Mar 152017
 
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Otto Dix The Triumph of Death 1934

 

Yes, austerity really kills real people, and it kills the societies they live in. Let’s try and explain this in simple terms. It’s a simple topic after all. Austerity is a mere left-over from faith-based policies derived from shoddy economics, and economics is a shoddy field to begin with. The austerity imposed on and in several countries and their economies after 2008, and the consequences it has had in these economies, cannot fail to make you wonder what level of intelligence the politicians have who did the imposing, as well as the economists who advised them in the process.

We should certainly not forget that the people who make these decisions are never the ones affected by them. Austerity hurts the poor. For those who are living comfortably -which includes politicians and economists that “matter”-, austerity at worst means eating and living somewhat less luxuriously. For the poor, taken far enough, it will mean not eating at all, not being able to afford clothing, medical care, even housing. Doing without 10% of very little hits much harder than missing out on 10% of an abundance.

And even then there are differences, for instance between countries. The damage done to British housing, education and health care by successive headless chicken governments is very real, and it will require a huge effort to restore these systems, if that is possible at all. Still, if the British have any complaints about the austerity unleashed upon them, they should really take a look at Greece. As this graph of households having a hard time making ends meet makes painfully clear:

 

 

Britain ‘only’ suffers from economically illiterate politicians and economists. Greece, on top of that, has to cope with a currency it has no control over, and with the foreign -dare we say ‘occupying’?- powers that do. A currency that is geared exclusively to the benefit of the richer Eurozone nations. The biggest mistake in building the EU, and the Eurozone in particular, is that the possibility has been left open for the larger and richer nations to reign over the smaller and poorer almost limitlessly. These things only become clear when things get worse, but then they really do.

This ‘biggest mistake’ predicted the end of the ‘union’ from the very moment it was established; all it will take is time, and comprehension. Eurozone rules say a country’s public debt cannot exceed 60% and its deficit must remain less than 3%. Rules that have been broken left right and center, including by the rich, Germany, France, who were never punished for doing so. The poor are.

These limits are completely arbitrary. They come from the text books of the same clueless cabal of economists that the entire Euro façade is based on. The same cabal also who now demand a 3.5% Greek budget surplus into infinity, the worst thing that can happen to an already impoverished economy, because it means even more money must flow out of an entity that already has none.

But let’s narrow our focus to austerity itself, and what makes it such a disaster. And then after that, we’ll take it a step further. We can blame economists for this mess, and hapless politicians, but that’s not the whole story; in the end they’re just messenger boys and girls. First though, here’s what austerity does. Let’s start with Ed Harrison talking about some revealing data that Matt Klein posted on FT Alphaville about comparing post-2008 Greece to emerging economies:

Europe’s Delusional Economic Policies

Here’s how Matt put it: “Greece had a very different post-crisis experience: it never recovered. By contrast, all the other countries were well past their pre-crisis peak after this much time had elapsed. On average, Argentina, Brazil, Indonesia, Thailand, and Turkey have outperformed Greece by more than 40 percentage points after nine years.”

.. unlike those countries, Greece lacked the ability to use the exchange rate as a shock absorber. So while Brazil and Greece faced the same type of downturn in dollar terms – about 45% in GDP per person – Brazilian living standards only deteriorated about 2%, compared to 26% in Greece. The net effect is that Greece had a relatively typical crisis in dollars but an unprecedently painful one in the terms that matter most”.

[..] Greece doesn’t have its own currency so the currency can’t depreciate. Greece must use the internal devaluation route, which makes its labor, goods and services cheaper through a deflationary path – and that is very destructive to demand, to growth, and to credit.

[..] it’s not about reforms, people. It’s about growth. And the euro – and the policies tied to membership – is anti-growth, particularly for a country like Greece that is forced to hit an unrealistic 3.5% primary surplus indefinitely.

 

Another good report came from the WaPo at about the same time Ed wrote his piece, some 4 weeks ago. After Matt Klein showing how hard austerity hit Greece compared to emerging economies, Matt O’Brien shows us how austerity hit multiple Eurozone countries, compared to what would have happened if they had not cut spending (or introduced the euro). It is damning.

Austerity Was A Bigger Disaster Than We Thought

Cutting spending, you see, shouldn’t be a problem as long as you can cut interest rates too. That’s because lower borrowing costs can stimulate the economy just as much as lower government spending slows it down. What happens, though, if interest rates are already zero, or, even worse, you’re part of a currency union that means you can’t devalue your way out of trouble? Well, nothing good.

House, Tesar and Proebsting calculated how much each European economy grew — or, more to the point, shrank — between the time they started cutting their budgets in 2010 and the end of 2014, and then compared it with what actually realistic models say would have happened if they hadn’t done austerity or adopted the euro.

According to this, the hardest-hit countries of Greece, Ireland, Italy, Portugal and Spain would have contracted by only 1% instead of the 18% they did if they hadn’t slashed spending; by only 7% if they’d kept their drachmas, pounds, liras, escudos, pesetas and the ability to devalue that went along with them if they hadn’t become a part of the common currency and outsourced those decisions to Frankfurt; and only would have seen their debt-to-GDP ratios rise by eight percentage points instead of the 16 they did if they hadn’t tried to get their budgets closer to being balanced.

In short, austerity hurt what it was supposed to help, and helped hurt the economy even more than a once-in-three-generations crisis already had.

[..] the euro really has been a doomsday device for turning recessions into depressions. It’s not just that it caused the crisis by keeping money too loose for Greece and the rest of them during the boom and too tight for them during the bust. It’s also that it forced a lot of this austerity on them. Think about it like this. Countries that can print their own money never have to default on their debts – they can always inflate them away instead – but ones that can’t, because, say, they share a common currency, might have to.

Just the possibility of that, though, can be enough to make it a reality. If markets are worried that you might not be able to pay back your debts, they’ll make you pay a higher interest rate on them – which might make it so that you really can’t.

In other words, the euro can cause a self-fulfilling prophecy where countries can’t afford to spend any more even though spending any less will only make everything worse.

That’s actually a pretty good description of what happened until the ECB belatedly announced that it would do “whatever it takes” to put an end to this in 2012. Which was enough to get investors to stop pushing austerity, but, alas, not politicians. It’s a good reminder that you should never doubt that a small group of committed ideologues can destroy the economy. Indeed, it’s the only thing that ever has.

