over Silicon Valley, with consumers, regulators and politicians assailing the company over issues ranging from its commercial dominance to its privacy policy. It has reluctantly accepted the European Court of Justice’s ruling on the right to be forgotten, which requires it to consider requests not to index certain links about people’s past. The European parliament has no formal power to split up companies, but has increasing influence on the commission, which initiates all EU legislation. The commission has been investigating concerns over Google’s dominance of online search for five years, with critics arguing that the company’s rankings favour its own services, hitting its rivals’ profits.

Eh, no. UKIP did not start this.

• European Season of Political Discontent Rung In by UKIP (Bloomberg)

Some 16,867 voters in southeast England ushered in a season of European political tumult that in an extreme scenario could lead to Britain exiting the European Union, Greece quitting the euro or Catalonia seceding from Spain. Victory by the anti-EU U.K. Independence Party in a British parliamentary contest was fueled by the same sense of economic injustice and antagonism to politics-as-usual that will unsettle Europe in coming months. It also gave a flavor of the potential fallout, as the pound fell against most of its 16 major peers. “The markets have a lot to worry about,” Edmund Phelps, a Nobel Prize-winning economist at Columbia University in New York, said in an interview before the British vote. “It’s possible that we could see a swing toward the extreme right, and one must wonder what ramifications this would have for the European Union and the euro area.”

Since Greece’s runaway debt convulsed the euro region in 2010, Europe has avoided doomsday storylines like the breakup of the EU, the euro or a member state. Whether those risks were banished or merely deferred will become clearer in the next rounds of political jousting. Early elections are beckoning in Greece, Catalonia, Italy and Austria, and that’s before scheduled ballots including in the U.K. in May, Portugal in September or October and in Spain at year’s end. The re-emergence of political risk in Europe is cited by Royal Bank of Scotland Plc analysts including Alberto Gallo as among the “top trades” for 2015. Europeans rehearsed the revolt in last May’s European Parliament balloting, upping the vote count of anti-establishment parties to about 30% from 20%. The motley groups failed to form a cohesive force and mainstream parties retained control. Protest parties are now set to consolidate gains at the national level.

I’ll pay plastic, please.

• The Curse Of Black Friday Sales (NY Post)

After a tough 2014, nervous retailers couldn’t afford to wait for the traditional day after Thanksgiving to pull the trigger on holiday shopping discounts. So retail titans from Amazon to Walmart — and nearly every store in between — have been stretching the selling season with Black Friday discounts that started the day after Halloween. Macy’s, JCPenney and Toys R Us, which started opening on Thanksgiving a couple of years ago, are opening earlier than ever for Turkey Day 2014. Retail experts say the hysterical bombardment of deals both online and in stores all November long shows just how ineffective — and dysfunctional — the Black Friday business model has become. Just 28% of shoppers are expected to hit the stores the day after Thanksgiving this year, according to a survey released last week from Bankrate.com.

“Retailers know that big pop, the big Black Friday day — it’s not working,” said Bankrate.com analyst Jeanine Skowronski. Black Friday used to be the day retailers’ profit ledgers entered the black for the year. Now it’s known for chaos, stampeding crowds and deals that can be found with less hassle online or some other time. As shoppers struggle with stagnant wages and high food prices, stores are fighting to win their limited discretionary dollars and turn a profit amid all the price-cutting. Add to that, on Black Friday, picketers will be outside 1,600 Walmart stores, calling for higher wages and full-time jobs for those who want them. “Personally, I never go to a store on Black Friday—there’s no need to,” said Edward Hertzman, publisher of Sourcing Journal.

“A better sale is probably just around the corner, especially on seasonal merchandise.” Since the 2008 Black Friday trampling death of a Long Island Walmart employee by a mob of shoppers, the post Turkey Day doorbuster sales have been notorious for attracting dangerous crowds. This year, Walmart and other stores are staggering deals and trying new strategies to keep the crowds less dangerous. Stores began extending Black Friday to try to bounce back from the recession. Now, however, they have trained consumers to expect a constant stream of price cuts, and are jockeying for first place in a fiercely competitive race. The discounts may help stores reach the forecast of up to 4% revenue growth for the 2014 holiday season, but margins will suffer.

Have they incorporated Alibaba’s Singles Day yet? How about if we have one ‘special’ event every week? Would they all shop like crazy?

• UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)

Black Friday begins on Monday. If that’s the sort of sentence that elicits a double-take, I can only apologise — and say, blame the Americans. Ever a nation to milk something for all it’s worth and a bit more, the US has turned the day after Thanksgiving, when retailers cut their prices, into a week-long extravaganza. So Amazon will begin its “Black Friday Deals Week” promotions from 8am on Monday, with “lighting deals” every 10 minutes and lasting until stocks run out. The climactic day will still be Friday, and this year, more than ever, Britain will be swamped with discounts online and in the High Street. Visa Europe is forecasting that £360,000 will be spent every minute, or £6000 per second on its cards next Friday.

Once the preserve of Amazon, which in 2010 brought the phenomenon of the day after Thanksgiving as the day for retailers to offer big bargains, it’s now become one of the most important dates in the retail calendar. Friday is already set to become the biggest online shopping day in the UK. [..] In the US, Black Friday got its name from Philadelphia, where the police had to cope with the collision of shoppers heading for the sales and American football fans going to the annual Army v Navy fixture. It quickly acquired another interpretation, as the day when stores moved from being in the red to the black. UK retailers are crossing their fingers and hoping that the second meaning comes true.

So all we need to do is cut our holiday shopping?

• Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)

Global capitalism, as a system, simply doesn’t work. Russell Brand’s new book provides the proof. As does my new book. And the hundreds of other new books that are just out. And the Sainsbury’s advert. And all the current adverts for booze and perfume, chocolates and jewels, supermarkets and computer games. The gaudy, twinkly proof is going up all around us as the last of the leaves come down. It’s called Christmas. [..]

Christmas is an annual bubble – an irrational buying fever that’s actually scheduled. We know it will come and, like all bubbles, we know it will end. Unlike most bubbles, we also know precisely when it will end. The huge signs advertising a collapse in prices are already stacked in department stores’ stockrooms as the final spasm of Christmas Eve top-whack spending is taking place. At this time of year, the invisible hand gets delirium tremens – possibly from the number of drinks the invisible mouth is sticking away. Looked at with a Scrooge-like economist’s hat on (gift idea for an accountant!), this makes no sense. Millions of people are each buying hundreds of things they don’t need – often luxuries they can scarcely afford – and at a time when such items’ prices are artificially inflated because everyone else is also buying them.

Wait a couple of weeks and jumpers with reindeer on, chocolates in stocking-shaped presentation packs and sacks of brussels sprouts will be going for a song. The rational economic choice, even for an alcoholic gourmand who likes wearing jewels, would be to schedule a knees-up for 10 January. And, as every shopkeeper will tell you, a huge sector of our economy depends on this. Our already beleaguered high streets would be wastelands without it, the hellish out-of-town malls exist primarily to harness this “golden quarter” of spending. The capitalist dream that western economies aspire to live is sustained by a crazy retail spike caused by a bastardised form of religious observance.

And now, after three pieces on shopping crazes, here’s your moment of zen:

• Food Banks Face Record Demand As Low-Income Families Look For Help (PA)

Growing numbers of people on low incomes are turning to food banks to survive, new research has revealed. Almost 500,000 adults and children were given three days’ food in the first six months of the current financial year – a record – the Trussell Trust reported. The charity said the number of adults being referred to one of its 400 food banks had increased by 38% compared with the same period last year. Problems with social security were the biggest trigger for going to a food bank, but more than a fifth blamed low income. In the six months to September, 492,641 people were given three days’ food and support, including 176,565 children, compared with 355,982 during the same period in the previous year.

Trussell Trust chief executive David McAuley said: “Whilst the rate of new food banks opening has slowed dramatically, we’re continuing to see a significant increase in numbers helped by them. “Substantial numbers are needing help because of problems with the social security system but what’s new is that we’re also seeing a marked rise in numbers of people coming to us with low income as the primary cause of their crisis. “Incomes for the poorest have not been increasing in line with inflation and many, whether in low-paid work or on welfare, are not yet seeing the benefits of economic recovery. “Instead they are living on a financial knife-edge where one small change in circumstances or a life shock can force them into a crisis where they cannot afford to eat.”

“He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.”

• Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)

Foreign Minister Sergei Lavrov accused the West on Saturday of trying to use sanctions imposed on Moscow in the Ukraine crisis to seek “regime change” in Russia. His comments stepped up Moscow’s war of words with the United States and the European Union in their worst diplomatic standoff since the Cold War ended. “As for the concept behind to the use of coercive measures, the West is making clear it does not want to force Russia to change policy but wants to secure regime change,” Tass news agency quoted Lavrov as telling a meeting of the advisory Foreign and Defence Policy Council in Moscow. He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.

“Now public figures in Western countries say there is a need to impose sanctions that will destroy the economy and cause public protests,” Lavrov said. His comments followed remarks on Thursday in which President Vladimir Putin said Moscow must guard against a “colour revolution” in Russia, referring to protests that toppled leaders in other former Soviet republics. Western sanctions have limited access to foreign capital for some of Russia’s largest companies and banks, hit the defence and energy industries, and imposed asset freezes and travel bans on some of Putin’s allies.

Move over, Pussy Riot?!

• Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)

Brandon Duncan has no criminal record, but could face a life sentence of 25 years in prison as prosecutors say his latest album lent artistic motivation for a recent string of gang-related shootings. San Diego County prosecutors have charged Duncan, 33, with nine felonies connected to a wave of gang-related shootings in the California city. Although the musician has not been charged with discharging or providing firearms in the recent shootings, prosecutors say his musical lyrics encourage gang behavior. Duncan’s latest album, entitled “No Safety,” features a photograph of a revolver with bullets on the cover. The gangsta rapper, who is being held on $1 million bail, is scheduled to head to court in December. If found guilty of felony charges, Duncan could serve a life sentence of 25 years in prison, his lawyer said. San Diego police say Duncan is a gang member, who goes by the name TD.

