Status quo, as our generation know it, established in 1945 has plodded along ever since. It is true that it have had near death experiences several times, especially in August 1971 when the world almost lost faith in the global reserve currency and in 2008 when the fractional reserve Ponzi nearly consumed itself. While the recent Brexit vote seem to be just another near death experience we believe it says something more fundamental about the world. When the 1945 new world order came into existence, its architects built it on a shaky foundation based on statists Keynesian principles. It was clearly unsustainable from the get-go, but as long as living standards rose, no one seemed to notice or care. The global elite managed to resurrect a dying system in the 1970s by giving its people something for nothing.
Debt accumulation collateralized by rising asset values became a substitute for productivity and wage increases. While people could no longer afford to pay for their health care, education, house or car through savings they kept on voting for the incumbents (no, there is no difference between center left and right) since friendly bankers were more than willing to make up the difference. It is clear for all to see but the Ph.Ds. that frequent elitist policy circles that the massive misallocation and consumption of capital such a perverted system enables will eventually collapse on itself. Debt used to be productive, id est. self-liquidating, but now it is used for consumption backed by future income projections based on historical experience.
However, one should not extrapolate future income streams from a historical regime when the new one is fundamentally different. The promised incomes obviously never materialized and the world reached peak debt. The credit Ponzi is dead. Consider the following chart that depicts decennial change in average real earnings for the UK worker. It shows an unprecedented development. Not since the 1860s have the UK worker experienced falling real earnings over a ten-year period. Such dramatic change obviously does something to the so-called social contract people have been tricked into. People no longer believe in a brighter future and there is nothing more detrimental to a human being than that.
No longer vested in the status quo, people opt for radical change, hence; Brexit, Trump, Le Pen, Lega Nord, M5S. Old rules does not apply anymore. Over the next couple of years, we will experience a torrent of sea change, a lot of it unpleasant, but it will come nonetheless. In the social contract, immigration is OK when jobs are plentiful and people’s houses are worth more every year. Not so much when they are unemployed and without a house or even prospects of ever owning one. Corruption in the higher echelons of society is grudgingly accepted when the elite allegedly runs a system where incomes and productivity constantly moves upwards, but will not be tolerated as blue collar jobs are moved offshore.
[..] So what does this mean for the UK specifically? Few have lived as high on the hog as the brits have. Their current account deficit at 6 per cent of GDP is reminiscent of countries heading into depressions. In the mid-1970s, the IMF had to bail them out and in the early 1990s, the infamous ERM regime collapsed as Soros made his billion. The pound got a pounding on the Brexit vote, but it was destined to fall anyways. The adjustment needed to correct this imbalance is not over and we should all expect a far weaker pound in the months and years ahead. Brexit only triggered what was already baked into the cake in the first place.
The Bank of England’s chief economist has called for a big package of measures to support the UK’s post-Brexit economy, stressing the need for a prompt and robust response to the uncertainty. Andy Haldane made it clear the Bank’s monetary policy committee would do more than merely cut interest rates from their already record low of 0.5% when it meets in August. The Bank’s chief economist used a speech to warn that decisive action was required at a time when confidence had been dented by the shock referendum result. “In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn.
“Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round.” The Bank surprised the City when it left interest rates on hold at its July meeting held this week, but the minutes of the MPC’s discussions said most of its nine members thought an easing of policy would be required in August.
The tone and content of Haldane’s speech suggest that the MPC will use public appearances to make the case for strong action in August. Options include cutting interest rates to 0.25% or lower, restarting the Bank’s £375bn quantitative easing scheme and providing cut price loans to banks under the funding for lending scheme. [..] In a reference to the prison movie The Shawshank Redemption Haldane said: “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same ‘luxury’.”
Philip Hammond, the UK’s newly appointed chancellor of the exchequer, said the vote to leave the EU had “rattled confidence” and that he will take “whatever measures” needed to shore up the British economy. “The number one challenge is to stabilise the economy, send signals of confidence about the future, the plans we have for the future to the markets, to business, to international investors,” Hammond said in a Sky News interview. Hammond’s comments came ahead of a meeting later on Thursday of Bank of England policy makers who will debate whether to reduce the key interest rate for the first time since 2009.
The Bank’s governor, Mark Carney, is seeking to stave off further turmoil after the pound plunged and consumer confidence dropped to a 21-year low in the wake of last month’s decision to quit the EU. The chancellor, appointed to the role late on Wednesday by new prime minister, Theresa May, will meet Carney on Thursday morning “to make an assessment of where the economy is,” he said in a BBC TV interview. He added: “I think the governor of the Bank of England is doing an excellent job.”
The Dow Jones Industrial Average hit its fourth consecutive closing high on Friday, rising 10.14 points, or less than 0.1%, to 18516.55. For the week, it gained 2%. The S&P 500’s rally put the index above the mean average of year-end targets from 18 analysts tracked by Birinyi Associates. Collectively, those analysts predicted, as of July 6, that the S&P 500 would finish this year at 2153. The index closed above that level on Friday, at 2161.74, despite slipping 0.1% after four record closes in a row. Analysts revise their year-end targets throughout the year. In mid-January, the average year-end target was 2198, according to Birinyi Associates.
Markets elsewhere rallied for the week. Japan’s Nikkei Stock Average rose 9.2% over five sessions, its best performance in 6 1/2 years. The Stoxx Europe 600 rose 3.2% in the week. “The market is showing us, if nothing else, its resilience,” said Jason Browne, chief investment officer of FundX Investment Group in San Francisco. Investors began to put money back into riskier assets such as stocks, an encouraging sign to those who had worried about the stream of money leaving equity funds this year. In the seven days to July 13, investors poured a net $7.8 billion into U.S. equity funds, according to data provider Lipper. It was the first weekly inflow since late April.
European Union regulators are considering ways to speed the implementation of collateral requirements for derivatives as the bloc’s failure to meet a global deadline threatens to fracture the $493 trillion market. The European Commission said last month it wouldn’t meet a Sept. 1 global deadline. In a draft letter addressed to the main EU regulators, the bloc’s executive arm is now proposing to adapt its plans to “align with the internationally agreed timelines as closely as possible.” Previously, the commission said it would finish EU technical rules on margins for non-centrally cleared over-the-counter derivatives by year-end and have them take effect before mid-2017. That prompted a backlash from regulators in Washington and Tokyo, who said they intended to impose the rules on schedule, while leaving the door open to a delay.