 

 

So those are the outcomes, But what’s the theory, where does the “small group of committed ideologues” go so wrong? Let’s go really basic and simple. Last week, Britsh economist Ann Pettifor, promoting her new book “The Production of Money: How to Break the Power of Bankers”, said this to Vogue:

Politicians who advocate for austerity measures—cutting spending—like to say that the government ought to run its budget the way women manage our households, but unlike us, the government issues currency and sets interest rates and so on, and the government collects taxes. And if the government is managing the economy well, it ought to be expanding the numbers of people who are employed and therefore paying income tax and tax on purchases—purchases that turn a profit for businesses which then hire more employees, and on and on it goes. That’s called the multiplier effect, and for 100 years or so, it’s been well understood. And it’s why governments should invest not in tax breaks for wealthy people, but in initiatives like building infrastructure.

Around the same time, Ann wrote in the Guardian:

[..] the public are told that cuts in spending and in some benefits, combined with rises in income from taxes will – just as with a household – balance the budget. Even though a single household’s budget is a) minuscule compared to that of a government; b) does not, like the government’s, impact on the wider economy; c) does not benefit from tax revenues (now, or in the foreseeable future); and d) is not backed by a powerful central bank. Despite all these obvious differences, government budgets are deemed analogous (by economists and politicians) to a household budget.

[..] If the economy slumps (as in 2008-9) and the private sector weakens, then like a see-saw the public sector deficit, and then the debt, rises. When private economic activity revives (thanks to increased investment, employment, sales etc) tax revenues rise, unemployment benefits fall, and the government deficit and debt follow the same downward trajectory. So, to balance the government’s budget, efforts must be made to revive Britain’s economy, including the indebted private sector.

In other words, when faced with economic hard times, a government should not cut spending, it should increase it -and it can-. Because cutting spending is sure to make things worse. At the same time of course, this is not an option available to Greece, because it has ceded control of its currency, and therefore its economy, to a largely unaccountable and faceless cabal that couldn’t care less what happens in the country.

All they care about is that the debts the banks in the rich part of the eurozone incurred can be moved onto someone else’s shoulders. Which is where -most of- Greece’s crisis came from to begin with. And so, yes, Germany and Holland and France are sitting sort of pretty, because they prevented a banking crisis from happening at home; they transferred it to Greece’s pensioners and unemployed youth. The ‘model’ of the Eurozone allows them to do this. Coincidence? Bug or feature?

 

 

Oh, and it’s not only Greece, though it’s by far the hardest hit. Read Roberto Centeno in the Express below. Reminds me of Greeks friends saying: “In 2010, we were told we had €160 billion or so in debt, and we needed a bailout. Now we have over €600 billion in debt, they say. How is that possible? What happened? What was that bailout for?”

‘Spain Is Ruined For 50 Years’

A leading Spanish economist has hit out at the ECB saying “crazy” loans will ruin the lives of the population for the next 50 years. And it is only a matter of time before the Government is forced to default as a debt bubble and low wages effectively forge the worst declines in “living memory”. Leading economist Roberto Centeno, who was an advisor to US president Donald Trump’s election team on hispanic issues, says the country has borrowed €603 billion that it cannot conceivably pay back. And he says Spanish politicians including Minister of Economy Luis de Guindos are “insulting their intelligence” after doing back door deals with the ECB. In a blog post Mr Centeno says there needs to be audits so the country can understand the magnitude of its debt mountain.

He said Spain was “moving steadily towards the suspension of payments which is the result of out of control public waste, financed with the largest debt bubble in our history, supported by the ECB with its crazy policy of zero interest rate expansion and without any supervision.” The expert added the doomed situation will “lead to the ruin of several generations of Spaniards over the next 50 years”. [..] He said the country is currently suffering from a “third world production model”. He added: “We have a third world production model of speculators and waiters, with a labour market where the majority of jobs created are temporary and with remunerations of €600, the largest wage decline in living memory. “And all this was completed with a broken pension system and an insolvent financial system.”

Forecasting an unprecedented shock to the European financial model, Mr Centento is calling for an immediate audit despite a recent revelation that the ECB is failing in its supervisory role over Europe’s banks. He also claimed the Spanish government and European Union leaders have been manipulating figures since 2008. Mr Centento said: “We will require the European Commission and Eurostat to audit and audit the Spanish accounting system for serious accounting discrepancies that may jeopardise stability. “The gigantic debt bubble accumulated by irresponsible governments, and that never ceases to grow, will be the ruin of several generations of Spaniards. “The Bank of Spain’s debt to the Eurosystem is the largest in Europe. “The day that the ECB minimally closes the tap of this type of financing or markets increase their risk aversion, the situation will be unsustainable.”

 

 

But then it’s time to move on, courtesy of Michael Hudson, prominent economist, who should be a guest of honor, at the very least, at every Eurogroup meeting. You know, to give Dijsselbloem and Schäuble a reality check. Michael shines a whole different additional light on European austerity policies. This is from an interview with Sharmini Peries:

Finance as Warfare: IMF Lent to Greece Knowing It Could Never Pay Back Debt

MICHAEL HUDSON: You said the lenders expect Greece to grow. That is not so. There is no way in which the lenders expected Greece to grow. In fact, the IMF was the main lender. It said that Greece cannot grow, under the circumstances that it has now. What do you do in a case where you make a loan to a country, and the entire staff says that there is no way this country can repay the loan? That is what the IMF staff said in 2015.

It made the loan anyway – not to Greece, but to pay French banks, German banks and a few other bondholders – not a penny actually went to Greece. The junk economics they used claimed to have a program to make sure the IMF would help manage the Greek economy to enable it to repay. Unfortunately, their secret ingredient was austerity.

[..] for the last 50 years, every austerity program that the IMF has made has shrunk the victim economy. No austerity program has ever helped an economy grow. No budget surplus has ever helped an economy grow, because a budget surplus sucks money out of the economy.

As for the conditionalities, the so-called reforms, they are an Orwellian term for anti-reform, for cutting back pensions and rolling back the progress that the labor movement has made in the last half century. So, the lenders knew very well that Greece would not grow, and that it would shrink.

 

So, the question is, why does this junk economics continue, decade after decade? The reason is that the loans are made to Greece precisely because Greece couldn’t pay. When a country can’t pay, the rules at the IMF and EU and the German bankers behind it say, don’t worry, we will simply insist that you sell off your public domain. Sell off your land, your transportation, your ports, your electric utilities.

[..] If Greece continues to repay the loan, if it does not withdraw from the euro, then it is going to be in a permanent depression, as far as the eye can see. Greece is suffering the result of these bad loans. It is already in a longer depression today, a deeper depression, than it was in the 1930s.

[..] when Greece fails, that’s a success for the foreign investors that want to buy the Greek railroads. They want to take over the ports. They want to take over the land. They want the tourist sites. But most of all, they want to set an example of Greece, to show that France, the Netherlands or other countries that may think of withdrawing from the euro – withdraw and decide they would rather grow than be impoverished – that the IMF and EU will do to them just what they’re doing to Greece.