In 2000, California, faced with an increase in gang-related violence, passed Proposition 21, which takes aim at individuals “who actively participates in any criminal street gang with knowledge that its members engage in or have engaged in a pattern of criminal gang activity.” Prosecutors, citing a section of the law, argued that Duncan, through his music and gang affiliations “willfully promotes, furthers, or assists in any felonious criminal conduct by members of that gang.” “We’re not just talking about a CD of anything, of love songs. We’re talking about a CD (cover)… There is a revolver with bullets,” said Deputy District Attorney Anthony Campagna, as quoted by the Los Angeles Times. Duncan’s lawyer, Brian Watkins, disputes the claim, saying the prosecution’s use of an obscure California law is “absolutely unconstitutional” and impedes his client’s First Amendment right to the freedom of speech.

“It’s no different than Snoop Dogg or Tupac,” Watkins, naming other rappers known for their controversial lyrics, said. “It’s telling the story of street life.” “If we are trying to criminalize artistic expression, what’s next, Brian De Palma and Al Pacino?” said Watkins, in reference to the 1983 movie “Scarface” directed by De Palma and starring Pacino.

“Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.”

• We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

One of the fears of those who seek to defend the natural world is that people won’t act until it is too late. Only when disasters strike will we understand how much damage we have done, and what the consequences might be. I have some bad news: it’s worse than that. For his fascinating and transformative book, Don’t Even Think About It: why our brains are wired to ignore climate change, George Marshall visited Bastrop in Texas, which had suffered from a record drought followed by a record wildfire, and Sea Bright in New Jersey, which was devastated by Hurricane Sandy. These disasters are likely to have been caused or exacerbated by climate change.

He interviewed plenty of people in both places, and in neither case – Republican Texas or Democratic New Jersey – could he find anyone who could recall a conversation about climate change as a potential cause of the catastrophe they had suffered. It simply had not arisen. The editor of the Bastrop Advertiser told him: “Sure, if climate change had a direct impact on us, we would definitely bring it in, but we are more centred around Bastrop County.” The mayor of Sea Bright told him: “We just want to go home, and we will deal with all that lofty stuff some other day.” Marshall found that when people are dealing with the damage and rebuilding their lives they are even less inclined than they might otherwise be to talk about the underlying issues.

In his lectures, he makes another important point that – in retrospect – also seems obvious: people often react to crises in perverse and destructive ways. For example, immigrants, Jews, old women and other scapegoats have been blamed for scores of disasters they did not create. And sometimes people respond with behaviour that makes the disaster even worse: think, for instance, of the swing to Ukip, a party run by a former banker and funded by a gruesome collection of tycoons and financiers, in response to an economic crisis caused by the banks. I have seen many examples of this reactive denial at work, and I wonder now whether we are encountering another one. The world’s wild creatures are in crisis. In the past 40 years the world has lost over 50% of its vertebrate wildlife. Hardly anywhere is spared this catastrophe. In the UK, for example, 60% of the 3,000 species whose fate has been studied have declined over the past 50 years. Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.

Debt Rattle November 18 2014

Nov 182014

November 18, 2014 Posted by Raúl Ilargi Meijer at 1:09 pm Finance Tagged with: Abenomics, aquifer, CDS, corruption, deficit, Draghi, ebola, pension, qualms, Shale, slavery, volatility 1 Response »

Dorothea Lange Saturday afternoon, Pittsboro, North Carolina Jul 1939

• Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)

• Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)

• Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)

• ‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)

• ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)

• Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)

• Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)

• Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)

• Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)

• Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)

• Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)

• Australia’s Record-Low Rates To Head Further South (CNBC)

• US Pension Insurer Ran Record $62 Billion Deficit (AP)

• All Aboard The Instability Express (James Howard Kunstler)

• The Secret History Of Corruption In America (Stoller)

• UK Grocery Sales In Decline For First Time In 20 Years (Guardian)

• 1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)

• Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)

• Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)

• 3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)

• Modern Slavery Affects More Than 35 Million People (Guardian)

• Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

It’ll give him the power to totally sink the nation. All that’s missing is a few nuke plants and a major quake.

• Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)

Japanese Prime Minister Shinzo Abe called a snap election and announced a delay in the second sales tax hike by 18 months after the country fell into recession. The move announced on Tuesday comes after growth numbers on Monday showed the world’s third-largest economy shrunk by an annualized 1.6% in the third quarter after a 7.3% contraction in the second quarter, shocking the markets. “I have decided not to raise the consumption tax to 10% next October and I have decided to delay a consumption tax hike for 18 months,” Abe said at a press conference. Japan has suffered since the first consumption tax hike from 5 to 8% in April.

Abe said the rise in the sales tax “acted as a heavy weight and offset a rise in consumption”. A second consumption tax hike was set for October 2015 which would have seen a 2% increase to 10%. Abe also said the lower house of parliament would be dissolved on November 21 and an election would be called in a move to strengthen his mandate for “Abenomics” – his set of economic policies. The Japanese Prime Minister admitted that it will be a “difficult election” but said he wanted the public to back his package of reforms. “There are differing opinions on the structural reforms we have proposed and I have decided that I need to hear the voice of the Japanese public on whether or not we should go forward with these reforms,” Abe said.

There are still ‘analysts’ around who actually believe this stuff: “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery”. Spending in Japan has been down for years, nothing to do with sales taxes.

• Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)

With Japan’s slump into its fourth recession since 2008 threatening the failure of the Abenomics reflation program, Prime Minister Shinzo Abe’s administration is taking steps to shore up growth for the coming year. Economy Minister Akira Amari told reporters yesterday in Tokyo there’s a high chance of a stimulus package. Etsuro Honda, an adviser to Abe, said a 3 trillion yen ($26 billion) program was appropriate and should go toward measures that directly help households, such as child care support. Abe, who holds a news conference later today, is also considering a postponement of an October sales-tax increase until 2017 – a move that would add 0.3 percentage point to growth in the coming fiscal year, according to the median estimate of economists surveyed by Bloomberg.

At stake for the prime minister is assuring re-election in a likely snap vote next month that may serve as a referendum on his policies. “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery,” Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo, wrote in a note to clients yesterday, referring to the sales, or value-added, tax. “If Abe’s Liberal Democratic Party wins in the election, ‘Abenomics’ would be set” to be sustained until as long as until 2018, when he would run up against term limits as LDP head, according to Ogata.

Less than two years into Abenomics – a three-pronged strategy to pull Japan out of two decades of stagnation through monetary stimulus, fiscal flexibility and structural deregulation – the program has yet to spark sustained growth. An April sales-tax rise saw the economy sink into two straight quarters of contraction, a government report showed yesterday. Abe, 60, has yet to implement growth-strategy items from labor-market liberalization to the securing of a free-trade deal within the U.S.-led Trans-Pacific Partnership talks. Corporate-tax cut discussions have yet to see legislation enacted. In other areas, Abenomics has stirred Japan, achieving the end of 15 years of sustained deflation and spurring focus in the stock market on corporate returns on equity. The Topix index of shares has jumped 79% in the past two years.

Once again, Ambrose is out of his league. And not as sure as the title suggests, since he also says: “This is a formidable task and may ultimately fail.” The rest is not arguments, but exclusively wishful thinking. And harking back to what Japan did in 1932 is cute, but also entirely hollow.

• Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)

Abenomics is alive and well. Japan’s crash into its fourth recession since 2008 is a nasty surprise for premier Shinzo Abe but it tells us almost nothing about the central thrust of his reflation blitz The mini-slump is chiefly due to a one-off fiscal shock in April. Mr Abe defied warnings from Keynesian critics and unwisely stuck to plans drawn up by a previous (DPJ) government to raise the consumption tax from 5pc to 8pc. The essence of Abenomics is monetary reflation a l’outrance to lift the country out of deflation after two Lost Decades. The unstated purpose of this “First Arrow” is to lower real interest rates and raise the growth of nominal GDP to 5pc, deemed the minimum necessary to stop Japan’s debt trajectory from spiralling out of control. This is a formidable task and may ultimately fail. Public debt is already 245pc of GDP. Debt payments are 43pc of fiscal revenues. The population is expected to fall to from 127m to 87m by 2060. Given the grim mathematics of this, the inertia of the pre-Abe era was inexcusable.

Takuji Aida from Societe Generale said the tax rise was an “unnecessary diversion from Mr Abe’s reflationary goals” but will not have a lasting effect. The contraction of Japanese GDP by 0.4pc in the third quarter – following a 1.8pc crash in the second quarter – is certainly a public relations embarrassment, but less dreadful than meets the eye. The economy expanded by 0.2pc when adjusted for inventory effects. Machinery orders rose for a fourth month in September to 2.9pc. Retail sales jumped by 2.3pc. Danske Bank’s Fleming Nielsen says Japan’s economy will be growing at a 3pc rate again this winter. Mr Abe has shrugged off the tax debacle without much political damage. He is likely to call a snap election for December, win heartily, and suspend plans for a further rise in the sales tax to 10pc next October, ditching a policy he never liked anyway.

Besides, Ambrose, the guy who thought it all up has this: ” .. there are always new taxpayers, so this is a feasible Ponzi game”. How bad can you get it when, as Ambrose himself said, ” .. the population is expected to fall to from 127m to 87m by 2060″? It’s a hopeless game.

• ‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)

Koichi Hamada is a special adviser to prime minister Shinzo Abe and one of his closest confidants. That makes his comments, as The Telegraph reports, even more stunningly concerning. Focusing his attention on the fact that Japan must delay the 2nd stage of its planned consumption tax hike – for fear of derailing the ‘recovery’ – Hamada unwittingly, it seems, explains the terrible reality behind the so-called “godfather” of Abenomics’ perspective on the extreme monetary policy he has unleashed… Select stunning quotes that everyone should ignore and just BTFPonziD in Japan…

“The consumption tax hike is a great big turbulence to the Japanese economy. It may have erased almost two thirds of the benefits of Abenomics,” he told the Telegraph. “At the very least, a third of this great experiment is gone.” [..] “I used to say that we should wait until the third quarter figures are out. However, by various economic indicators, the GDP figures cannot be very optimistic,” he added. [..] “We should increase the consumption tax in the intermediate future,” he said. “This first shock starting in April has been countered by a monetary counter-move. But can we risk another shock in this way?” He also said that while he fully supported the Bank of Japan’s bond buying spree, he said there would be diminishing returns from quantitative easing the longer it went on. “I completely agree with Kuroda’s direction of policy, as well as his strategy of keeping quiet and surprising the market. Of course, if you repeat the same kind of action then the impact will be weaker,” he said.

[..] Marc Faber, the famous Swiss investor, has accused Japan of “engaging in a Ponzi scheme” because the BoJ is hoovering up most of the debt that has been issued by the government. While Mr Hamada agreed that Japan had created a “mild ponzi game”, he also said it was a “feasible” one because of Japan’s huge foreign reserves. “In a Ponzi game you exhaust the lenders eventually, and of course Japanese taxpayers may revolt. But otherwise there are always new taxpayers, so this is a feasible Ponzi game, though I’m not saying it’s good.” Mr Hamada said it was important that Japanese policymakers sent a clear signal that the government was willing to do whatever it takes to smash deflation and pave the way for wage increases for millions of workers. “I’m optimistic about wages, but the uncertainty is how long it takes,” he said. Business is still in doubt about whether Abenomics will continue. If they know it will continue and the profits of export firms are really soaring, they will start to share that with their employees.”

So to sum up… as long as the BoJ keeps buying stocks and bonds in ever-greater amounts (and Japan has more taxpayers to foot the bill) then the ponzi scheme can survive in its fiscally unsustainable way… what a total farce.

Tell ‘im ee’s dreamin’.

• ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)

The euro zone’s growth has weakened over the summer months, European Central Bank (ECB) President Mario Draghi told European lawmakers Monday, but stressed that he was willing to do more to stimulate the economy—including the purchase of government bonds. Speaking at the European Union’s Parliament, Draghi reiterated that the bank’s governing council remained “unanimous in its commitment to using additional unconventional instruments if needed.” He added: “The other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds.” The comments helped the pan-European FTSEurofirst 300 close 0.5% higher on the day.

The central bank has already launched a slew of stimulus in an effort to boost the economy by easing credit conditions. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS) – and there are calls for the ECB to do more by launching a U.S. Federal Reserve-style sovereign bond-buying program. Further measures, “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term,” Draghi added.

“Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before.” Ahem: the goal is $1 trillion. At this rate, that’ll take 6 years.

• Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)

ECB President Mario Draghi explicitly cited government-bond buying as a policy tool officials could use to stimulate the economy if the outlook worsens. “Other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds,” Draghi said in Brussels today during quarterly testimony to lawmakers at the European Parliament. In opening remarks both today and after the ECB’s monthly policy decision, Draghi stopped short of mentioning government bonds when he said that officials had been tasked with the preparation of further stimulus measures. His comments today come weeks before the institution’s critical December meeting, when it will publish new forecasts that are likely to incorporate a lower outlook for the economy and inflation. Draghi will succeed in boosting the ECB’s balance sheet back toward €3 trillion ($3.74 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so, according to a majority of economists in Bloomberg’s monthly survey published today.

Until now, the ECB has restricted purchases of assets to covered bonds, though asset-backed securities are now on its shopping list too. Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before. As Draghi spoke, Italian and Spanish bonds rose. The ECB president began his comments in the parliament by presenting European lawmakers with a list of policy resolutions for them to pursue in 2015 as he insisted his institution alone can’t fix the economy. “2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track,” Draghi said today. “Monetary policy alone will not be able to achieve this.” “Monetary policy has done a lot,” Draghi said. “It can do more if structural reforms are implemented. It can’t do everything.”

Not sure the Bundesbank and Nowotny will look favorable on being called ‘qualms’. 60% of Bloomberg ‘experts’ think Draghi will win, and they’re hardly ever right about anything.

• Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)

Mario Draghi will succeed in boosting the European Central Bank’s balance sheet back toward 3 trillion euros ($3.75 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so. That’s the majority view of economists in Bloomberg’s monthly survey, who have become more optimistic that the ECB president will meet his goal. Most predicted he’ll have to buy more than covered bonds and asset-backed securities though, and 72% said any stimulus expansion will be against the wishes of some national central-bank governors. Draghi, who has faced opposition to his most recent measures, told European lawmakers today that an expanded purchase program could include government bonds, as he insisted the ECB alone can’t fix the region’s economy. He also reiterated his pledge to be ready with further steps should the outlook worsen, and 95% of respondents in the survey said he’ll act on that promise either this year or in 2015.

“If private-sector asset purchases are insufficient, then sovereign bonds will then likely be included,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “This will be a hard sell internally.” Resistance to Draghi’s recent loosening of policy has come primarily from Germany. Bundesbank President Jens Weidmann has repeatedly warned of the risks of large-scale asset purchases, known as quantitative easing, and Executive Board member Sabine Lautenschlaeger has said the balance between cost and benefit for some non-standard tools is currently negative. Austria’s Ewald Nowotny joined Weidmann in opposing the ABS plan. That didn’t stop a fresh reference by Draghi on Nov. 6 to driving the balance sheet back toward its March 2012 level via asset purchases and targeted loans to banks. 60% of the economists surveyed said he’ll succeed, which implies that close to €1 euros of assets will be added. In last month’s survey just 39% said he’ll achieve his aim.

Yup, that’s that strong revovered economy for you.

• Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)

Industrial production in the U.S. unexpectedly dropped in October, weighed down by declines at utilities, mines and automakers that signal manufacturing started the fourth quarter on soft footing. Output fell 0.1% after a 0.8% increase in September that was smaller than previously estimated, figures from the Federal Reserve in Washington showed today. The median forecast in a Bloomberg survey of 83 economists projected a 0.2% gain. Factory production rose 0.2%, matching the prior month’s advance that was also revised down. A pickup in manufacturing is needed to help bolster the expansion, now is its sixth year, as global growth from Europe and Japan to emerging markets cools. Rising consumer confidence and the drop in gasoline prices are brightening the outlook for holiday sales, indicating factories will get a lift in the next few months.

When CDS dries up, there will be major problems in the markets. It’s in the size: ” .. the market that shrank to less than $11 trillion from $32 trillion before the financial crisis”. So much money is evaporating it’s scary: “requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses”.

• Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)

Deutsche Bank will stop trading most credit-default swaps tied to individual companies, exiting a business that new banking regulations have made costlier, according to a spokeswoman. The lender will instead focus on transactions in corporate bonds, while maintaining trading in the more active market for credit swaps tied to benchmark indexes, Michele Allison, a spokeswoman for the bank said today. The firm also will continue trading swaps tied to emerging-market borrowers and distressed companies, she said. The derivatives are used by hedge funds, banks and other institutional investors to protect against losses or to speculate on the ability of companies to repay their obligations. Deutsche Bank is exiting a part of the market that shrank to less than $11 trillion from $32 trillion before the financial crisis, data from the Bank for International Settlements show.

Dealing in credit swaps, which have been blamed for exacerbating the 2008 financial crisis, has become more expensive for lenders like Deutsche Bank as regulators across the U.S. and Europe require banks to hold more capital to back trades, reducing the returns for shareholders. “When liquidity providers leave the market, it becomes really questionable if the market is functioning efficiently,” Jochen Felsenheimer, founder of XAIA Investment said in a telephone interview. “Regulators continue to dry out the CDS market by putting more and more constraints.” Among measures that regulators have enacted since the crisis is requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses if they can’t make good on the transactions. Much of the market, where the privately negotiated trades have typically been done over phone calls and e-mails, is also being shifted to electronic systems.

What could go wrong?

• Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)

In a flash, the bond market went wild. What began on Oct. 15 as another day in the U.S. Treasury market suddenly turned into the biggest yield fluctuations in a quarter century, leaving investors worrying there will be turbulence ahead. The episode exposed a collision of forces – the rise of high-frequency trading and the decline of Wall Street dealers – that are reshaping the world’s biggest and most important bond market. Money managers say the $12.4 trillion Treasury market is becoming less liquid, meaning securities can no longer be traded as quickly and easily as they used to be, thanks in part to the Federal Reserve’s bond-buying program.

“The way the market is set up right now, we’ll see instances like we did on that day,” said Michael Lorizio, senior trader Manulife Asset Management, which oversees $281 billion. “There’s going to be a learning curve as to how to handle that.” The development reflects unintended consequences of new financial regulation, as well as steps the Fed has taken to breath life into the U.S. economy. The implications, however, extend far beyond Wall Street, because the Treasury market determines borrowing costs for governments, companies and consumers around the world. When the day began on Oct. 15, an unprecedented number of investors were betting that interest rates would rise and U.S. government debt would lose value. The news that morning seemed ominous. Ebola was spreading. So was war in the Middle East.

At 8:30 a.m. in Washington, the Commerce Department announced a decline in retail sales. The shift came all at once. The sentiment that the Fed would raise rates reversed. Traders who’d bet against, or shorted, Treasury bonds had to buy as many as they could as quickly as they could to limit their losses. By 9:38 a.m., 10-year Treasury yields plunged 0.34 percentage point, the most in five years. Analysts such as Jim Bianco, president of Bianco Research LLC in Chicago, blame the herd mentality of electronic traders. “A lot of these guys are focused on speed,” Bianco said. “They’re all uncreative and write the same program. When the stimulus comes in a certain way, every one of them comes to the same conclusion at exactly the same moment.”