The regulations will apply billions of dollars in collateral demands to swaps traded by the world’s largest banks, including JPMorgan Chase, Barclays and Deutsche Bank. The financial industry has called for global regulators to enforce the requirements at the same time to avoid creating the potential for regulatory arbitrage between jurisdictions. The Basel Committee on Banking Supervision, which includes regulators from around the world, helped set the international deadlines that start taking effect for the biggest banks in September and ratchet up starting in March 2017. The over-the-counter swap market is estimated at $493 trillion by the Bank for International Settlements. In the undated draft letter seen by Bloomberg, the commission proposed that the requirements would take effect one month after the EU’s technical rules enter into force.
It took up less than a minute of a one-hour speech, but led to an unexpectedly busy weekend for the Polish Ministry of Development in Warsaw. At the governing Law & Justice Party’s congress on the first Saturday of this month, leader Jaroslaw Kaczynski spelled out his vision for the country. He mentioned briefly that Poland should do more with the money parked in its retirement funds. At Kaczynski’s ministry of choice for economic policy, senior officials swiftly rounded up colleagues to work through Sunday so that at 8:30 a.m. the next day – before financial markets opened – an overhaul of the $35 billion pension industry could be unveiled. Investment companies were incredulous and the stock market dropped, though it came as little surprise to the people close to the real power in Poland.
Kaczynski, 67, holds no office beyond his role as lawmaker – he’s not the prime minister, president and doesn’t even run a department. His drumbeat of mistrust for both Russia and western Europe, the them-and-us attacks on Poland’s post-communist elite and his courting of the Catholic church give him enough of a devoted following that he needs no title. “Politically, he’s a sort of commander in chief or a first secretary we knew from the times of communism,” said Marek Migalski at Silesian University in Katowice. A former Law & Justice lawmaker in the European Parliament, he was ostracized by the party for criticizing Kaczynski in 2010. “I’d say that for his supporters, he’s even more than Moses. It’s not just a notion that Kaczynski is doing only good things, it’s the conviction that things that are done by Kaczynski are good.”
Since at least 2010, the European Commission has been in possession of concrete evidence that automobile manufacturers were cheating on emissions values of diesel vehicles, according to a number of internal documents that SPIEGEL ONLINE has obtained. The papers show that emissions cheating had been under discussion for years both within the Commission and the EU member state governments. The documents also show that the German government was informed of a 2012 meeting on the issue. The scandal first hit the headlines in 2015 when it became known that Volkswagen had manipulated the emissions of its diesel vehicles. The records provide a rough chronology of the scandal, which reaches back to the middle of the 2000s.
Back then, European Commission experts noticed an odd phenomenon: Air quality in European cities was improving much more slowly than was to be expected in light of stricter emissions regulations. The Commission charged the Joint Research Centre (JRC) – an organization that carries out studies on behalf of the Commission – with measuring emissions in real-life conditions. To do so, JRC used a portable device known as the Freeway Performance Measurement System (PeMS), which measures the temperature and chemical makeup of emissions in addition to vehicle data such as speed and acceleration. This technology, which was later used to reveal VW emissions manipulation in the United States, was largely developed by the JRC.
JRC launched their PeMS tests in 2007 and quickly discovered that nitrogen oxide emissions from diesel vehicles were much higher under road conditions than in the laboratory. The initial results were published in a journal in 2008 and they came to the attention of the Commission. On Oct. 8, 2010 – roughly three years after the JRC tests – an internal memo noted that it was “well known” that there was a discrepancy between diesel vehicle emissions during the type approval stage (when new vehicle models are approved for use on European roads) and real-world driving conditions. The document also makes the origin of this discrepancy clear: It is the product of “an extended use of certain abatement technologies in diesel vehicles.”
‘Economics is for everyone’, argues legendary economist Ha-Joon Chang in our latest mind-blowing RSA Animate. This is the video economists don’t want you to see! Chang explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives.
Marion Post Wolcott Coal miner waiting for lift home, Capels, West Virginia 1938
George Osborne declared on Monday that the UK “is in a position of strength” (he meant the economy, not the football team). No, it is not. That’s why he and his ilk lost the vote. But Osborne’s actually thick enough to look in the mirror and tell himself he did a good job. Utterly blind to the people he keelhauled over the past 6 years.
And no doubt while he’s at it, he’s at least tempted to label all 17 million Britons who voted ‘Leave’, uneducated racists. George’s well-to-do friends may be in “a position of strength”, but the British people who paid for these friends of George’s to be comfortable, are nowhere near “a position of strength”.
The only way to protest the wringer they have been put through was to vote against anything Osborne and Cameron represent. And so they did.
Most of the “Brexit is the end of the world” claims that have followed Friday’s referendum result are as stunning as Osborne’s blind spot for this own people (who he doesn’t even see as ‘his own’). And most of them come from people who until recently claimed to detest ‘Gideon’.
In the eyes of a vast majority of commentators, all hell is busy imminently breaking loose in UK society and its economy because those 17 million dumb racists voted No to the EU, which was in reality simply a No to Osborne and Cameron -and Juncker et al-, and all they stand for, something just about entirely overlooked; for most of these voters, it was not a Yes to anyone else, just a NO!.
At the same time the Leave campaign claims endless streams of milk and honey are in the offing, an equally unlikely proposition (is it perhaps an idea to not only talk about money or race; how about physics?).
Fact is nobody knows where Brexit will lead, for the simple reason that there are no precedents or other comparisons. Everybody on all sides just makes things up. Since most of the media outlets that have any pretense left of serious journalism are on the Remain train, it would be easy to be fooled by them.
The whole ‘discussion’ -it’s more an endless parade of monologues- has turned into the metaphorical hammer looking for a nail in embarrassing ways.
Who do all these people have to blame but themselves? Weren’t they the ones who felt up to the very last moment that there would be no Brexit? And isn’t that why they decided to keep calm and carry on? Let’s see some denials of that, please.
The “I was asleep but that’s not really my fault, is it?” kind of thing. Bring it on. The Guardian has the audacity to ask for donations from those who “appreciate their Brexit coverage”. Granted, they publish some 826 pieces a day on the topic. But I’d consider paying them just to stop doing that.