So they’re making an example of Greece. They’re going to show that finance rules, and in fact that is why both Trump and Ted Malloch have come up in support of the separatist movement in France. They’re supporting Marine Le Pen, just as Putin is supporting Marine Le Pen. There’s a perception throughout the world that finance really is a mode of warfare.

Sharmini Peries: Greece has now said, no more austerity measures. We’re not going to agree to them. So, this is going to amount to an impasse that is not going to be resolvable. Should Greece exit the euro?

MICHAEL HUDSON: Yes, it should, but the question is how should it do it, and on what terms? The problem is not only leaving the euro. The problem really is the foreign debt that was bad debt that it was loaded onto by the Eurozone. If you leave the euro and still pay the foreign debt, then you’re still in a permanent depression from which you can never exit. There’s a broad moral principle here: If you lend money to a country that your statistics show cannot pay the debt, is there really a moral obligation to pay the debt? Greece did have a commission two years ago saying that this debt is odious. But it’s not enough just to say there’s an odious debt. You have to have something more positive.

[..] what is needed is a Declaration of Rights. Just as the Westphalia rules in 1648, a Universal Declaration that countries should not be attacked in war, that countries should not be overthrown by other countries. I think, the Declaration of International Law has to realize that no country should be obliged to impose poverty on its population, and sell off the public domain in order to pay its foreign creditors.

[..] the looming problem is that you have to pay debts that are so far beyond your ability to pay that you’ll end up like Haiti did after it rebelled after the French Revolution.

[..] A few years after that, in 1824, Greece had a revolution and found the same problem. It borrowed from the Ricardo brothers, the brothers of David Ricardo, the economist and lobbyist for the bankers in London. Just like the IMF, he said that any country can afford to repay its debts, because of automatic stabilization. Ricardo came out with a junk economics theory that is still held by the IMF and the European Union today, saying that indebted countries can automatically pay.

Well, Greece ended up taking on an enormous debt, paying interest but still defaulting again and again. Each time it had to give up more sovereignty. The result was basically a constant depression. Slow growth is what retarded Greece and much of the rest of southern Europe. So unless they tackle the debt problem, membership in the Eurozone or the European Union is really secondary.

There is no such question as “why did austerity fail ‘in a particular case'”?. Austerity always fails. You could perhaps come up with a theoretical example in which a society greatly overspends and toning down spending might balance some things, but other than that, and nothing in what we see today resembles such an example, austerity can only work out badly. And that’s before, as Michael Hudson suggests, austerity is used as a means to conquer people and countries in a financial warfare setting.

This is because our economies (as measured in GDP) are 60-70% dependent on consumer spending. Ergo, when you force consumer spending down through austerity measures, GDP must and will of necessity come down with it. And if you cut spending, stores will close, and then their suppliers will, and they will fire their workers, which will further cut consumer spending etc. It doesn’t get simpler than that.

There is a lot of talk about boosting exports etc., but exports make up only a relatively small part of most economies, even in the US, compared to domestic consumption. As still is the case in virtually every economy, more exports will never make up for what you lose by severely cutting wages and pensions while at the same time raising taxes across the board (Greek reality). The only possible result from this is misery and lower government revenues, in a vicious circle, dragging an economy ever further down.

Since this is so obvious a 5-year old can figure it out in 5 minutes, the reason for imposing the kind of austerity measures that the Eurogroup has unleashed upon Greece must inevitably be questioned in the way professor Hudson does. If someone owes you a substantial amount of money, the last thing you want to do is make sure they cannot pay it back. You want such a person to have a -good- job, a source of income, that pays enough so that they can pay you back. Unless you have your eyes on their home, their car, their daughters, their assets.

What the EU and IMF do with Greece is the exact opposite of that. They’re making sure that Greece gets poorer every day, and the Greeks get poorer, ensuring that the debt, whether it’s odious or not -and that is a very valid question-, will never be paid back. And then they can move in and snap up all of the country’s -rich- resources on the cheap. But in the process, they create a very unstable country, something that may seem to be to their benefit but will blow up in their faces.

It’s not the first time that I say the EU and the US would be well advised to ensure Greece is a stable society, but they all continue to forcibly lead the cradle of democracy in the exact opposite direction.

The best metaphor I can think of is: Austerity is like bloodletting in the Middle Ages, only with a lower success rate.

 

 

Sep 262016
 
 September 26, 2016  Posted by at 8:50 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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NPC Fire at Thomas Somerville plant, Washington DC 1926


Asian Markets Drop As Pessimism Increases Ahead Of OPEC Meeting (MW)
Deutsche Bank Slumps to Fresh Record Low on Capital Concerns (BBG)
China’s Smaller Banks Are Funding Each Other’s Lending (BBG)
China Launches $52.5 Billion Restructuring Fund For State-Owned Firms (R.)
A Weaker Currency Is No Longer the Economic Elixir It Once Was (BBG)
US Home Prices Rose 76% Since 1999 As Real Income Grew Less Than 2% (BBG)
Justin Trudeau’s Canadian Honeymoon Is About to End (BBG)
The Know-Nothing Economists Who Created This Mess Blast Trump’s Plan (MW)
Amazon “Tweaks” Hillary Book Stats: ‘5-Star’ Reviews Double Overnight (ZH)
Cracks Showing In Germany’s Fragile Truce With The ECB (R.)
German Minister: Britain Won’t Stop EU Army (Pol.)
50% Of Guns In America Owned By Just 3% Of Population (ZH)
African Elephants ‘Suffer Worst Decline In 25 Years’ (AFP)

 

 

And Europe’s falling faster.

Asian Markets Drop As Pessimism Increases Ahead Of OPEC Meeting (MW)

Asian shares were broadly lower Monday, as relief over a delay by the U.S. Federal Reserve in raising interest rates wore off. Japan’s Nikkei was down 0.8%, while Hong Kong’s Hang Seng Index retreated 0.7%. South Korea’s Kospi slipped 0.4%. “Asia Pacific investors are bracing for a sell day after European and U.S. traders took some hard won risk off the table,” wrote Michael McCarthy, chief market strategist at CMC Markets, in a note. On Friday, the S&P 500 and Nasdaq both fell 0.6% and the Dow Jones Industrial Average shed 0.7% as energy stocks slid with oil prices Friday. Investors were also pessimistic on Monday over any breakthroughs in oil-production cuts when OPEC gathers for an informal meeting later this week.

Read more …

Merkel’s comments weigh in.