And we’ll see this as a positive, shall we?

• Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)

The five Wall Street banks that advised on $100 billion of takeovers announced yesterday by Halliburton and Actavis could reap as much as $316 million in fees for their work. Goldman Sachs and Bank of America will take home the lion’s share of that, with roles on both the $34.6 billion purchase of Baker Hughes Inc. by Halliburton, and the $66 billion acquisition of Allergan by Actavis. Goldman Sachs was the sole adviser to Baker Hughes, while Bank of America and Credit Suisse advised Halliburton. The three banks are set to receive as much as $143 million in total, Freeman & Co. said. Halliburton, the second-biggest oilfield services provider, agreed to buy No. 3 Baker Hughes, taking advantage of plunging crude prices to set up the biggest takeover of a U.S. energy company in three years. Actavis’s deal to acquire Allergan, meanwhile, will help the target rebuff a hostile approach from Valeant Pharmaceuticals International Inc.

Goldman Sachs and Bank of America were also advisers to Allergan, for which they may share as much as $92 million, according to Freeman. JPMorgan, meanwhile, may receive as much as $81 million as adviser to Actavis. Yesterday’s deals firmed up Goldman Sachs’s status as the No. 1 adviser on M&A, with almost $814 billion of total value to its credit. Morgan Stanley which didn’t have a role on either of the two large deals, ranks second with $653 billion of deals to its credit. Citigroup, which also didn’t have a role on either deal, slipped a spot in the rankings to No. 4, while Bank of America rose to third from fifth. The ranking lists, called league-tables, are used by banks when they pitch their services to clients. A strong track record can help them convince companies to hire them as advisers. “We are extremely proud of the performance and momentum of our M&A franchise and the strategic advice and solutions that we have delivered to our clients in 2014,” Citigroup spokesman Robert Julavits wrote.

Fingers in your ears, a big bang is coming.

• Australia’s Record-Low Rates To Head Further South (CNBC)

Australia’s economy faces myriad headwinds that could trigger interest rate cuts from the central bank, taking borrowing rates further south from current historic lows. “Leading indicators suggest that a case can be made for further cuts: Confidence is low and consistent with weak growth, inflation expectations are falling and the unemployment rate is rising,” Credit Suisse wrote in a note Friday, arguing that rates could fall to 1.5%. Consumer confidence slumped over 12% on year in November, according to a joint survey from the Melbourne Institute and Westpac, marking the ninth straight month of pessimists outnumbering optimists – the longest slump since the global financial crisis.

Meanwhile, Australia’s official jobless rate rose to a 12-year high of 6.2%in October. Lower inflation also paves the way for rate cuts, Credit Suisse said. Headline consumer price inflation cooled to an annual 2.3% during the third-quarter, the lower end of the central bank’s 2-3% target band. Most importantly, markets have started to price in cuts, it said. The dominant view among major banks is still for the Reserve Bank of Australia to hike interest rates in 2015, but Credit Suisse says the behavior of the spread between 10-year bond yields and the cash rate is “abnormal” and doesn’t reflect that view.

One of multiple problems in US pensions.

• US Pension Insurer Ran Record $62 Billion Deficit (AP)

The federal agency that insures pensions for about 41 million Americans saw its deficit nearly double in the latest fiscal year. The agency said the worsening finances of some multi-employer pension plans mainly caused the increased deficit. At about $62 billion for the budget year ending Sept. 30, it was the widest deficit in the 40-year history of the Pension Benefit Guaranty, which reported the data Monday. That compares with a $36 billion shortfall the previous year. Multi-employer plans are pension agreements between labor unions and a group of companies, usually in the same industry. The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion from $8.3 billion in 2013. By contrast, the deficit in the single-employer program shrank to $19.3 billion from $27.4 billion.

“The global economy has caught the equivalent of financial Ebola: deflation ..”

• All Aboard The Instability Express (James Howard Kunstler)

The mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations. Plummeting oil prices are a symptom of terrible mounting instabilities in the world. After years of stagnation, complacency, and official pretense, the linked matrix of systems we depend on for running our techno-industrial society is shaking itself to pieces.

American officials either don’t understand what they’re seeing, or don’t want you to know what they see. The tensions between energy, money, and economy have entered a new phase of destructive unwind. The global economy has caught the equivalent of financial Ebola: deflation, which is the recognition that debts can’t be repaid, obligations can’t be met, and contracts won’t be honored. Credit evaporates and actual business declines steeply as a result of all those things. Who wants to send a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with a certified check to pay for it? Financial Ebola means that the connective tissues of trade start to dissolve, and pretty soon blood starts dribbling out of national economies.

One way this expresses itself is the violent rise and fall of comparative currency values. The Japanese yen and the euro go down, the dollar goes up. It happens in a few months, which is quickly in the world of money. Foolish US cheerleaders suppose that the rising dollar is like the rising score of an NFL football team on any given Sunday. “We’re numbah one!” It’s just not like that. The global economy is not some stupid football contest. When currencies change value quickly, as has happened since the past summer, big banks get into big trouble. Their revenue streams are pegged to so-called “carry trades” in which big blobs of money are borrowed in one currency and used to place bets in other currencies. When currency values change radically, carry trades blow up.

So do so-called “derivatives” such as bets on interest rate differentials. When the sums of money involved are grotesquely large, the parties involved discover that they never had any ability to pay off their losing bet. It was all pretense. In fact, the chance that the bet might go bad never figured into their calculations. The net result of all that foolish irresponsibility is that banks find themselves in a position of being unable to trust each other on virtually any transaction. When that happens, the flow of credit, a.k.a. “liquidity,” dries up and you have a bona fide financial crisis. Nobody can pay anybody else. Nobody trusts anybody. Fortunes are lost. Elephants stomp around in distress, then keel over and die, and a lot of “little people” get crushed in the dusty ground.

Looks like a good book to get.

• The Secret History Of Corruption In America (Stoller)

If there s one way to summarize Zephyr Teachout’s extraordinary book Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United, it is that today we are living in Benjamin Franklin’s dystopia. Her basic contention, which is not unfamiliar to most of us in sentiment if not in detail, is that the modern Supreme Court has engaged in a revolutionary reinterpretation of corruption and therefore in American political life. This outlook, written by Supreme Court Justice Anthony Kennedy in the famous Citizens United case, understands and celebrates America as a brutal and Hobbesian competitive struggle among self-interested actors attempting to use money to gain personal benefits in the public sphere.

What makes the book so remarkable is its scope and ability to link current debates to our rich and forgotten history. Perhaps this has been done before, but if it has, I have never seen it. Liberals tend to think that questions about electoral and political corruption started in the 1970s, in the Watergate era. What Teachout shows is that these questions were foundational in the American Revolution itself, and every epoch since. They are in fact questions fundamental to the design of democracy.

Teachout starts her book by telling the story of a set of debates that took place even before the Constitution was ratified – whether American officials could take gifts from foreign kings. The French King, as a matter of diplomatic process, routinely gave diamond-encrusted snuff boxes to foreign ambassadors. Americans, adopting a radical Dutch provision banning such gifts, wrestled with the question of temptation to individual public servants versus international diplomatic norms. The gifts ban, she argues, was evidence of a particular demanding notion of corruption at the heart of American legal history. These rules, bright-line rules versus corrupt-intent rules, govern temptation and structure. They cover innocent and illicit activity, as opposed to bribery rules which are organized solely around quid pro quo corruption.

However you slice and dice it, that’s not a number from a recovering economy.

• UK Grocery Sales In Decline For First Time In 20 Years (Guardian)

UK grocery sales have gone into decline for the first time in at least 20 years as a raging price war and the falling cost of food commodities hit Britain’s supermarkets. In good news for shoppers, the average price of a basket of everyday essentials such as milk, bread and vegetables now costs 0.4% less than it did a year ago, according to the latest figures from market research firm Kantar Worldpanel. But the figures highlight a painful few months for the UK’s biggest retailers with all of the “big four” supermarkets seeing sales fall back in the 12 weeks to 9 November. Tesco continues to be the worst performer with sales dropping by 3.7%, but Morrisons’ performance deteriorated at the fastest rate, with the slump in sales accelerating to 3.3%, from 1.3% a month ago.

Sainsbury’s trading figures also worsened, with sales down 2.5%. Asda’s sales also went into decline, for the first time in some months, although the Walmart-owned group was the only one of the big four to hold market share. Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel said: “The declining grocery market will be of concern to retailers as they gear up for the key Christmas trading season.” In a pattern that has continued throughout this year, the German discounters Aldi and Lidl continued to grow strongly, as did the up-market grocer Waitrose. But only Waitrose picked up the pace of growth, to 5.6%, shoring up its spot at the UK’s sixth largest supermarket. Aldi’s growth slowed to 25.5% from 29.1% last month, and more than 30% earlier this year, while Lidl’s growth slowed to 16.8% from 17.7% last month.

Complaceny and hubris pay off.

• 1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)

Supermarket chiefs need to take drastic action by shutting one in five of their stores if the financial health of the mainstream grocery chains is to recover from the damage being wreaked by altered shopping habits and the onslaught of the discounters, according to analysts at Goldman Sachs. A large closure programme is the only viable solution to bring about a return to profitable growth for the UK supermarket industry, the analysts said in a report. With 56% of Tesco’s stores bigger than 40,000 sq ft, the report concludes the market leader has the biggest problem on its hands. Profits at the three listed chains, Tesco, Sainsbury’s and Morrisons, have gone into reverse as weak food sales are exacerbated by the runaway growth of Aldi and Lidl. Further pressure is coming from structural changes in the market such as the growth of online and convenience store retailing.