Hillary Clinton’s reaction to Brexit was to call for ‘steady, experienced leadership’. Which sounds sort of reasonable but is in reality just another way of saying ‘more of the same’. And that in turn happens to be exactly what Brexit was a reaction against.
Clinton’s simply and obviously aiming for those Americans who are afraid of change. But that doesn’t mean she has the power to prevent it. Nor that it’s a wise track to be on, given that Trump is where he is because so many people clearly want change, not ‘more of the same’.
European Parliament president Martin Schulz was quoted as saying: “The British have violated the rules. It is not the EU philosophy that the crowd can decide its fate.” Still wondering what the source of that quote is. Saw Prof. Richard Werner quote it, but without the source.
Jean-Claude -‘You have to lie’- Juncker told European Parliament members yesterday that he has imposed a ‘Presidential’ ban on EU commissioners holding informal or secret talks with the British about the country’s exit from the EU, until the UK government formally invokes Article 50. I bet you he’s holding secret talks right now.
A Bloomberg headline: “EU Chiefs ‘Held Hostage’ by UK Tell Cameron to Spell Out Goals”. Err, guys and dolls, Cameron resigned. He’s in no position to spell out anything, and he wants it even less; Georgy ain’t even touching that hot potato just to pass it on. He’ll take a pig’s head any day.
As Jeremy Corbyn faces a Labour Party rebellion, George Monbiot says “I fear that may be the end of the Labour party. Just when we need it most.“ No, that’s not what you need, George, you need a party or other organization that stands up for you and ‘yours’. And when’s the last time Labour has done that for the majority of British people?
Also, beware of economists who talk politics; they think these are separate fields. Some even think there’s science involved. Brexit is not “Britain’s democratic failure”, as economist Kenneth Rogoff suggests, that failure came a long time ago, when corporatism fascism came in, first through Labour’s own Tony Blair, and was subsequently perfected by Cameron and Osborne.
If anything, it’s the opposite, that is to say, Brexit is Britain’s democratic resurgence, though it has arguably come in a repulsively distorted shape. But perhaps that is inevitable once real democracy has had its head held underwater for so many years.
Through all the insistence that Britain must stay inside the EU, I can’t help wondering when ‘Britain can’t stand on its own two legs’, which is what all these commentaries come down to, came to be perceived as a winning argument, but all but a few ‘expert voices’ insist this is true.
‘Britain faces an uncertain future’. How awful is that? Still, I bet you, when next time it sounds even halfway convenient, uncertainty will get to mean ‘opportunity’. Oh, and don’t you, too, hate the implications of a word like ‘nervousness’, as in: “everyone’s nervous”? Well, unless one’s favorite musician or athlete talks about the ‘healthy nervousness‘ necessary to perform well.
Much respected economist/writer Edward Harrison says on Twitter: “.. this is the part I HATE. We are, what, 5 days into this. No one knows how severe the Market reaction will be. It’s ludicrous..”
And I’m like, chill, mate, why is it ludicrous that you can’t predict what ‘The Markets’ reaction to something, anything will be? If that’s something you HATE, maybe you should not be in the game, or in the kitchen for that matter.
The markets are not supposed to be predictable, and when they are, it means someone is manipulating them, and someone else is paying for that predictability, and that second someone is invariably not in on ‘the game’.
Kids say the darndest things. So do investors and economists.
Just because you want want certainty, doesn’t mean you have a right to it, democratic or not. And neither does anyone else. But if you want some regardless, here goes: you can be certain the economy will collapse at some point. That’s not the certainty you were looking for, is it? So what would you prefer, accepting that certainty, or to let someone tell you that this negative prediction is still uncertain? I’ll give you a few minutes to think about it.
Mariana Mazzucato, another economist, says:
The third challenge is green growth. EU legislation has improved the quality of British beaches and the air we breathe. But green policies will also form the next industrial wave that will lead to future prosperity. Today green spending is an option for governments and businesses; soon it will be a necessity. Those who have chosen to invest will be in a strong position.
And I’m thinking: where to begin? A wave of future prosperity? You mean as in Elon Musk prosperity? Using public money to blow pipe dreams? Green spending is a big ruse meant to allow the formerly rich -yeah, that’s you- lay their worried consciences to rest, and pay for it through their noses.
But there is so much debt burying us all, inside our own societies, that we will never be able to afford any transition to a green economy, even if it were possible from a physics point of view. Which it is definitely not. All the rest is just propaganda.
Our future consists of using a lot less energy -try 90% on for size-; how we get there is partly up to us -but only partly-, we can do it wisely and voluntarily or stupidly through hard set limitations, but that’s the only choice we have. We will never replace even a fraction of fossil fuels with wind or sun or algea or project X.
That same species of certainty applies to the European Union, even if it may appear -even- less obvious. The grandiose EU project of an ever closer union is running into the limits of economics as well as physics. European nations can work together, but not when they’re forced to give up their sovereignty, their independence and their livelihoods.
That will lead them to turn on each other. There’s no escaping it. The EU is the sack the cats will fight in.
The EU is a monstrosity with no parallel in modern times, as evidenced in how it bulldozed the Greek economy, and in how it allowed many hundreds of promising young lives to drown in the Mediterranean, and you Britons want to not just belong to that monstrosity, you’re willing to fight one another over the privilege?
Foreign governments are dumping U.S. debt like never before. In a bid to raise cash, foreign central banks and government institutions sold $57.2 billion of U.S. Treasury debt and other notes in January, according to figures released on Tuesday. That is up from $48 billion in December and the highest monthly tally on record going back to 1978. It’s part of a broader trend that gathered steam last year when central banks sold a record $225 billion of U.S. debt. “Foreigners have no longer been our BFF when it comes to buying U.S. Treasuries,” Peter Boockvar at The Lindsey Group wrote. So what are foreign central bankers doing with these piles of cash? They’re mostly using the funds to stimulate their own economies as the global growth slowdown and crash in oil prices continue to take their toll.
For instance, China has been liquidating its holdings of foreign debt to pump money into its slowing economy, plummeting currency and extremely volatile stock market. China, the largest owner of U.S. debt, trimmed its Treasury holdings by $8.2 billion in January, the Treasury Department said. The actual decline was likely larger considering China reported selling $100 billion of foreign-exchange reserves in January. Countries exposed to the oil price crash are using the cash to fill giant holes in their budget. Norway, Mexico, Canada and Colombia all cut their Treasury holdings in January as oil plunged below $30 a barrel for the first time in a dozen years. Foreign sales of U.S. debt appear to be largely driven by economic necessity. “These foreign sales are not fundamentally driven. The U.S. economy seems to be on better footing,” said Sharon Stark at D.A. Davidson.