Deutsche Bank Slumps to Fresh Record Low on Capital Concerns (BBG)

Deutsche Bank shares dropped to a record low amid concerns that the lender’s capital buffers will be undermined by mounting legal charges including a settlement tied to the sale of U.S. securities The shares dropped 4.2% to €10.93 at 9:15 a.m. in Frankfurt, an all-time low. The 38-member Bloomberg Europe Banks and Financial Services Index slipped 1.5%, with Deutsche Bank the worst performer. A potential $14 billion bill to settle a U.S. probe into residential mortgage-backed securities is more than twice the €5.5 billion ($6.2 billion) Deutsche Bank has set aside for litigation. The lender also faces inquiries into legal issues including currency manipulation, precious metals trading and billions of dollars in transfers out of Russia, complicating CEO John Cryan’s efforts to bolster profitability and capital ratios.

Germany’s biggest bank would be “significantly under-capitalized” even assuming enough provisions to cover an eventual settlement with the U.S. Justice Department, Andrew Lim at Societe Generale said in a note earlier this month. A settlement range of $3 billion to $3.5 billion would leave the German lender room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan analysts wrote. Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank in the year heading into the national election in September 2017.

Read more …

Big warning sign. Circle jerking tail eating snakes.

China’s Smaller Banks Are Funding Each Other’s Lending (BBG)

[..] China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA estimates total debt may reach 321% of GDP in 2020 from 261% in the first half. “Contagion risks are definitely rising,” said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. “The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.” Shanghai Pudong Development Bank said in an e-mailed response on Sept. 24 it has been using appropriate financing and its regular deposits and interbank borrowing have been developing properly and in synchronization.

Total liabilities will be kept under control in the long run and all liquidity gauges meet regulatory requirements, it said. Rising short-term borrowing doesn’t mean its risks have climbed as well, the bank said. “City commercial banks should change as soon as possible the situation of allocating more funds into investing than lending, and developing their off-balance-sheet businesses too fast,” Shang Fulin, chairman of the China Banking Regulatory Commission, said. The PBOC resumed longer-term reverse repos to boost borrowing costs in August and deputy governor Yi Gang said in a television interview earlier this month that the nation’s short-term goal is to curb leverage. It gauged demand for such auctions today. The benchmark 10-year government bond yield climbed slightly, to 2.73% from a decade low of 2.64% on Aug. 15.

[..] The higher the reliance on wholesale funds and investment in illiquid assets, the greater the risk of a liquidity crunch, said Christine Kuo at Moody’s. “When banks face fund withdrawals by other financial institutions, this will in turn prompt them to call back their own funds,” she said. Banks are also buying each others’ wealth-management products and accounting for the transactions as investment receivables. A record 26.3 trillion yuan of WMPs were outstanding as of June 30, doubling over two years, official data showed. Investment receivables at 25 listed banks grew 13.4% in the first half to 11 trillion yuan.

Read more …

Doesn’t sound like real restructuring.

China Launches $52.5 Billion Restructuring Fund For State-Owned Firms (R.)

A private equity fund worth 350 billion yuan ($52.5 billion) has been launched in China to help with the restructuring of state firms, a newspaper run by Xinhua news agency reported on Monday. The China State-owned Enterprises Restructuring Fund will be managed by the State-owned Assets Supervision and Administration Commission (SASAC), according to the Economic Information Daily. The report said 10 state-owned enterprises have established the fund to help with restructuring of state firms, including M&A deals, as part of government efforts to advance supply side reform. The 10 firms have provided initial registered capital of 131 billion yuan, the newspaper said.

No detail was provided on the source of the rest of the equity fund. The 10 firms include China Mobile, China Railway Rolling Stock, China Petroleum & Chemical and China Chengtong, a restructuring platform supervised by SASAC that will lead the fund. China is embarking on a revamp of its massive but debt-ridden state sector, which has struggled under a system that requires firms to maximize economic gains while fulfilling government policy objectives. The government has vowed to create innovative and globally competitive enterprises through mergers, asset swaps and management reforms.

Read more …

Caveat: a weak currency doesn’t automatically spur more exports. But they should also ask where exports would be if the currency had remained strong. Maybe they would have plummeted. Maybe global trade is falling fast.

A Weaker Currency Is No Longer the Economic Elixir It Once Was (BBG)

A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was. Just look at Japan, where the yen plunged 28% in the two years through 2014, yet net exports to America still fell by 10% in the span. Or at the U.K., where the pound’s 19% tumble in the two years through 2009 couldn’t stave off a 26% decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs. The findings suggest that weaker currencies may not provide much assistance to officials in countries like Japan and the U.K. that are relying on unprecedented easy-money policies to help boost tenuous growth and inflation.

On the flip side, the data also indicate that concerns U.S. growth will be derailed as rising interest rates drive investors into the dollar are also overblown. A shift in the structure of advanced-economy trade to less price-elastic goods and services, combined with the prolonged effects of the financial crisis, have stunted the sensitivity of trade volumes relative to global exchange rates, according to Goldman Sachs analysts led by Jari Stehn. “If you’re a central banker, yes you’re paying attention to currency levels, but the more-developed market economies aren’t reacting to currency debasing policies like they used to,” said Philippe Bonnefoy, the founder of hedge fund Eleuthera. “The impact has been diluted.”

Global central banks have cut policy rates 667 times since 2008, according to Bank of America Corp. During that period, the dollar’s 10 main peers have fallen 14%, yet Group-of-Eight economies have grown an average of just 1%. Since the late 1990s, a 10% inflation-adjusted depreciation in currencies of 23 advanced economies boosted net exports by just 0.6% of GDP, according to Goldman Sachs. That compares with 1.3% of GDP in the two decades prior. U.S. trade with all nations slipped to $3.7 trillion in 2015, from $3.9 trillion in 2014.

Read more …

“Since 1999 year-end through 2015 home prices have risen 76% while household mean real income has grown less than 2%..”

US Home Prices Rose 76% Since 1999 As Real Income Grew Less Than 2% (BBG)

U.S. home prices appear to be getting out of hand again as the gap between home price growth and household real income growth is close to where it was just before the housing collapse. It’s also notable, and worrying, that the housing market is back in a “flipping frenzy” with non-bank actors climbing aboard to fund the speculation. Since 1999 year-end through 2015 home prices have risen 76% while household mean real income has grown less than 2%; the millennium-to-date gap between the two growth rates peaked at 84% during 2005-2006 and has risen back to 74% as of 2015 year-end. Gap at year-end 2007 was 75%. This millennium through 2015 has seen average new and existing home sale prices rise 84% and 55%, respectively, despite the lack of income growth.