Last week Sainsbury’s reported a first half loss of £290m as it counted the cost of pulling the plug on 40 new supermarket projects and wrote down the value of its underperforming stores. Goldman Sachs analyst Rob Joyce was gloomy about the ability of the major players to bounce back if the fight was based on price cuts alone. “We believe that any major price investments by Morrisons, Sainsbury’s or Tesco can be exceeded by the discounters,” he wrote. The unhealthy industry dynamic prompted him to predict large stores would suffer like-for-like sales declines of 3% a year until 2020, unless the big chains embrace the need for major surgery. Too much focus on profitability allowed the “discounters to get too strong”, with incumbents, until recently, reliant on pushing up prices to combat falling sales?, according to the report. But even Asda, which was the first of the big four to take on the discounters with a £1bn price cuts campaign, has started to show signs of strain.

It’s a simple story.

• Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)

Russian President Vladimir Putin warned he won’t allow rebels in eastern Ukraine to be defeated by government forces as European Union ministers met to consider imposing more sanctions on the separatists. “You want the Ukrainian central authorities to annihilate everyone there, all of their political foes and opponents,” Putin said in an interview yesterday with Germany’s ARD television. “Is that what you want? We certainly don’t. And we won’t let it happen.” German Chancellor Angela Merkel said yesterday the EU will keep its economic sanctions on Russia “for as long as they are needed.”

EU foreign ministers convened today in Brussels to discuss adding to sanctions that have limited access to capital markets for some Russian banks and companies and blacklisted officials involved in the conflict. New measures will likely target pro-Russian separatist leaders, the EU said. “Sanctions in themselves are not an objective, they can be an instrument if they come together with other measures,” European Union foreign policy chief Federica Mogherini told reporters before the meeting. She said the EU’s three-track strategy consists of sanctions, encouragement of reforms in Ukraine and dialogue with Russia. “We are very concerned about any possible ethnic cleansings and Ukraine ending up as a neo-Nazi state,” Putin said according to an English translation of his remarks published by the Kremlin.

They’re afraid if they cut production, investors may pull out. So they keep on the treadmill until they blow up the entire thing.

• Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)

Shale drillers are planning on production growth with fewer rigs despite a worldwide glut that has sent crude prices to a four-year low. Companies including Devon Energy, Continental Resources and EOG Resources said they expect to pump more from their prime properties while cutting back in their least productive prospects. That puts the onus on OPEC nations, led by Saudi Arabia, to cut output if they want to stem the slide in global oil prices. “There’s a lot more production coming online this year and in the first half of 2015,” said Jason Wangler, an analyst at Wunderlich Securities. “This isn’t a machine that you can turn on and off with a switch. It’s going to take months, if not quarters, to turn it around.”

Domestic output topped 9 million barrels a day for the first time since at least 1983, the U.S. Energy Information Administration said Nov. 13. West Texas Intermediate crude, the U.S. benchmark oil contract, sank 18 cents yesterday to settle at $75.64 a barrel. Prices fell to $74.21 on Nov. 13, the lowest since 2010. “Certainly if prices fall even further than they are now, it’ll have some impact, and it may slow the growth rate of U.S. production,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy in New York. “I still think, unless they fall significantly further, U.S. production is going to see dramatic increases in growth.”

Lower prices aren’t stopping U.S. shale drillers. Devon Energy, which pumped 136,000 barrels a day of crude in the third quarter, will boost output by as much as 25% next year, said John Richels, the company’s CEO, in a Nov. 5 earnings call. That rivals this year’s expansion, even though Devon will idle four of its six rigs in Oklahoma’s Mississippi Lime prospect. Continental Resources, which produced 128,000 barrels a day in the third quarter, trimmed $600 million from its 2015 drilling budget by shelving plans to add new rigs. Nonetheless, the Oklahoma City-based company said in its Nov. 6 earnings call it will increase output as much as 29%. Pioneer Natural Resources in Irving, Texas, the most active driller in West Texas’s Permian Basin, said in its Nov. 5 third-quarter call that it plans to add as much as 21%.

Anything for a buck.

• 3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)

Dear California readers: if you drank tapwater this morning (or at any point in the past few weeks/months), you may be in luck as you no longer need to buy oil to lubricate your engine: just use your blood, and think of the cost-savings. That’s the good news. Also, the bad news, because as the California’s Department of Conservation’s Chief Deputy Director, Jason Marshall, told NBC Bay Area, California state officials allowed oil and gas companies to pump up to 3 billion gallons (call it 70 million barrels) of oil fracking-contaminated waste water into formerly clean aquifiers, aquifiers which at least on paper are supposed to be off-limits to that kind of activity, and are protected by the government’s EPA – an agency which, it appears, was richly compensated by the same oil and gas companies to look elsewhere.

And the scariest words of admission one can ever hear from a government apparatchik: “In multiple different places of the permitting process an error could have been made.” Because nothing short of a full-blown disaster prompts the use of the dreaded passive voice. And what was unsaid is that the “biggest error that was made” is that someone caught California regulators screwing over the taxpayers just so a few oil majors could save their shareholders a few billion dollars in overhead fees. And now that one government agency has been caught flaunting the rules, the other government agencies, and certainly private citizens and businesses, start screaming: after all some faith in the well-greased, pardon the pun, government apparatus has to remain:

“It’s inexcusable,” said Hollin Kretzmann, at the Center for Biological Diversity in San Francisco. “At (a) time when California is experiencing one of the worst droughts in history, we’re allowing oil companies to contaminate what could otherwise be very useful ground water resources for irrigation and for drinking. It’s possible these aquifers are now contaminated irreparably.”

Our own countries are replete with mental slaves.

• Modern Slavery Affects More Than 35 Million People (Guardian)

More than 35 million people around the world are trapped in a modern form of slavery, according to a report highlighting the prevalence of forced labour, human trafficking, forced marriages, debt bondage and commerical sexual exploitation. The Walk Free Foundation (WFF), an Australia-based NGO that publishes the annual global slavery index, said that as a result of better data and improved methodology it had increased its estimate 23% in the past year. Five countries accounted for 61% of slavery, although it was found in all 167 countries covered by the report, including the UK. India was top of the list with about 14.29 million enslaved people, followed by China with 3.24 million, Pakistan 2.06 million, Uzbekistan 1.2 million, and Russia 1.05 million.

Mauritania had the highest proportion of its population in modern slavery, at 4%, followed by Uzbekistan with 3.97%, Haiti 2.3%, Qatar 1.36% and India 1.14%. Andrew Forrest, the chairman and founder of WFF – which is campaigning for the end of slavery within a generation – said: “There is an assumption that slavery is an issue from a bygone era. Or that it only exists in countries ravaged by war and poverty. “These findings show that modern slavery exists in every country. We are all responsible for the most appalling situations where modern slavery exists and the desperate misery it brings upon our fellow human beings.

That’s an excellent way to look at them.

• Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

Patients arrive at the Médecins Sans Frontières treatment centre in Sierra Leone 10 to an ambulance. The overcrowding means that by the time they get there, even those whose original symptoms may not have been Ebola will have been sufficiently exposed to catch it on the way in. Such is life in West Africa in the midst of the worst outbreak of the disease since it was first identified 38 years ago. Ebola Frontline – Panorama (BBC1) followed MSF doctor Javid Abdelmoneim – who, along with his colleagues, you can’t help but feel must be the owners of the last working consciences in the western world – on his month-long volunteer posting to the centre, treating some of the tens of thousands of people who have contracted Ebola since the epidemic began nine months ago.

Furnished with a specially adapted camera fitted to his goggles, one that can survive the chlorine sprayings and sluicings as part of the good doctor’s 20 minute decontamination procedure every time he leaves the tent full of his suffering and dying charges, we watch along with him as the disease plots its course through bodies, through families and through entire communities. People die quietly, for the most part. The loudest noise we hear is the wailing in grief of a woman who loses her sister. Their parents died before the cameras got there. Eleven-month-old Alfa is an Ebola orphan too, one of the estimated 10.3 million children directly or indirectly affected by the crisis. She dies alone, relieved of physical pain, Abdelmoneim hopes, by the morphine he gives her as her little body starts to fail, but “she looked frightened at the end”.

She is buried in a cemetery purpose-built for bodies that remain biohazards after death, one of hundreds of people marked only by patient ID numbers scrawled on paper labels attached to sticks driven into the ground. While the volunteer doctors, nurses and staff try to hold the line at the treatment centre – whose name they change to “case management centre” in recognition that all they can give is supportive, not curative care – the voiceover keeps us abreast of the rising death toll in Africa and the ponderous reactions and non-reactions of other nations to the crisis, and the delivery and non-delivery of promises and aid to the stricken regions. Last month the UN called for a twentyfold increase in help. Half of that has so far been donated. A plague on all our houses.

Debt Rattle October 22 2014

Oct 222014

October 22, 2014 Posted by Raúl Ilargi Meijer at 10:47 am Finance Tagged with: Big Oil, budget, China, deficit, ebola, ECB, EU, Fed, oil, Russia, Shale, Stress Test 2 Responses »

Russell Lee Migrant family in trailer home near Edinburg, Texas Feb 1939

• At Least 11 Banks To Fail European Stress Tests (Reuters)

• All the Markets Need Is $200 Billion a Quarter From the Central Bankers (BW)

• What Would It Take To Trigger The ‘Fed Put’? (MarketWatch)

• Currency Wars Evolve With Goal of Avoiding, Exporting Deflation (Bloomberg)

• Are Belgium, Finland And France The ‘New Periphery’ In Europe? (CNBC)

• EU To Warn France And Italy On Budget Plans (FT)

• US Shale Producers Cramming Wells in Risky Push to Extend Boom (Bloomberg)

• Oil at $80 a Barrel Muffles Forecasts for US Shale Boom (Bloomberg)

• How Wall Street Is Killing Big Oil (Oilprice.com)

• Investors Pile Into Oil Funds at Fastest Pace in 2 Years (Bloomberg)

• Markets Need To Accept Low Growth As ‘New Normal’ In China (Saxo)

• China to Let World in on Gauge Showing State of Economy (Bloomberg)

• UK Deficit Up 10% From Last Year, National Debt Rises £100 Billion (Guardian)

• The Moral Economy Of Debt (Robert Skidelsky)

• Fears Over Gas Supply As Russia-Ukraine Talks Fail (Reuters)

• New York Fed Caught Sight of London Whale and Let Him Go (Bloomberg)

• World’s Top-Ranked Pension Funds Probed for Hedge Fund Use (Bloomberg)

• How To Start A War And Lose An Empire (Dmitry Orlov)

• “Omenland” (James Howard Kunstler)

• WHO: Ebola Serum In Weeks And Vaccine Tests In Africa By January (Guardian)

This could make a whole lot of people really nervous.