That’s why total foreign holdings of U.S. debt actually rose in January to $6.18 trillion. That’s because demand from global investors continues to be high. Besides, some foreign governments added to their piles of Treasury bonds, including Japan, Brazil and Belgium. Despite all these foreign government sales, demand for U.S. Treasuries remains high. In fact, the U.S. can borrow money at a lower rate now than at the beginning of the year. The benchmark 10-year Treasury yield is sitting at 1.99%. That’s down from nearly 3% two years ago. Demand is driven by the relative strength of the American economy, which continues to add jobs at a healthy pace despite the global headwinds. The diminished appetite from overseas is being offset by a number of factors. First, the turmoil in global financial markets has boosted appetite for safe-haven assets like U.S. government debt.
It has been over half a year since we first downgraded the industrial recession to an all-out global depression by using Caterpillar retail sales data, which have been so counterintuitive to what the company’s earnings have been reporting that last September we had to ask “What On Earth Is Going On With Caterpillar Sales?.” Today, we must admit that something simply does not compute. On one hand, CAT stock has soared by over 30% from its 2016 lows….
… despite warning just yesterday that the pain will continue after the company guided even lower to already depressed expectations. But what makes no sense at all is that according to the just released CAT retail sales data, the industrial recession since downgraded to a depression, just fell out of the bottom, when the heavy industrial equipment company reported that February world sales crashed by 21%, after falling “only” 15% in January, led by double digit drops in every single market:
US down 11% after sliding 7% in January
China and Asia/PAC down 26% after being down 22%
EAME down 23% after sliding 14% the month before
Latin Marica imploding by 45% after a 36% drop one month ago, and one of the worst monthly drops on record.
Visually, this is as follows:
And what is more confusing is that CAT has not only not had a positive monthly increase in retail sales in a record 39 months, or more than double the length of the Financial Crisis’ 19 months and the longest in history, but the February drop was the biggest one month decline in 5 years!
Of course, on its face, this data would explain why over the past month first the BOJ, then the PBOC, then the ECB and finally the Fed all surprised with not only more dovishness but much more outright easing as central banks panic to halt what at least according to this one indicator confirms the global economy has not been worse in nearly half a decade.
Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.
Behind the suspected agreement, according to Joachim Fels of Pimco and David Zervos of Jefferies is a belief that a further major dollar rise against the euro and the yen would be bad for the global economy. “There seems to be some kind of tacit Shanghai Accord in place,” said Fels, who is global economic adviser for Pimco. “The agreement is to roughly stabilize the dollar versus the major currencies through appropriate monetary policy action, not through intervention.” Many other analysts are skeptical. “I don’t think there is a coordinated agreement among central banks to follow the policies they have,” said Charles Collyns, chief economist for the Institute of International Finance in Washington and a former U.S. Treasury official. “But clearly central banks do talk with each other and are aware of each other’s strategies.”
At the Plaza Hotel in 1985, the U.S. and its four industrial-nation allies struck a deal to bring down the sky-high dollar through concerted selling on the currency market. They came together a year and half later in Paris with the aim of stabilizing the greenback after successfully engineering its decline.
Interest rates in the United States have fallen to minus 2pc in real terms and are dropping into deeper negative territory with each passing month. This is a remarkable state of affairs. It is clear that the US Federal Reserve is now trapped. The FOMC dares not tighten despite core inflation reaching 2.3pc because it is so worried about tantrums in financial markets and about that other Sword of Damocles – some $11 trillion of offshore debt denominated in dollars, up from $2 trillion in 2000. The Fed has been forced by circumstances to act as the world’s central bank, nursing a fragile and treacherous financial system struggling with unprecedented leverage. Average debt ratios are 36 percentage points of GDP higher than they were at the top of the pre-Lehman bubble in 2008, and this time emerging markets have been drawn into the quagmire as well by the spill-over effects of quantitative easing.
Like it or not, the Fed is stuck with the task of cleaning up a global mess that is arguably of its own making. You can certainly make a case that the Fed was right to hold rates steady this week and – crucially – to signal just two more rises over the rest of the year. The risks are not symmetric. It would be fatal if the US economy failed to achieve “escape velocity” and then slid back into deflation, leaving no margin of safety before the next downturn. Yet however well-intentioned, the Fed’s policy is fast becoming untenable. The Cleveland Fed’s median index of underlying inflation is already up to 2.8pc. Healthcare costs, car insurance, rents, restaurant bills, hotels, and women’s clothing are all soaring. Marc Ostwald from ADM said the Fed’s governors have effectively told the world that “they will remain forcefully ‘behind the curve’, and ignore their own forecasts of a very tight labour market”.
They are searching for excuses not to tighten, either by discovering yet more “slack” in the shadows of the penumbras of the remotest corners of the jobs market, or by dismissing the inflation data as spikey, transient, and unreliable. Fed chief Janet Yellen was asked twice in her press conference whether the institution’s credibility was at stake if it continues to drag its feet, and this time the warnings are coming from people who know what they are talking about. She admitted that the US economy is “close to our maximum employment objective”, meaning that it is near the inflexion point of NAIRU (non-accelerating inflation rate of unemployment), where unemployment is so low that wage pressures start to gather steam. She admitted too that headline inflation will pick up briskly as the effects of the oil price crash fade from the data. Yet she shrank from her own insights.
China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.
In traditional economic theory, as in politics, we Americans are taught to believe that selfishness is next to godliness. We are taught that the market is at its most efficient when individuals act rationally to maximize their own self-interest without regard to the effects on anyone else. We are taught that democracy is at its most functional when individuals and factions pursue their own self-interest aggressively. In both instances, we are taught that an invisible hand converts this relentless clash and competition of self-seekers into a greater good. These teachings are half right: most people indeed are looking out for themselves. We have no illusions about that. But the teachings are half wrong in that they enshrine a particular, and particularly narrow, notion of what it means to look out for oneself.