Existing and new home sales average prices peaked at $280.2k in June 2015 and $384k in Oct. 2014, respectively; both peaks exceeded levels seen during housing boom. Over the same period outstanding home mortgage debt has risen 14%, though it’s notable that with the end of easy mortgage credit it has fallen 11% from its June 2008 peak. Concurrent with this 11% fall, the homeownership rate (63.8% at 2015 year-end) has slid back to levels last seen in the mid-1960s. Monthly U.S. single-family home price y/y growth hit a post-crisis peak of 10.85% in Oct. 2013 and has since leveled off at ~5% each month since July 2015; this is still easily outpacing growth in real income.

The disconnect between home price growth and the lack of real income growth has led homebuilders’ to turn to the higher-end of the market and for Ginnie Mae to take the lead in mortgage lending. GNMA offers taxpayer-guaranteed loans to first-time homebuyers who have lower credit scores and smaller down payments than those who obtain loans through Fannie Mae or Freddie Mac. Whereas from 2005-2007 GNMA pct share of net MBS issuance was ~2% each year, during 2014, 2015 and 2016 YTD it is ~67%, according to BofAML data. Another severe downturn in home prices would be unlikely to play out in the agency MBS market in like manner to 2007-2008 as the Fed now holds ~33% of the outstanding universe and the U.S. taxpayer now guarantees almost all of the market with Fannie and Freddie remaining under government conservatorship.

Read more …

A big bad hornet’s nest. And that’s before the economic poisoned chalice is served.

Justin Trudeau’s Canadian Honeymoon Is About to End (BBG)

Along Canada’s evergreen-draped west coast, the fate of a multi-billion-dollar energy project and a nation’s reconciliation with its dark, colonial past hang in the balance. Beating rawhide drums and singing hymns, occupiers of Lelu Island—where Malaysia’s state oil company plans a $28 billion liquefied natural gas project—assert indigenous claims to the area where trees bear the markings of their forefathers and waters run rich with crimson salmon they fear the project will obliterate. “The blood of my ancestors is on my hands if I don’t defend this land,” says Donald Wesley, 59, a hereditary chief of the Gitwilgyoots tribe which has inhabited the area for more than 6,000 years.

That claim is about to test Justin Trudeau, the country’s telegenic 44-year-old prime minister, who swept to power a year ago vowing to be many things to many people—to tackle climate change, revive the economy, and reset Canada’s fraught relationship with its indigenous communities. Those pledges are set for collision in British Columbia—home to more First Nations communities than any other province and the crucible where a resource economy seeks to reinvent itself. Trudeau has promised to decide on the LNG project on Lelu Island by Oct. 2. He has big spending plans to spur growth in a commodities downturn, and B.C., the birthplace of Greenpeace, is where most energy projects able to support that growth are located.

Indigenous groups, essential to public support, are divided, with some seeking to preserve their habitat and traditions, and others arguing that the projects offer a path out of poverty, addiction and suicide. Facing five major energy initiatives in B.C., Trudeau will choose which constituency to abandon. He’s allowed a hydroelectric dam to proceed; pending are decisions on Enbridge’s Northern Gateway crude pipeline, Petroliam Nasional’s LNG project on Lelu Island, a pipeline expansion by Kinder Morgan, as well as a ban on crude oil tankers. He’s said to want at least one pipeline, and favor Kinder Morgan. Trudeau says regularly it’s a prime minister’s job to get the country’s resources to market, and a pipeline approval would demonstrate Canada can get major projects completed as warnings mount that the complex web of regulatory rules is spurring a flight of capital.

Read more …

“It was refreshing to hear that Trump economic adviser Stephen Moore responded to a question from Pethokoukis about all the red ink in Trump’s plan with, “Whether it’s going to pay for itself, I don’t really care.”

The Know-Nothing Economists Who Created This Mess Blast Trump’s Plan (MW)

Establishment economists ranging from austere neoliberals to spendthrift Keynesians are united in branding Donald Trump’s proposed economic policies as “disastrous.” He must be on to something. These economists are the distinguished experts, after all, who have championed the globalization that gutted American manufacturing, promoted the offshoring and outsourcing of American jobs, encouraged American companies to keep trillions (trillions!) of dollars of profit abroad, and enabled the tax inversions allowing American companies to move to the country most willing to beggar its neighbor. These are the celebrity academics who have championed the deficit-reducing, budget-balancing, tax-cutting policies that have crippled our infrastructure, degraded our schools, and cut public services from police and fire protection to garbage collection.

And now this gaggle of Washington insiders is warning us that Trump’s policies will throw the country into recession, ignite a trade war, launch the national debt into the stratosphere, and create more unemployment rather than jobs. Why, really, should anyone listen to them? There is Mark Zandi, whose title as chief economist of Moody Analytics makes this sometime adviser to Barack Obama and backer of Democratic nominee Hillary Clinton seem nonpartisan, even though he clearly is not. Not surprisingly, Zandi had his team at Moody’s produce some modeling this summer that concluded that Trump’s economic proposals would result in a less global economy, lead to larger government deficits and more debt, will largely benefit very high-income households, and will result in a weaker U.S. economy.

The implication is that these are all bad things. Those for whom Trump’s economic message resonates might consider a less global U.S. economy a good thing. To brand deficits and debts as terrible you would first have to prove that they do more harm than good.

[..] those establishment economists who through several administrations have served so ably on the president’s Council of Economic Advisers, in the Treasury Department and the Federal Reserve — the people, in short, who have delivered us into the economic morass they blithely call secular stagnation — are training their heavy artillery on poor, dumb Trump. Progressive economist Joseph Stiglitz, who chaired the CEA under President Bill Clinton, gives Trump an “F” in economics because the nominee apparently doesn’t understand the principle of comparative advantage in global trade — as if we lived in a world where currency manipulation, dumping subsidies, and substandard environmental and labor conditions don’t keep this pristine economic principle from working its magic.

And conservative analyst James Pethokoukis, a fellow at the American Enterprise Institute, labeled Trump’s economic plan “a complete and utter joke” as he took the Republican nominee to task for potentially adding $2.6 trillion to $3.9 trillion to the national debt over the next 10 years — even though the $9 trillion in debt added during the 7.5 years of the Obama administration has caused no detectable harm. It was refreshing to hear that Trump economic adviser Stephen Moore responded to a question from Pethokoukis about all the red ink in Trump’s plan with, “Whether it’s going to pay for itself, I don’t really care.” High time someone influencing policy fully appreciated the dynamic flexibility of a fiat currency in government finance. We don’t really need to care whether the plan “pays for itself” in the short term, if it does indeed produce the accelerated growth promised.

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For entertainment purposes only.