• At Least 11 Banks To Fail European Stress Tests (Reuters)

At least 11 banks from six European countries are set to fail a region-wide financial health check this weekend, Spanish news agency Efe reported, citing several unidentified financial sources. The results of the stress tests on 130 banks by the European Central Bank are due to be unveiled on Sunday. Four banks in Greece, three Italian lenders and two Austrian ones are among those that preliminary data showed had failed the tests, Efe said. It gave no details of how much capital the banks would have to raise and said this could yet change as numbers could be revised at the last minute.

The euro fell on the report. Efe also identified a Cypriot bank and possibly one from Belgium and one from Portugal. The exercise is designed to see how banks would cope under various economic scenarios, including adverse ones, and is likely to reveal capital shortfalls at some entities. The ECB is carrying out the checks of how the biggest euro zone banks have valued their assets, and whether they have enough capital to weather another economic crash, before taking over as their supervisor on Nov. 4.

Anyone still realize how insane that is, or are our brains completely numb and dumbed down by now?

• All the Markets Need Is $200 Billion a Quarter From the Central Bankers (BW)

The central-bank put lives on. Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited. A put option gives investors the right to sell their asset at a set price so the theory goes that central banks will ultimately provide a floor for falling asset markets to ensure they don’t take economies down with them. Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick.

Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago. “These comments left markets with the impression that the ‘central-bank put’ is still in place,” Morgan Stanley currency strategists led by Hans Redeker told clients in a report yesterday. Matt King, global head of credit strategy at Citigroup, and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding. By estimating that zero stimulus would be consistent with a 10% quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.

With the Fed and counterparts peeling back their net liquidity injections from almost $1 trillion in 2012 toward that magic marker, King’s team said “a negative reaction in markets was long overdue.” “We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices,” they said in an Oct. 17 report to clients. Bank of America Merrill Lynch strategists said in a report today that another 10% decline in U.S. stocks might spark speculation of a fourth round of quantitative easing from the Fed. That would mimic how the Fed acted following equity declines of 11% in 2010 and 16% in 2011.

It would seem that all it takes is for other central bankers failing to put in those $200 billion four times a year. But that still pre-supposes that the Fed’s first priority is to support the markets. Whereas I suggest it’s to support the big banks. And that’s not one and the same thing.

• What Would It Take To Trigger The ‘Fed Put’? (MarketWatch)

Janet Yellen runs the Federal Reserve now, but that doesn’t mean that notions about what used to be known as the “Bernanke put,” named after her predecessor, Ben Bernanke, have expired. So far, there’s been little talk of a “Yellen put,” but the U.S. Federal Reserve still remains ready to bail out the markets if things get hairy, Bank of America Merrill Lynch analysts say. Actual financial puts give the holder the right but not the obligation to sell the underlying security at a set price, known as the strike price. Puts named after central bankers are figurative. They’re shorthand for the idea the Fed will rush in to rescue tanking markets, a notion denied by Alan Greenspan and Bernanke, but reinforced by the Fed’s aggressive actions following big market declines, most recently, during the 2008 crisis. The BofA Merrill analysts, in a Tuesday note, say recent market volatility shows that investors are now losing faith in what traders had dubbed the “Draghi put,” named after European Central Bank President Mario Draghi.

Investors are growing less certain the ECB will step in with a program of full-fledged quantitative easing of its own stave off deflationary pressures in the eurozone. “If this ECB option turns out to be worthless, the key question becomes how much protection does the Fed provide? In other words, approximately how big can an equity correction become before the Fed steps in again?” they write. They note that in 2010 and 2011, the Fed stepped in following equity corrections of 11% and 16%, respectively. Based on their assessment of last week’s market action, the analysts say it appears it would take a further 10% decline from the recent lows to trigger anticipation of what might be dubbed QE 4, or the fourth iteration of the U.S. central bank’s monetary stimulus measures.

Everywhere but America.

• Currency Wars Evolve With Goal of Avoiding, Exporting Deflation (Bloomberg)

Currency wars are back, though this time the goal is to steal inflation, not growth. Brazil Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation. Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.

“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at HSBC which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.” Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.

[..] Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4% to more than 6% by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices. “Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, head of emerging-markets at Commerzbank, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said. Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned.

Interesting development. Forgot to ‘reform’ the core.

• Are Belgium, Finland And France The ‘New Periphery’ In Europe? (CNBC)

The improvement in competitiveness in southern euro zone nations has left some core countries such as Belgium and France lagging behind, posing the risk that they could become the “new periphery,” a new report warns. “A handful of core euro zone economies have registered pretty sharp increases in their unit labor costs (ULCs) over the past four years,” according to a report by Capital Economics published Monday. This was happening at the same time as those in many peripheral countries had been falling outright, it said. “While this process may help the peripheral economies regain relative competitiveness more rapidly, some core economies, including Belgium, now look at risk of falling behind, threatening to push the euro-zone’s periphery north,” Roger Bootle and Jonathan Loynes, managing director and chief European economist at Capital Economics respectively, said in their report. The report analysed changes in competitiveness in the euro zone by looking at unit labor costs (the average cost of labor to produce one unit of output) across the region.

On this metric it found that the southern peripheral economies comprised of Spain, Italy, Ireland and Portugal “have succeeded in cutting costs relative to the euro zone as a whole over the past few years.” However, in a handful of core economies, notably Belgium, Finland and France, ULCs have continued to rise, both in absolute terms and relative to the euro zone average. “In Belgium in particular, ULCs have risen sharply and are now the highest in the euro-zone. Belgium’s high costs already appear to be harming both investment and export growth, traditionally strong drivers of growth in the economy. And its current account has fallen into a sustained deficit for the first time in 30 years.” “All this suggests that Belgium’s recovery is unlikely to gather further pace [and] in contrast to governments in the south, we doubt that Belgian politicians will be prepared (or forced) to tackle these issues any time soon.” they added.

Rome and Paris will stare them down.

• EU To Warn France And Italy On Budget Plans (FT)

The European Commission will on Wednesday tell five euro zone countries, including France and Italy, that their budget plans risk breaching EU rules, say three officials briefed on the decision. The move comes a week after all euro zone countries submitted their budgets to Brussels for review as part of the EU’s new fiscal rules. Officially a request for more information, the commission’s move is the first step in a politically charged process of rejecting a euro zone nation’s budget and sending it back to national capitals for revision. A decision on rejection must be made by the end of the month. In addition to France and Italy, EU officials said similar requests will be sent to Austria, Slovenia and Malta. Simon O’Connor, a spokesman for Jyrki Katainen, the EU’s economic commissioner who is in charge of the evaluations, would not confirm the move. But he said it would not mean that Brussels had definitively decided to reject a country’s budget plan.

“Technical consultations with member states on the draft budget plans do not prejudge the outcome of our assessment,” O’Connor said. A formal request for revisions to the French and Italian budgets could prove politically explosive. Both governments are fending off rising anti-EU sentiment. Under the EU’s new budget rules, adopted at the height of the euro zone crisis, the commission is required to send a budget back to its government within two weeks of submission if it finds “particularly serious non-compliance” with EU budget rules. If the commission is contemplating such a move, the rules require it to notify the government in question within one week. Wednesday is the deadline for the one-week notification. EU officials said France and Italy may contravene different parts of the budget rules. France is required to get its deficit back under the EU ceiling of 3% of economic output by next year but its plan ignored that commitment, projecting a deficit of 4.3% of gross domestic product.

Right. We all know that by sticking two straws in a glass of soda, you get out twice as much as with one. And sure, a shale play is not exactly like a glass of water, but still close enough. I think this is not about getting out more, but about getting the same amount out faster. Doesn’t sound like a terrible solid business model, but it’s not at all surprising either, given how the shale industry operates.

• US Shale Producers Cramming Wells in Risky Push to Extend Boom (Bloomberg)

U.S. shale producers are cramming more wells into the juiciest spots of their oilfields in a move that may help keep the drilling boom going as prices plunge. The technique known as downspacing aims to pull more oil at less cost from each field, allowing companies to boost profit, attract more investment and arrange needed loans to continue drilling. Energy companies see closely-packed wells as their best chance to add billions more barrels of oil to U.S. production that’s already the highest in a quarter century. “We would be dealing with more than a decade of inventory,” said Manuj Nikhanj, co-head of energy research for ITG Investment Research in Calgary. “If you can go twice as tight, the multiplication effect is massive.”

To make downspacing work, the industry must first solve a problem that for decades has required producers to carefully distance their wells. Crowded wells may steal crude from each other without raising total production enough to make the extra drilling worthwhile. Too much of that cannibalization could propel the U.S. production revolution into a faster downturn. In the past, most wells were drilled vertically into conventional reservoirs, which act more like pools of oil or gas. Companies learned quickly that packing wells too closely together just drains the reservoirs faster without appreciably increasing production, like two straws in the same milkshake. Shale rock is different, acting more like an oil-soaked sponge.