Conventional wisdom conflates self-interest and selfishness. It makes sense to be self-interested in the long run. It does not make sense to be reflexively selfish in every transaction. And that, unfortunately, is what market fundamentalism and libertarian politics promote: a brand of selfishness that is profoundly against our actual interest. Let’s back up a step. When Thomas Jefferson wrote in the Declaration of Independence that certain truths were held to be “self-evident,” he was not recording a timeless fact; he was asserting one into being. Today we read his words through the filter of modernity. We assume that those truths had always been self-evident. But they weren’t. They most certainly were not a generation before Jefferson wrote.
In the quarter century between 1750 and 1775, in a confluence of dramatic changes in science, politics, religion, and economics, a group of enlightened British colonists in America grew gradually more open to the idea that all men are created equal and are endowed by their Creator with certain unalienable rights. It took Jefferson’s assertion, and the Revolution that followed, to make those truths self-evident. We point this out as a simple reminder. Every so often in history, new truths about human nature and the nature of human societies crystallize. Such paradigmatic shifts build gradually but cascade suddenly. This has certainly been the case with prevailing ideas about what constitutes self-interest. Self-interest, it turns out, is not a fixed entity that can be objectively defined and held constant. It is a malleable, culturally embodied notion.
Think about it. Before the Enlightenment, the average serf believed that his destiny was foreordained. He fatalistically understood the scope of life’s possibility to be circumscribed by his status at birth. His concept of self-interest extended only as far as that of his nobleman. His station was fixed, and reinforced by tradition and social ritual. His hopes for betterment were pinned on the afterlife. Post-Enlightenment, that all changed. The average European now believed he was master of his own destiny. Instead of worrying about his odds of a good afterlife, he worried about improving his lot here and now. He was motivated to advance beyond what had seemed fated. He was inclined to be skeptical about received notions of what was possible in life.
Iain Duncan Smith has resigned as work and pensions secretary over cuts to disability benefits, in the most dramatic cabinet departure of David Cameron’s leadership. In a sign that divisions over Europe have heightened tensions in the Conservatives, the former party leader stormed out of his job, saying he thought the cuts to welfare for disabled people known as personal independence payments (PIP) were a “compromise too far”. Duncan Smith, who is campaigning to leave the EU in opposition to Downing Street, said he had too often felt under pressure to make huge welfare savings before a budget in a stinging critique of George Osborne’s entire approach to reducing the deficit.
In a direct attack on Osborne and a blow to the chancellor’s hopes of becoming the next Tory leader, Duncan Smith said the disability cuts were defensible in narrow terms of deficit reduction but not “in the way they were placed in a budget that benefits higher earning taxpayers”. He said he was stepping down because Osborne’s cuts were for self-imposed political reasons rather than in the national economic interest. “I am unable to watch passively while certain policies are enacted in order to meet the fiscal self-imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest,” Duncan Smith wrote in a resignation letter to Cameron.
“Too often my team and I will have been pressured in the immediate run-up to a budget or fiscal event to deliver yet more reductions to the working age benefit bill. There has been too much emphasis on money saving exercises and not enough awareness from the Treasury, in particular, that the government’s vision of a new welfare-to-work system could not repeatedly be salami-sliced.”
Some cash-strapped U.S. oil and gas companies are considering creating an unusual layer of debt as a way of surviving the rout in oil and gas prices, according to restructuring advisors. Chesapeake Energy for example is considering the strategy to swap some of its roughly $9 billion debt. Severely distressed companies may issue so-called 1.5 lien debt, sandwiched between the first and second liens, to raise new capital. Investors with a stomach for risk would get a better yield than for the top debt, and have a stronger claim than junior creditors if the company filed for bankruptcy. Companies could also create a new, middle layer of debt to swap with existing bondholders, offering them the option of giving up principal to jump the queue for repayment in the event of a bankruptcy.
But 1.5 liens, which often have longer maturities that help companies buy time to pay existing bondholders in full, are a sign of desperation that would anger junior creditors, restructuring experts said. Only six companies have done 1.5 lien deals over the past several years, according to Moody’s. The swap would make sense for Chesapeake because its bonds maturing in 2017 and 2018 are trading at depressed levels, analysts said. “This happens when the market kind of constricts,” said John Rogers, senior vice president at Moody’s. “(You) see it in deals where the company is overlevered and has a maturity coming up.” However, some credit rating agencies view the exchange of new 1.5 lien secured notes for existing senior unsecured and 2nd lien secured notes as a distressed exchange and a limited default depending on their definition of default.
The European Commission will be obliged to consult with US authorities before adopting new legislative proposals following passage of a controversial series of trade negotiations being carried out mostly in secret. A leaked document obtained by campaign group the Independent and Corporate Europe Observatory (CEO) from the ongoing EU-US Transatlantic Trade and Investment Partnership (TTIP) negotiations reveals the unelected Commission will have authority to decide in which areas there should be cooperation with the US – leaving EU member states and the European Parliament further sidelined. The main objective of TTIP is to harmonise transatlantic rules in a range of areas – including food and consumer product safety, environmental protection, financial services and banking.
The leaked document concerns the “regulatory cooperation” chapter of the talks, which the European Union says will result in “cutting red tape for EU firms without cutting corners”. It shows a labyrinth of procedures that could tie up any EU proposals that go against US interests, according to analysis by CEO. The campaign group said the document also reveals the extent to which major corporations and industry groups will be able to influence the development of regulatory cooperation by making what is referred to as a “substantial proposal” to the working agenda of the Commission and US agencies. The plans revealed by the document will give the US regulatory authorities a “questionable role” in Brussels lawmaking and weaken the European Parliament, CEO argues.
Kenneth Haar, researcher for CEO, said: “EU and US determination to put big business at the heart of decision-making is a direct threat to democratic principles. This document shows how TTIP’s regulatory cooperation will facilitate big business influence – and US influence – on lawmaking before a proposal is even presented to parliaments.” Nick Dearden, director of the Global Justice Now campaign group, said: “The leak absolutely confirms our fears about TTIP. It’s all about giving big business more power over a very wide range of laws and regulations. In fact, business lobbies are on record as saying they want to co-write laws with governments – this gets them a step closer. This isn’t an ‘add on’ or a small part of TTIP – it’s absolutely central.”
Mr Dearden said it was “scary” that the US could get the power to challenge and amend European regulations before elected European politicians have had the chance to debate them. Referring to the imminent EU referendum, he said: “We’re talking about sovereignty at the moment in this country – it’s difficult to imagine a more serious threat to our sovereignty than this trade deal.”