Amazon “Tweaks” Hillary Book Stats: ‘5-Star’ Reviews Double Overnight (ZH)

Two short weeks ago, we exposed the gaping difference between Amazon reader reviews of Hillary Clinton’s “Stronger Together” book (14% 5-Stars) and Donald Trump’s “Great Again” book (74% 5-Stars)… As The New York Times reported at the time, the book was a disaster. Both Mrs. Clinton and her running mate, Senator Tim Kaine, have promoted the book on the campaign trail, but the sales figure, which tallies about 80% of booksellers nationwide and does not include e-books, firmly makes the book what the publishing industry would consider a flop. [..] So, as with everything else in this ‘new normal rigged’ world, something had to be done and WaPo-owner Jeff Bezos’ Amazon reviews appear to have been ‘tweaked’ – more than doubling Hillary’s top reviews.

But, as WND.com explains, Amazon’s steps to ‘fix’ Hillary’s book rviews has resulted in 5-star ratings with scathingly negative comments… If you can’t even win when the rules are changed in your favor, things must be REALLY bad. That’s how it looks for Hillary Clinton’s new 2016 campaign book, “Stronger Together,” co-authored with running mate Tim Kaine. WND reported just days ago when the book was being savaged on Amazon.com with negative reviews, with 81% one-star ratings and an average of only 1.7. Clinton supporters lashed out at “trolls” they said were criticizing the book only because they oppose the Democrat’s presidential candidacy. WND previously reported there were more than 1,200 reviews, and the number grew to than 2,000.

But Thursday afternoon, there were only 255, with many of the most critical reviews removed by Amazon, whose CEO, Jeff Bezos, owns the Washington Post, which created an army of 20 reporters and researchers to investigate the life of Donald Trump. Victory for the Clinton book, however, remains out of grasp, with the negative, one-star responses, outnumbering positive, five-star responses nearly 2-1. The one-star ratings Thursday were 62%, to 35% for five-star ratings.

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“..the political landscape in Germany has become decidedly more toxic for the ECB over the past months.”

Cracks Showing In Germany’s Fragile Truce With The ECB (R.)

Michael Stuebgen, a conservative member of the German parliament, was speaking with the head of a local savings bank recently about the ECB’s QE program. “He told me the bond market was being emptied out,” Stuebgen recalled. “He likened it to going into a supermarket where everything has been bought up. You might find a shriveled old carrot or potato. Pretty soon you’re starving.” Stuebgen, a spokesman on European affairs for Chancellor Angela Merkel’s party in the Bundestag, credits the ECB and its President Mario Draghi with saving the euro zone from collapse four years ago. But conversations like the one with the banker have convinced him that its policies, in particular the massive bond-buying program known as QE, have gone too far. He is not alone.

[..] Instead of changing course, as Stuebgen and his colleagues want, the ECB is widely expected to announce an extension of its QE program by the end of the year. The program is due to expire in March. As early as next month, it could also announce steps to broaden the scope of what it can buy in response to a dwindling pool of available assets. The most controversial change would be abandoning the so-called “capital key”, which limits the proportion of government bonds the ECB can buy from any given member state, based on its size and economic weight. “The big challenge for Mario Draghi will be to prepare the Bundestag and German public for a further easing of monetary policy,” said Marcel Fratzscher, head of the DIW economic institute and a former senior official at the ECB.

That message is unlikely to go down well in Berlin. In addition to concerns about the distorting effects of QE on financial markets and the impact of low interest rates on German savers and insurers, the political landscape in Germany has become decidedly more toxic for the ECB over the past months.

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Better get rid of the EU before they acutally do this.

German Minister: Britain Won’t Stop EU Army (Pol.)

Ursula von der Leyen, Germany’s defense minister, does not believe the U.K. will stand in the way of deepened defense cooperation between EU member countries, she told Reuters in an interview Sunday night. Von der Leyen said she was confident Britain would “make good its promise that it will not hinder important EU reforms.” Michael Fallon, Britain’s defense secretary, said earlier this month Britain will veto measures to build an EU army for as long as it remains a member of the bloc. Von der Leyen said she told Fallon the plans were not directed against Britain, but “designed for a strong Europe” instead.

Martin Schulz, the president of the European Parliament, said during a speech in London last week that a British veto was “counterproductive and anyway not possible in this case.” EU defense ministers will discuss common military proposals on Monday and Tuesday. Federica Mogherini, the European Commission’s foreign policy chief, said earlier this month that member countries could combine their defense capabilities via a so-far unused provision in the Lisbon Treaty.

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Feel safe?

50% Of Guns In America Owned By Just 3% Of Population (ZH)

A recent Harvard study of the demographics of gun ownership in the United States yielded a fairly shocking discovery, namely the emergence of the Obama gun “Super Owner.” The study, entitled “The Stock and Flow of US Firearms: Results from the 2015 National Firearms Survey”, was conducted by the Harvard School of Public Health and found that just 14% of all gun owners, or 7.6mm adults and 3% of the total U.S. population, possessed 50% of all guns owned by civilians in the country. Moreover, with a total stock of 270mm civilian-owned guns in the U.S., that implies that these “super owners” possess an average of nearly 18 guns per person.

“Gun owning respondents owned an average of 4.85 firearms (range: 1-140); the median gun owner reported owning approximately two guns. As can be seen in Figure 3, approximately half (48%) of gun owners report owning 1 or 2 guns, accounting for 14% of the total US gun stock, while those who own 10 or more guns (8% of all gun owners), own 39% of the gun stock. Put another way, one half of the gun stock (~130 million guns) is owned by approximately 86% of gun owners, while the other half is owned by 14% of gun owners (14% of gun owners equals 7.6 million adults, or 3% of the adult US population).”

Another startling discovery in the data, though “oddly” not highlighted in the report, is that the surge in gun ownership per capita seemed to coincide with the start of the Obama presidency and growing rhetoric over new gun regulations. Per the chart below, over the past 20 years, gun ownership per U.S. adult hovered around 1 from 1993 through 2007 but then surged starting in 2008 as an Obama presidency became increasingly likely. This trend is also reflected in annual guns sales which floated between 4-6mm units per year before surging in 2008.

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Tears. I still have tears left.

African Elephants ‘Suffer Worst Decline In 25 Years’ (AFP)

Africa’s elephant population has suffered its worst drop in 25 years, the International Union for Conservation of Nature (IUCN) said Sunday, blaming the plummeting numbers on poaching. Based on 275 estimates from across the continent, a report by the conservation group put Africa’s total elephant population at around 415,000, a decline of around 111,000 over the past decade. It is the first time in 25 years that the group’s African Elephant Status Report has reported a continental decline in numbers, with the IUCN attributing the losses in large part to a sharp rise in poaching. “The surge in poaching for ivory that began approximately a decade ago – the worst that Africa has experienced since the 1970s and 1980s – has been the main driver of the decline,” said IUCN in a statement.