Drilling sideways through the layers of shale taps more of the resource, while fracking is needed to crack the rock to allow oil and gas to flow more freely into the well. So far, early results from downspacing experiments by a handful of companies have been mixed. It’s “the billion-dollar question,” said Wood Mackenzie’s Jonathan Garrett, “Is downspacing allowing access to new resources, or is it drawing down the existing resources faster?” An analysis of a group of wells on the same lease in La Salle County, in the heart of Texas’s booming Eagle Ford formation, showed that closer spacing reduced the rate of return for drilling to 23% from a high of 62% for wells spaced further apart, according to a paper published in April by Society of Petroleum Engineers.

A sordid tale indeed.

• Oil at $80 a Barrel Muffles Forecasts for US Shale Boom (Bloomberg)

The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth. The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for New York-based Sanford Bernstein said in a report yesterday. Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie, ITG Investment and PKVerleger. Horizontal drilling through shale accounts for as much as 55% of U.S. production and just about all the growth, according to Bloomberg Intelligence. The nternational Energy Agency predicted in November that the U.S. would pass Russia and Saudi Arabia to become the biggest producer in the world by 2015. Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for Sydney-based Macquarie.

“It would reshape the way everybody would think about oil,” Dwivedi said. Daily domestic production added a record 944,000 barrels last year and reached a 29-year high of 8.95 million barrels this month, according to the Energy Information Administration, the U.S. Department of Energy’s statistical arm. Output, much less growth, is difficult to maintain because shale wells deplete faster than conventional production. Oil production from shale drilling, which bores horizontally through hard rock, declines more than 80% in four years, more than three times faster than conventional, vertical wells, according to the IEA. New wells have to generate about 1.8 million barrels a day each year to keep production steady, Dwivedi said. At $80 a barrel, output would grow by 5%, down from a previous forecast of 12%, according to New York-based ITG. At $75 a barrel, growth would fall 56% to about 500,000 barrels a day, Dwivedi said. Closer to $70 a barrel, the growth rate would drop to zero, he said.

why

This has been going on for a number of years. Exxon will go the way of IBM. Or maybe Rosneft can do a hostile take-over. That would be so funny.

• How Wall Street Is Killing Big Oil (Oilprice.com)

Lee Raymond, the famously pugnacious oilman who led ExxonMobil between 1999 and 2005, liked to tell Wall Street analysts that covering the company would be boring. “You’ll just have to live with outstanding, consistent financial and operating performance,” he once boasted. For generations, Exxon and its Big Oil brethren, including Chevron, ConocoPhilipps, BP, Royal Dutch Shell and Total, dominated the global energy landscape, raking in enormous profits and delivering fat dividends to shareholders. Big Oil has long been an investor darling. Those days are over. Once reliable market beaters, Big Oil shares are lagging: Over the last five years, when the S&P 500 rose more than 80%, shares of Exxon and Shell rose just over 30%. The underperformance reflects oil majors’ inability to maintain steady cash flows and increase production in a world where much of the easy oil has already been found and project costs are rapidly escalating.

Last year, Exxon, Chevron and Shell failed to increase oil and gas production despite having spent US$500 billion over the previous five years, $120 billion in 2013 alone. Under pressure from investors, the world’s largest oil companies are now forced to cut capital expenditure and sell assets to boost cash flows. Big Oil is, in short, heading towards liquidation. And this process has set in motion a tectonic shift in the global energy balance of power away from western international oil companies, or IOCs, and towards state-owned national oil companies, NOCs, in emerging markets. Not only do the NOCs – companies like Saudi Aramco; Russia’s Gazprom and Rosneft; China’s CNOOC, CNPC and Sinopec; India’s ONGC; Venezuela’s PDVSA; and Brazil’s Petrobras – control approximately 90% of the world’s known petroleum reserves, they are also immune to the market pressures constraining Big Oil.

Betting that the Saudi’s will blink. Hey, it’s a casino out there.

• Investors Pile Into Oil Funds at Fastest Pace in 2 Years (Bloomberg)

Investors are putting money into funds that track oil prices at the fastest rate in two years, betting that crude will rebound from a bear market. The four biggest oil exchange-traded products listed in the U.S. have received a combined $334 million so far this month, the most since October 2012, according to data compiled by Bloomberg. Shares outstanding of the funds, including the United States Oil Fund (DBO) and ProShares Ultra Bloomberg Crude Oil, rose to 55 million yesterday, a nine-month high. “There are investors who love to catch a falling knife,” said Dave Nadig, chief investment officer of San Francisco-based ETF.com. “It’s pretty easy to look at what’s been going on in oil and say ‘well, it has to bottom out somewhere.’ There are plenty of investors out there who still believe that the long-term trend of oil has to be $100.” Money has flowed into the funds as West Texas Intermediate and Brent crudes, the benchmarks for U.S. and global oil trading, each plunged more than 20% from their June highs, meeting a common definition of a bear market.

Wonder what the real number is at this point in time for China, the actual growth. Even 4% feels high.

• Markets Need To Accept Low Growth As ‘New Normal’ In China (Saxo)

Pauline Loong, Managing Director of Asia-analytica, gives us her assessment of the latest Chinese GDP figures: “The worst quarterly GDP performance in almost six years has raised hopes of a bolder policy response from Beijing. But more aggressive measures in the coming months might still not provide the hoped-for catalyst on stock prices or deliver the boost needed for a return to market-moving growth rates.” Pauline says we need to “be realistic” about China’s GDP and get used to lower numbers. For example 6.9% could be the “new normal” next year. China’s official GDP target for 2014 remains 7.5%, a number which looks increasingly out of reach. In response, Beijing has been “micro managing” stimulus, in Pauline’s view, going from sector to sector and even telling banks what size of business to lend to. Pauline Loong warns that China’s gear change from export driven economy to consumer driven market will take longer than most may imagine, it’s worth bearing in mind that Chinese GDP per capita is only just above Iraq in global rankings.

200 million migrant workers are missing from the official stats. That’s considerably more than the entire active US workforce. Remember, from the article above, that “Chinese GDP per capita is only just above Iraq in global rankings.”

• China to Let World in on Gauge Showing State of Economy (Bloomberg)

Chinese Premier Li Keqiang has an insider’s knowledge on the strength of the world’s second-largest economy that helps him determine when stimulus is needed. He’s about to share part of the secret. Li has said several times this year that slower growth is tolerable as long as enough jobs are created, often referring to a survey-based unemployment indicator that’s different from the registered urban jobless rate released every quarter. The published gauge excludes migrant workers who aren’t registered with local authorities, estimated at more than 200 million. The more comprehensive jobless rate will be released “very soon,” Sheng Laiyun, spokesman for the National Bureau of Statistics, said in Beijing yesterday. “The quality of the indicator, for now, looks very good. So, we are using it internally for policy decision-making references.”

China’s leaders have eschewed across-the-board stimulus and interest-rate cuts even as growth cooled to the weakest pace in more than five years last quarter, sticking to limited steps such as easing home-purchase controls. Having access to better barometers like the new unemployment measure would help economists estimate how deep a slowdown in gross domestic product the government will tolerate. “The lack of good unemployment data is the main reason why China still focuses so much on GDP,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “In fact, the government is more concerned about employment and inflation, and that’s why they refrained from big stimulus.” Releasing the methodology, breakdown and samples for the new jobless rate in addition to the headline number, as the U.S. does, would also greatly help researchers, Zhu said.

He called China’s current registered unemployment rate “untrustworthy and unusable.” Sporadic revelations made by the government about the broader unemployment gauge, which surveys 31 cities, show about a 1 percentage-point divergence from the official rate this year. The surveyed rate fell for four straight months to 5.05% in June, the National Development and Reform Commission said on its website in July. In contrast, the official registered rate was 4.08% in the second quarter, unchanged from the previous three months. The new surveyed rate adopts a methodology following the guidance of the International Labour Organization, according to Cai Fang, vice director of the government-backed Chinese Academy of Social Sciences. “All eyes will be on it,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “It’s going to be really important, like that of the U.S.”

The UK government is a joke.

• UK Deficit Up 10% From Last Year, National Debt Rises £100 Billion (Guardian)

The chancellor’s plan to cut the deficit this year looks increasingly unrealistic after another jump in government borrowing in September pushed the deficit 10% higher in the first half of the year, lessening the chances of a pre-election giveaway at December’s autumn statement. Borrowing last month was £11.8bn, £1.6bn higher than in September 2013 and more than £1bn higher than City economists had forecast, official figures showed, as the tax take failed to keep pace with government spending despite the recovery in the economy. Tax receipts have disappointed over recent months partly due to unexpectedly weak pay growth and the increase in the personal allowance to £10,000. In the first six months of the tax year, between April and September, borrowing was £58bn, up £5.4bn on the first half of last year, according to the Office for National Statistics. Economists said it was looking increasingly likely George Osborne would miss his target of reducing the deficit by more than £12bn in 2014-15.

Alan Clarke, economist at Scotiabank, said that if the current trend continued, borrowing would come in about £10bn above the target. Howard Archer, chief UK economist at IHS Global Insight, said: “The chancellor is looking ever more unlikely to meet his fiscal targets for 2014/15. This means that Mr Osborne faces an awkward fiscal backdrop as he announces his autumn statement in December as the May 2015 general election draws ever nearer. This gives him little scope to announce any major sweeteners.” The Office for Budget Responsibility, the Treasury’s official forecaster, cautioned that although there was uncertainty over government borrowing in the second half of the fiscal year, tax receipts for the full year were likely to come in below forecast. “Factors such as weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues mean it is looking less likely that the full year receipts growth forecast will be met,” it said.

How is this not a criminal practice: “The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar.”