Refugees and migrants arriving in Europe will be sent back across the Aegean sea under the terms of a deal between the EU and Turkey that has been criticised by aid agencies as inhumane. In an agreement that raises the prospect of a desperate last-minute rush to Greek shores by refugees and migrants hoping to beat the deadline of midnight on Saturday, the European council president, Donald Tusk, resolved sticking points with Turkey’s prime minister, Ahmet Davatoglu, before all of the EU’s 28 leaders approved the deal at talks in Brussels. Anyone arriving after Saturday midnight can expect to be returned to Turkey in the coming weeks. The UN’s refugee agency said big questions remained about how the deal would work in practice and called for urgent improvements to Greece’s system for assessing refugees.
But thousands of refugees who have already made it to Greece will be resettled in Europe, although they cannot choose where. The German chancellor, Angela Merkel, urged refugees at Idomeni to move to other accommodation being offered by the Greek authorities. Some 14,000 people are waiting at the border village in the hope of travelling north. “I want to take the opportunity to tell the refugees at Idomeni that they should trust the Greek government and move to other accommodation where the conditions will be significantly better,” Merkel said. She added that “from there, Greece will put asylum procedures in motion or redistribution to other European countries will take place”.
In exchange for taking in refugees, Turkey can expect “re-energised” talks on its EU membership, with the promise of negotiations on one policy area to be opened before July. Although this is a climbdown by Turkey, after Cyprus blocked a more ambitious restart of accession talks, Davatoglu said it was “a historic day” for EU-Turkey relations. But the head of the UN high commissioner for human rights in Europe raised concerns that safeguards intended to protect vulnerable asylum seekers would not be in place in time. Vincent Cochetel, director of the UNHCR for Europe, said the agreement was legal on paper, but questions remained on how it was implemented. “For us the proof is in the pudding. Clearly the deal on paper is consistent with international law and standards. The worry is that the safeguards will not be in place on 20 March.”
People claiming asylum needed access to interpreters and the right of appeal, he said, vital elements of a functioning asylum system that Greece has struggled to put in place until now. Implementation “is a big question mark, it is a big challenge”. Aid agencies accused the EU of failing to respect the spirit of EU and international laws. “This is a dark day for the refugee convention, a dark day for Europe and a dark day for humanity,” said Kate Allen of Amnesty International. Action Aid’s Mike Noyes claimed the deal would “effectively turn the Greek islands … into prison camps where terrified people are held against their will before being deported back to Turkey”.
Amnesty International has accused European leaders of “double speak” over a deal which will see Europe-bound migrants returned to Turkey. The leading human rights charity said the deal failed to hide the EU’s “dogged determination to turn its back on a global refugee crisis”. Under the plan, migrants arriving in Greece will be sent back to Turkey if their asylum claim is rejected. In return, Turkey will receive aid and political concessions. John Dalhuisen, Amnesty International’s Director for Europe and Central Asia, said promises by the EU to respect international and European law “appear suspiciously like sugar-coating the cyanide pill that refugee protection in Europe has just been forced to swallow”. He added: “Guarantees to scrupulously respect international law are incompatible with the touted return to Turkey of all irregular migrants arriving on the Greek islands as of Sunday.”
Scepticism hangs heavy in the air about a host of legal issues, and about whether the agreement can actually work in practice. The idea at the heart of the deal – sending virtually all irregular migrants back to Turkey from the Greek islands – is the most controversial.
European leaders insist that everything will be in compliance with the law. “It excludes any kind of collective expulsions,” emphasised European Council President Donald Tusk. The UN refugee agency (UNHCR) will take part in the scheme, but it is clearly uncomfortable with what has been agreed. Turkey is “not a safe country for refugees and migrants”, Mr Dalhuisen said, adding that any deal to return migrants based on claims it was would be “flawed, illegal and immoral”. It is hoped the plan, agreed at a summit in Brussels, will deter people from taking the often dangerous sea crossing from Turkey to Greece.
As part of the arrangement, EU countries will resettle Syrian migrants already living in Turkey. EU leaders have welcomed the agreement, but German Chancellor Angela Merkel warned of legal challenges to come. Some of the initial concessions offered to Turkey have been watered down and some EU members expressed disquiet over Turkey’s human rights record. Turkish Prime Minister Ahmet Davutoglu hailed it as a “historic” day. European Council President Donald Tusk said there had been unanimous agreement between Turkey and the 28 EU members. The UN warned that Greece’s capacity to assess asylum claims needed to be strengthened for the deal. Implementation was “crucial”, the organisation said. An EU source told the BBC up to 72,000 Syrian migrants living in Turkey would be settled in the EU under the agreement. They added that the mechanism would be abandoned if the numbers returned to Turkey exceeded that figure.
It is all for show. The EU plan to limit migrants flowing into Europe might cut numbers by a few thousand. Subsidising Turkey’s refugee camps might hold a few back. David Cameron’s “Australia” plan to seize and return migrant boats might cut a few more. News of horrors on the Macedonian border might deter some from making the desperate bid to escape present danger in hope of a safer future. But it won’t make much difference. One force greater than all the state power in the world is that of human beings fleeing for their lives. So what is the point of yet another “EU summit” on refugees? It is done to pretend to people back home that “something is being done”. It is to allay fear with an appearance of tough measures, that in turn might deter the marginal refugee, the economic migrant, the hanger-on.
But it is hard to see any meaningful change when it comes to separating Syrians and Iraqis from Afghans and Pakistanis on a Greek island, and manhandling them into a ferry back to Turkey or Libya. It is all for show. The reality is that once a refugee has established a foothold in a particular country, he or she is that country’s problem. It is both humanity and the law. We can build fences and fortresses to keep people out, but even the sophisticated regimes of western Europe can only watch as a tide of wretchedness ebbs back and forth. Sooner or later desperate people get through. Look at America’s Mexican population. Australia’s draconian policy of turning back boats and imprisoning migrants has slackened its flow, but these are not refugees, and neighbouring Indonesia is not Libya or Syria.
The current wave of newcomers to Europe’s shores is a tiny addition to the continent’s stagnant populations. That was one reason why Germany initially welcomed half a million well-qualified Syrians. As the Indian subcontinent, the Arabian Peninsula and even Africa grow and prosper, the outflow should ease. The west’s dreadful interventions in the Middle East – the prime cause of the present anarchy – must surely end. When order returns to Afghanistan, Syria and Iraq, these once-stable countries will be repopulated. But other conflicts will take their place.