Habitat loss is also increasingly threatening the species, the group said. IUCN chief Inger Andersen said the numbers showed “the truly alarming plight of the majestic elephant”. “It is shocking but not surprising that poaching has taken such a dramatic toll on this iconic species,” she said. The IUCN report was released at the world’s biggest conference on the international wildlife trade, taking place in Johannesburg. Thousands of conservationists and government officials are seeking to thrash out international trade regulations aimed at protecting different species. A booming illegal wildlife trade has put huge pressure on an existing treaty signed by more than 180 countries – the Convention on International Trade in Endangered Species (CITES).

Read more …

May 172016
 
 May 17, 2016  Posted by at 9:22 am Finance Tagged with: , , , , , , ,  2 Responses »
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Charlotte Brooks Tom Corbett, Space Cadet 1952

This is an article by our friend Steve Keen, which was yanked by Forbes yesterday after just a few hours due to, according to Steve, their ‘parody policy’. I did some research and it turns out the Automatic Earth has no such policy. So I offered Steve to repost it here.

Steve Keen: CERN has just announced the discovery of a new particle, called the “FERIR”.

This is not a fundamental particle of matter like the Higgs Boson, but an invention of economists. CERN in this instance stands not for the famous particle accelerator straddling the French and Swiss borders, but for an economic research lab at MIT—whose initials are coincidentally the same as those of its far more famous cousin.

Despite its relative anonymity, MIT’s CERN is far more important than its physical namesake. The latter merely informs us about the fundamental nature of the universe. MIT’s CERN, on the other hand, shapes our lives today, because the discoveries it makes dramatically affect economic policy.

CERN, which in this case stands for “Crazy Economic Rationalizations for aNomalies”, has discovered many important sub-economic particles in the past, with its most famous discovery to date being the NAIRU, or “Non-Accelerating Inflation Rate of Unemployment”. Today’s newly discovered particle, the FERIR, or “Full Employment Real Interest Rate”, is the anti-particle of the NAIRU.

Its existence was first mooted some 30 months ago by Professor Larry Summers at the 2013 IMF Research Conference. The existence of the FERIR was confirmed just this week by CERN’s particle equilibrator, the DSGEin.

Asked why the discovery had occurred now, Professor Krugman explained that ever since the GFC (“Global Financial Crisis”), economists had been attempting to understand not only how the GFC happened, but also why its aftermath has been what Professor Summers characterized as “Secular Stagnation”.

Their attempts to understand the GFC continued to fail, until Professor Summers suggested that perhaps the GFC had destroyed the NAIRU, leaving the ZLB (“Zero Lower Bound”) in its place.

This could have happened only if there was a mysterious second particle, which was generated when a NAIRU equilibrated with a GFC. Rather than remaining in equilibrium, as sub-economic particles do in DSGEin, NAIRU apparently vanished instantly when the GFC appeared. Something else must have taken its place. DSGEin was unable to help here, since it rapidly returned to equilibrium—while the real world that it was supposed to simulate clearly had not.

CERN’s attempts to model this phenomenon in DSGEin were frustrated by the fact that a GFC does not exist inside a DSGEin—in fact, the construction of the DSGEin was predicated on non-existence of GFCs.

The ever-practical Professor Krugman recently suggested a way to overcome this problem. Why not turn to the real world, where GFCs exist in abundance, and feed one of those into the DSGEin?

Unfortunately, the experiment destroyed the DSGEin, since the very existence of a GFC within it put it through an existential crisis. However, before it broke down (while mysteriously singing the first verse of “Daisy, Daisy, give me your answer do”), the value for the NAIRU in DSGEin suddenly turned negative.

This led Professor Summers to the conjecture that perhaps there was a negative anti-particle to the NAIRU, which he dubbed the FERIR.

Lacking a functional DSGEin at the time, Summers fed a GFC into the older SLIM equilibrator lovingly maintained by Professor Krugman—and he discovered that the NAIRU took on a negative value there. Since the NAIRU cannot be negative, Professor Summers realised that he had discovered a new particle—the FERIR. When the FERIR interacted with a ZLB, the outcome was Secular Stagnation.

Professor Summers—who expects to receive the Nobel Prize for his discovery—had some harsh words for critics who had rubbished the very attempt to explain the GFC using a sub-economic particle equilibrator.

“They accuse us of adding ‘epicycles’ to our models to make them fit the data. That’s nonsense: that’s so 15th century. We’re way beyond that now,” sneered Professor Summers at length. “These days, we add new fundamental particles to our sub-economic menagerie: that’s way more sophisticated.”

The FERIR may now help economists understand the persistence of the ZLB, which has confounded all predictions to date. Having expected the ZLB to evaporate and be replaced fairly rapidly by an NRI (“Natural Rate of Interest”), economists have been flummoxed by its persistence—eight years now and counting.

“We have shown that the FERIR equilibrates with and maintains the ZLB,” Professor Krugman explained. “So Larry’s discovery is really, really important”.

Now that economists have explained the persistence of the ZLB, they can now turn their attention to understanding its perverse effects. The real problem of the ZLB for economists has been that it inverts the status and behaviour of all other sub-economic particles. In particular:

Growth, which was high, is now low;

Inflation, which was bad & everywhere, is now good & nowhere;

CBs (“Central Banks”) which prevent inflation, now try to cause it; and

HMDs (“Helicopter Money Drops”) which were mad, are now sane

These inversions are causing real problems for economists, who find themselves arguing for policies they used to oppose. Professor Summers hopes that knowledge of the existence of the FERIR will make it easier for economists to argue that night is day and rainbows are grey, as they provide policy advice in these troubled times.

POSTSCRIPT: Written with the inspiration of Axel Leijonhufvud’s brilliant parody “Life Among the Econ” firmly in mind.

POST-POSTSCRIPT: The NAIRU—the “Non-Accelerating Inflation Rate of Unemployment”—was a fiction of Milton Friedman’s imagination, and countless hours were wasted by economists trying to calculate it. I fully expect a new generation of economists to waste their time trying to calculate the FERIR as well.

POST-POST-POSTSCRIPT: The serious intent to this parody is the observation that the approach to economics that failed to anticipate the GFC—and that even believed such events were impossible—is unlikely to be able to advise what to do in the aftermath to the GFC. We need a new theory, not merely a new fictional acronym in the fantasy universe of mainstream economics.

Jul 282015
 
 July 28, 2015  Posted by at 6:38 pm Finance Tagged with: , , , , , , , ,  6 Responses »
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Jack Delano Chicago & North Western Railroad locomotive shops 1942

As the “Varoufakis Files” provide everyone interested in the Greek tragi-comedy with an additional million pages of intriguing fodder -we all really needed that added layer of murky conspiracy, re: the Watergate tapes-, a different question has been playing in my head. Again. That is: Why are economists discussing politics?