• The Moral Economy Of Debt (Robert Skidelsky)

Every economic collapse brings a demand for debt forgiveness. The incomes needed to repay loans have evaporated, and assets posted as collateral have lost value. Creditors demand their pound of flesh; debtors clamour for relief. Consider Strike Debt, an offshoot of the Occupy movement, which calls itself “a nationwide movement of debt resisters fighting for economic justice and democratic freedom”. Its website argues that “with stagnant wages, systemic unemployment, and public service cuts” people are being forced into debt in order to obtain the most basic necessities of life, leading them to “surrender [their] futures to the banks”. One of Strike Debt’s initiatives, rolling jubilee, crowdsources funds to buy and extinguish debt, a process it calls collective refusal. The group’s progress has been impressive, raising more than $700,000 and extinguishing debt worth almost $18.6m. It is the existence of a secondary debt market that enables rolling jubilee to buy debt so cheaply.

Financial institutions that have come to doubt their borrowers’ ability to repay, sell the debt to third parties at knockdown prices, often for as little as five cents on the dollar. Buyers then attempt to profit by recouping some or all of the debt from the borrowers. The US student loan provider, Sallie Mae, sells repackaged debt for as little as 15 cents on the dollar. To draw attention to the often-nefarious practices of debt collectors, rolling jubilee recently cancelled student debt for 2,761 people enrolled at Everest College, a for-profit school whose parent company, Corinthian Colleges, is being sued by the US government for predatory lending. Everest’s loan portfolio was valued at almost $3.9m. Rolling jubilee bought it for $106,709.48, or about three cents on the dollar. But that is a drop in the ocean. In the US alone, students owe more than $1tn, or about 6% of GDP. And the student population is just one of many social groups that lives on debt.

Indeed, throughout the world, the economic downturn of 2008-09 increased the burden of private and public debt – to the point that the public-private distinction became blurred.In a recent speech in Chicago, Irish president Michael D Higgins explained how private debt became sovereign debt. He said: “As a consequence of the need to borrow so as to finance current expenditure and, above all, as a result of the blanket guarantee extended to the main Irish banks’ assets and liabilities, Ireland’s general government debt increased from 25% of GDP in 2007 to 124% in 2013.” The Irish government’s aim, of course, was to save the banking system. But the unintended consequence of the bailout was to shatter confidence in the government’s solvency.

One day a deal is announced, the next it’s denied.

• Fears Over Gas Supply As Russia-Ukraine Talks Fail (Reuters)

Russia and Ukraine failed to reach an accord on gas supplies for the coming winter in EU-brokered talks on Tuesday but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay. After a day of talks widely expected to be the final word, European Energy Commissioner Guenther Oettinger told a news conference the three parties agreed the price Ukraine would pay Russia’s Gazprom – $385 per thousand cubic metres – as long as it paid in advance for the deliveries. But Russian Energy Minister Alexander Novak said Moscow was still seeking assurances on how Kiev, which earlier in the day asked the EU for a further €2 billion ($2.55 billion) in credit, would find the money to pay Moscow for its energy.

Dependent on Western aid, Ukraine is in a weak position in relation to its former Soviet master in Moscow, though Russia’s reasons were unclear for wanting further assurances on finances, beyond an agreement to supply gas only for cash up front. Citing unpaid bills worth more than $5 billion, Russia cut off gas flows to Kiev in mid-June. The move added to East-West tensions sparked by Russia’s annexation of Ukraine’s Crimea and conflict in Russian-speaking eastern Ukraine. The two countries are fighting in an international court over the debt, but Oettinger noted that Ukraine had agreed to pay off $3.1 billion in two tranches this year to help unblock its access to gas over the winter. European Union states, many also dependent on Russian gas and locked in a trade war with Moscow over Ukraine, fear their own supplies could be disrupted if the issue is not resolved.

Boy oh boy, what a surprise.

• New York Fed Caught Sight of London Whale and Let Him Go (Bloomberg)

It seems pretty clear to me that JPMorgan’s London Whale episode, in which the bank’s Chief Investment Office lost $6.2 billion on poorly managed credit derivatives trades, was a huge win for U.S. banking regulators. Like, here is a rough model of banking regulation:

Banks tend to be better at banking than banking regulators are, so they are unlikely to want to defer to the regulators’ judgment in most circumstances.

You need the banks to buy into the regulation, and defer to the regulators, for the regulation to produce real broad-based risk reduction rather than mere check-the-box compliance efforts.

One way to get the banks to buy into regulation is for them to fail catastrophically and realize that they’re not as good at their jobs as they thought they were.

But catastrophic failure is precisely what, as a regulator, you want to prevent.

Because it’s bad.

But also because, if you allow a catastrophic failure, then you’re not a very good regulator either, so the failure provides no additional reason for a bank to listen to you.

So 2008 ushered in a new regulatory environment but at, you know, a certain cost, both to the world and to the regulators’ credibility.

At east the Danes have not yet fully been taken over.

• World’s Top-Ranked Pension Funds Probed for Hedge Fund Use (Bloomberg)

Denmark, home to the world’s top-ranked pension system, will toughen oversight of the $500 billion industry after regulators observed a surge in risk-taking linked in part to more widespread use of hedge funds. The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report. The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016.

The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions. “The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.” Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

Great Orlov piece on Unkraine, US, Russia, NATO.

• How To Start A War And Lose An Empire (Dmitry Orlov)

A year and a half I wrote an essay on how the US chooses to view Russia, titled The Image of the Enemy. I was living in Russia at the time, and, after observing the American anti-Russian rhetoric and the Russian reaction to it, I made some observations that seemed important at the time. It turns out that I managed to spot an important trend, but given the quick pace of developments since then, these observations are now woefully out of date, and so here is an update. [..] … what a difference a year and a half has made! Ukraine, which was at that time collapsing at about the same steady pace as it had been ever since its independence two decades ago, is now truly a defunct state, with its economy in free-fall, one region gone and two more in open rebellion, much of the country terrorized by oligarch-funded death squads, and some American-anointed puppets nominally in charge but quaking in their boots about what’s coming next.

Syria and Iraq, which were then at a low simmer, have since erupted into full-blown war, with large parts of both now under the control of the Islamic Caliphate, which was formed with help from the US, was armed with US-made weapons via the Iraqis. Post-Qaddafi Libya seems to be working on establishing an Islamic Caliphate of its own. Against this backdrop of profound foreign US foreign policy failure, the US recently saw it fit to accuse Russia of having troops “on NATO’s doorstep,” as if this had nothing to do with the fact that NATO has expanded east, all the way to Russia’s borders. Unsurprisingly, US–Russia relations have now reached a point where the Russians saw it fit to issue a stern warning: further Western attempts at blackmailing them may result in a nuclear confrontation. The American behavior throughout this succession of defeats has been remarkably consistent, with the constant element being their flat refusal to deal with reality in any way, shape or form.

Just as before, in Syria the Americans are ever looking for moderate, pro-Western Islamists, who want to do what the Americans want (topple the government of Bashar al Assad) but will stop short of going on to destroy all the infidel invaders they can get their hands on. The fact that such moderate, pro-Western Islamists do not seem to exist does not affect American strategy in the region in any way. Similarly, in Ukraine, the fact that the heavy American investment in “freedom and democracy,” or “open society,” or what have you, has produced a government dominated by fascists and a civil war is, according to the Americans, just some Russian propaganda. Parading under the banner of Hitler’s Ukrainian SS division and anointing Nazi collaborators as national heroes is just not convincing enough for them. What do these Nazis have to do to prove that they are Nazis, build some ovens and roast some Jews? Just massacring people by setting fire to a building, as they did in Odessa, or shooting unarmed civilians in the back and tossing them into mass graves, as they did in Donetsk, doesn’t seem to work.

And my main man Jim was in Sweden.

• “Omenland” (James Howard Kunstler)

[..] too soon, I landed back in Newark Airport, Lord have mercy. I grabbed a taxi to the Newark train station to get to the Hudson River line out of New York City back upstate. Along the way on Route 21, I passed a graffiti on an overpass. It said “Omenland.” The anonymous genius who sprayed that there sure caught the US zeitgeist. Newark compares to Stockholm as an Ebola victim in the gutter compares to a supermodel at poolside. The scene in the Newark train station was like the barroom from Star Wars, a creature-feature extravaganza, intergalactic Mutt Central, wookies in hoodies with burning coals for eyes, ladies with pierced cheeks, crack-heads, winos, missing body part people, lopsided head people, and the scrofulous physical condition of the station is proof positive that Chris Christie is unqualified to be president. This is a gateway to New York, America’s greatest city, you understand, and it looks like the veritable checkpoint to the rectum of the universe. You know what occurred to me: maybe it is?

Guess it’s better than nothing.

• WHO: Ebola Serum In Weeks And Vaccine Tests In Africa By January (Guardian)

The World Health Organisation has announced it hopes to begin testing two experimental Ebola vaccines in west Africa by January and may have a blood serum treatment available for use in Liberia within two weeks. The UN’s health agency said it aimed to begin testing the two vaccines in the new year on more than 20,000 frontline health care workers and others in west Africa – a bigger rollout than previously envisioned. Dr Marie Paule Kieny, an assistant director general at the WHO, acknowledged there were many “ifs” remaining and “still a possibility that it [a vaccine] will fail”. But she sketched out a much broader experiment than was imagined only six months ago, saying the WHO hoped to dispense tens of thousands of doses in the first months of the new year. “These are quite large trials,” she said.

Kieny said in remarks reported by the BBC that a serum was also being developed for use in Liberia based on antibodies extracted from the blood of Ebola survivors. “There are partnerships which are starting to be put in place to have capacity in the three countries to safely extract plasma and make preparation that can be used for the treatment of infective patients. “The partnership which is moving the quickest will be in Liberia where we hope that in the coming weeks there will be facilities set up to collect the blood, treat the blood and be able to process it for use.” A WHO spokeswoman, Fadela Chaib, said the agency expected 20,000 vaccinations in January and similar numbers in the months afterwards using the trial products. An effective vaccine would still not in itself be enough to stop the outbreak but could protect the medical workers who are central to the effort. More than 200 of them have died of Ebola.

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