While economists love to chart the impact of globalisation on trade flows, no one charts its impact on flow of people. Come what may, migration will be a theme of the 21st century. No one can underestimate the stress that inflows from Asia and Africa will place on European societies. America is still wrestling to absorb its one-time black and Hispanic migrations. But absorb we must. Migration is a fact of history. We should learn to handle it, not pretend to stop it.
By any measure, the war waged by the EU against the people smugglers blamed for the refugee crisis has been an abject failure. If sabre-rattling, barbed wire, and naval flotillas and other barriers could disrupt the trade in transporting migrants, this is a war would have been won long ago. Yet the EU-Turkey deal offers more of the same. Rounding up people smuggled into Greece and trading them for refugees registered in Turkey is not just unethical, it’s also unworkable. Earlier this month, David Cameron declared that despatching the Royal Navy to the Aegean to intercept and return refugees would help “break the business model of the criminal smugglers.” That outcome is unlikely. The “business model” of people smugglers is built on an imbalance in supply and demand.
Simply stated, the number of asylum seekers and other migrants driven to Europe by fear, hope and aspiration greatly exceeds the number allowed in, creating a market for intermediation served by trafficking. If there is one pervasive theme linking the diverse stories of migrants, it is a generalised indifference to the risks associated with strengthened border defences, perilous sea journeys, and strictures from EU leaders warning them not to travel. Whatever its military prowess, the Royal Navy is powerless to suspend the laws of economics. Refugees will continue to head for Europe – and the people smugglers will be there to facilitate their transit.
The overwhelming focus on strengthening borders and maritime patrolling is ultimately self-defeating. As migration and people smuggling become more risky – and more criminalised – the profits to be made from trafficking will rise. Europol estimates that a market now generating a turnover of some $6.6bn annually could triple in size over the next few years. With the risks and rewards associated with smuggling increasing, more organised criminal groups will enter the market. The Turkish mafia, assorted jihadi groups in Libya, and networked crime networks linking Europe to the Sahel are already strengthening their grip on people smuggling routes, eroding the already porous borders between people-smuggling, drugs-trafficking, gun-running and money-laundering.
Apparently immune to evidence, Europe’s policy makers appear hell-bent on repeating the mistakes of the war on drugs. That war has created extraordinary profits for organised crime, hurt vulnerable people, and supported the rise of institutions like the great Mexican drug cartels. So how should European leaders respond to the migrant crisis? They should start by pulling out of the cattle-market in refugee trading underpinning the proposed deal with Turkey. The way to defeat people smuggling is to suck the oxygen out of the market through a large-scale global resettlement programme, safe transit and orderly processing of asylum claims.
Prime Minister Haidar al-Abadi said the plunge in oil prices means Iraq needs IMF support to continue its fight against Islamic State, a battle he says his country is winning despite little support from its neighbors. “We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said of the oil collapse in an interview at the World Economic Forum in Davos, Switzerland. “We can defeat Daesh but with this fiscal problem, we need the support” of the IMF, he said. “We have to sustain the economy, we have to sustain our fight.” The conflict with Islamic State, which swept through swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment.
Iraq is now facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January as it approved a staff-monitored program to pave the way for a possible loan. Under the program, Iraq will seek to reduce its non-oil primary deficit. “We have cut a lot of our expenditures, government expenditures,” Abadi said in the interview. But the war brings its own costs. “We are paying salaries for the uniformed armies, for our fighters” and their weapons, Abadi said in Davos. Speaking later in a panel session in the Swiss resort, Abadi said Iraqi oil sold on Thursday for $22 a barrel, and after paying costs the country is left with $13 per barrel.
He called for neighbors to do more to help. The only country to have provided financial assistance is Kuwait, he said, which gave Iraq $200 million. “Daesh is on the retreat and it is collapsing but somebody is sending a life line to them,” Abadi said, citing victories for his forces in the key western city of Ramadi and using an Arabic acronym for Islamic State. “Neighbors are fighting for supremacy, using sectarianism.” Shiite Iran supports several of the biggest militias aiding Iraqi forces in the fight against Islamic State. Its rivalry with the Middle East’s biggest Sunni power, Saudi Arabia, has flared in recent weeks, complicating efforts to end conflicts in Iraq, Syria and Yemen. Iraq has managed to stop the advance of Islamic State in Iraq but if neighbors continue to inflame sectarianism, successes can be reversed, he said. “We are supposed to be in the same boat,” Abadi said. “In reality, we aren’t.”
Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It’s only likely to get worse this year. Experts say there are a lot of parallels between today’s crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust. Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That’s a 2,000%-plus jump. It’s just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so. No wonder America’s biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.
Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can’t pay back their debts. “The fact that a price below $100 seemed inconceivable to so many is kind of astonishing,” says Mike Lynch, president of Strategic Energy and Economic Research. “A lot of people just threw money away thinking the price would never go down.” On the last day of 2015, Swift Energy, an “independent oil and gas company” headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm’s earnings have declined over 70% in the past year.
Trimming costs and laying off workers can’t close that kind of gap. “In the 1980s, there was a bumper sticker that people in Texas had that said, ‘God give me one more boom and I promise not to screw it up,'” says Lynch. “People should have those bumper stickers ready again.” The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production. No one wants to cut back on production and risk losing market share. “It will be the U.S. companies that go out of business,” predicts La Forge. OPEC countries don’t have a lot of smaller players like the United States does. It’s usually the government that controls oil drilling and production in OPEC nations.
La Forge predicts the governments can hold their position longer. As the smaller players run out of cash, they will get swallowed up by bigger ones. “The big boys and girls will snap up a lot of cheap assets,” predicts Lynch. There’s a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn’t over for oil companies. “Some companies went under in 1986-’87 even when prices rebounded,” says La Forge. This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector. One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it’s struggling to deal with over $1 billion in debt that’s due this year alone.
The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.
The agency this month revised down its expectations of future oil prices, meaning that many of those companies’ ratings are likely to be cut even further. Credit ratings for the more financially secure investment grade companies are also likely to be lowered this time. Some companies under financial strain will be able to survive by selling assets. Private capital funds raised $57bn last year to invest in energy, according to Preqin, an alternative assets research service, and most of that money is still looking for a home. Companies with low-quality assets or excessive debts will not make it. Tom Watters of S&P expects “a lot more defaults this year”. Bankruptcies, a cash squeeze and poor returns on investment mean companies will continue to cut their capital spending.
The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,” he says. “At low prices, people aren’t going to keep producing.” He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.
A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money. Increased regulation and lower margins have seen five banks exit various countries in the last three months. Others look set to follow, further eroding the infrastructure through which governments raise debt. While these problems are for now masked by the European Central Bank buying €60 billion of debt every month to try to stimulate the euro zone economy, countries may feel the effects more sharply when the ECB scheme ends in March 2017. Since 2012, most euro zone governments have lost one or two banks as primary dealers, while Belgium – one of the bloc’s most indebted states – is down five.
Primary dealers are integral to government bond markets, buying new issues at auctions to service demand from investors and to maintain secondary trading activity. Without their support, countries would find it harder to sell debt, forcing them to offer investors higher interest rates. Over the last quarter alone, Credit Suisse pulled out of most European countries, ING quit Ireland, Commerzbank left Italy, and Belgium did not re-appoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer. In that time, only Danske Bank has added to its primary dealer roles in the bloc’s main markets. But even Danske is worried. “I’ve never seen it so bad,” said Soeren Moerch, head of fixed income trading at Danske Markets.
“When further banks reduce their willingness to be a primary dealer then liquidity will go even lower…we could have more failed auctions and we could see a big washout in the market.” Acting as a dealer has become increasingly expensive for banks under new regulations because of the amount of capital it requires, while trading profits that once made up for the initial spend have diminished in an era of ultra-low rates. “Shareholders would be shocked if they knew the scale of the costs that some businesses are taking,” said one banker who has worked at several major investment houses with primary dealer functions. The decline in dealers comes as many of the world’s largest financial firms, such as Morgan Stanley and Deutsche Bank, launch strategic reviews that are likely to impact their fixed income operations.
The risk that the euro zone could slide back into recession, having barely recovered from its long-running debt crisis, could exacerbate the withdrawal by prompting banks to retreat into their home markets. “It is a negative trend. The opposite that we saw in the first 10 years of the euro,” said Sergio Capaldi at Intesa SanPaolo. “For smaller countries…the fact that there are less players is something that could have a negative affect on market liquidity and borrowing costs.”
U.S. banks are cutting off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings. At issue are correspondent-banking relationships that allow Mexican banks to facilitate cross-border transactions and meet their clients’ needs for dealing in dollars—in effect, giving them access to the U.S. financial system. The global firms that provide those services are increasingly wary of dealing with Mexican banks as well as their customers, according to U.S. bankers and people familiar with the matter.
The moves are consistent with a broader shift across the industry, in which banks around the world are retreating from emerging markets as regulators ramp up their scrutiny and punishment of possible money laundering. For many banks, the money they can earn in such countries isn’t worth the cost of compliance or the penalties if they step across the line. U.S. financial regulators have long warned about the risks in Mexico of money laundering tied to the drug trade. The urgency spiked more than a year ago, when the Financial Crimes Enforcement Network, a unit of the Treasury Department, sent notices warning banks of the risk that drug cartels were laundering money through correspondent accounts, people familiar with the advisories said. Earlier, the Office of the Comptroller of the Currency sent a cautionary note to some big U.S. banks about their Mexico banking activities.
But the pain Mexican firms are experiencing is relatively new. The fallout is affecting Mexican banks of various sizes such as Grupo Elektra’s Banco Azteca, Grupo Financiero Banorte and Monex Grupo Financiero, and their customers, the people said. Regulators have consistently said they don’t direct banks to cut ties with specific countries or a large swath of customers. But the advisories, which had nonpublic components that haven’t been previously reported, were interpreted by several big banks as a fresh signal that they do business in Mexico at their own peril, according to people familiar with the matter. “All they know is that sanctions are big and revenues are small,” said Luis Niño de Rivera, vice chairman of Banco Azteca, based in Mexico City. “It’s simple arithmetic: ‘I make a million dollars and they’re going to fine me a billion? I won’t do that.’”
Dismal may not be the most desirable of modifiers, but economists love it when people call their discipline a science. They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology. In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution, tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma.
Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart). Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance.
Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not. Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.
A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented. On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.
Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely. It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.
A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis emergency plan. In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end. Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is ‘Director Advisor’ to the Bank of Greece.
This is the Wikipedia entry: “Heather Denise Gibson is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.” At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece. The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government. If this does not look like an inappropriate association for a chief negotiator, I don’t know what would.
David Cameron is considering plans to admit thousands of unaccompanied migrant children into the UK within weeks, as pressure grows on ministers to provide a haven for large numbers of young people who have fled their war-torn homelands without their parents. Amid growing expectation that an announcement is imminent, Downing Street said ministers were looking seriously at calls from charities, led by Save the Children, for the UK to admit at least 3,000 unaccompanied young people who have arrived in Europe from countries including Syria and Afghanistan, and who are judged to be at serious risk of falling prey to people traffickers. Government sources said such a humanitarian gesture would be in addition to the 20,000 refugees the UK has already agreed to accept, mainly from camps on the borders of Syria, by 2020.
Following a visit to refugee camps in Calais and Dunkirk on Saturday, Labour leader Jeremy Corbyn called on Cameron to offer children not just a refuge in the UK but proper homes and education, equivalent to the welcome received by those rescued from the Nazis and brought to the UK in 1939. “We must reach out the hand of humanity to the victims of war and brutal repression,” he said. “Along with other EU states, Britain needs to accept its share of refugees from the conflicts on Europe’s borders, including the horrific civil war in Syria. “We have to do more. As a matter of urgency, David Cameron should act to give refuge to unaccompanied refugee children now in Europe – as we did with Jewish Kindertransport children escaping from Nazi tyranny in the 1930s.
And the government must provide the resources needed for those areas accepting refugees – including in housing and education – rather than dumping them in some of Britain’s poorest communities.” Signs that the prime minister may act came after a week in which concern has risen in European capitals, and among aid agencies and charities, about the high number of migrants still pouring into the EU just as cold weather bites along the routes many are taking through the Balkans and central and eastern Europe. With one week of January to go, about 37,000 migrants and refugees have already arrived in the EU by land or sea, roughly 10 times the equivalent total for the month last year. The number of Mediterranean deaths stands at 158 this year.
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