Why are the now 6 month long Greece vs Troika discussions being conducted by the people who conduct them? All parties involved are apparently free to send to the table whoever they want, and while that seems nice and democratic, it doesn’t necessarily make it the best possible idea. To, in our view, put it mildly.

For perspective, please allow me to go back to something I wrote 3,5 months ago, May 12 2015:

Greece Is Now Just A Political Issue

[..] the EU/troika anno 2010 decided to bail out German and French and Wall Street banks (I know there’s an overlap) – instead of restructuring the debts they incurred with insane bets on Greece and its EU membership- and put the costs squarely on the shoulders of the Greek population.

This, as I said many times before, was not an economic decision; it was always entirely political. It’s also, by the way, therefore a decision the ECB should have fiercely protested, since it’s independent and a-political and it can’t afford to be dragged into such situations. But the ECB didn’t protest. [..]

The troika wants the Syriza government to execute things that run counter to their election promises. No matter how many people point out the failures of austerity measures as they are currently being implemented in various countries, the troika insists on more austerity. Even as they know full well Syriza can’t give them that because of its mandate. Let alone its morals.

It’s a power game. It’s a political game. It always was. But still it has invariably been presented by both the –international- press and the troika as an economic problem. Which has us wondering why this statement by ECB member and Austrian central bank head Ewald Nowotny yesterday, hasn’t invited more attention and scrutiny:

ECB’s Nowotny: Greece’s Problem Isn’t Economic

The Greek problem is more a political question than an economic one, a member of the European Central Bank said Monday. Discussions with political parties such as Greece’s left-wing Syriza and Spain’s Podemos may be refreshing by bringing in new ideas, “but at the end of the day, they must [end in] results,” ECB member Ewald Nowotny said, adding discussions are “not about playing games.”

The central banker declined to speculate on how to solve Greece’s financial problem saying the issue “is much more a political question than an economic question.” Mr. Nowotny also doesn’t see the ECB’s role as creating a federalized financial government inside the euro zone. “We cannot substitute the political sphere,” he said.

That seems, from where we’re located, to change the discussion quite a bit. Starting with the role of the ECB itself. Because, for one thing, and this doesn’t seem to be clear yet, if the Greek problem is all politics, as the central bank member himself says, there is no role for a central bank in the discussions. If Greece is a political question, the ECB should take its hands off the whole Greek issue, because as a central bank, it’s independent and that means it’s a-political.

The ECB should provide money for Greece when it asks for it, since there is no other central bank to provide the lender of last resort function for the country. Until perhaps Brussels calls a stop to this, but that in itself is problematic because it would be a political decision forced on an independent central bank once again. It would be better if the ‘union’, i.e. the other members, would make available what Greece needs, but they -seem to- think they’re just not that much of a union.

In their view, they’re a union only when times are good. And/or when all major banks have been bailed out; the people can then fight over the leftover scraps.

The IMF has stated they don’t want to be part of a third Greek bailout. Hardly anyone seems to notice anymore, but that makes the IMF a party to political decisions too. Lagarde et al claim they can’t loan to countries that don’t take the ‘right’ measures, but who decides which measures are the right ones? [..] Moreover, if we take Mr. Nowotny on his word, why are there still finance ministers and economists involved in the Greek issue negotiations? Doesn’t that only simply lead to confusion and delay?

It seemed crystal clear to me then, and does even more so today, but nothing has really changed, other than Greece having replaced one economist with another as finance minister. Which never really could help discussions in the eurogroup alone, because, as Ian Parker writes in his long must read “V” (for Vendetta) portrait, the rest of them are still not economists, and therefore have no appetite for discussing matters from that angle:

The Greek Warrior

At the level of the Eurogroup, Varoufakis told me, the conversation was “all about the rules.” It was not a forum in which to discuss debt unsustainability, or the rarity of economic growth under austerity conditions. Varoufakis told me that he was “accused of talking about economics.” Once, Varoufakis was asked what Greece’s target surplus should be, if not 4.5% of GDP. He “had to give a lecture” about the variables that made the question unanswerable in that form. “They’re not economists,” Varoufakis said. “Most of them are lawyers.”

At a certain point, it’s hard to escape the idea that it’s all like if you have a politically volatile discussion about building an airport, or ‘just’ a runway (commonplace issues), and the entire discussion is controlled by architects, or builders, instead of politicians. It makes no sense, and it can only possibly lead to undesirable outcomes. Because you got the wrong people in the wrong venue.

Moreover, unlike architecture, economics has huge credibility issues to begin with. Which is why politicians need to provide very specific instructions to their economists, or the entire exercise risks being watered down in no time to a battle between one economic stream of faith vs another. Keynes vs Mises, that kind of thing.

If we can agree with Nowotny (and I very much do) that this is a political issue, it’s the politicians who should make the decisions, on political grounds, and the economists should fill in the specifics after the fact.

Economists, and eventually lawyers, should fill in the details, but lawyers and economists posing as finance ministers should not be left in charge of the political decisions.

And no, here’s looking at Athens, naming an economist as finance minister does not make him a politician. Nor should it. An economist has his/her own place in the proceedings. But then, that’s where we hit upon the major conundrum: what makes a body a politician?

Turns out, that’s a hard one to answer. Because anyone can pretend to be a politician, and many do pretend just that. But how then, when we can agree that a certain issue is a political rather than an economical one, do we select the proper people to make decisions on the issue?

The simplest bit of deduction teaches us that putting economist Yanis Varoufakis on opposite ends of the same table with eurogroup finance ministers who are lawyers and don’t know diddly-squat about economics, doesn’t work. All a lawyer knows how to do is point to pre-conceived rules and regulations. It’s what lawyers do, it’s what enabled them to get their law degree.

But you might as well put a Chinese farmer and a West Virginia gun dealer together. They don’t speak the same language. Other then perhaps possibly that of compassion, but that’s the one quality lawyers are sure to lack once they get to be finance ministers.

Still, once you acknowledge that something is a political issue, you must make sure that only political arguments drive the talks, not economic ones, not even legal ones. And that’s what seems to be the little big 800-pound thingy, doesn’t it? They all just choose to pretend they speak the same language even if they know they don’t.

So all the eurogroup only possibly can do is to vent as little flexibility as possible. If they veer even an inch off the prescribed path, they would be instantly lost. Lawyers…

But that also, and very much so, means we need to wonder why Syriza insisted on prolonging the eurogroup talks all this time. The eurogroup, whatever it may be, and whatever we may think of it, is not a political forum. It’s evidently not an economic one, either, but that’s another story altogether.

Why did Varoufakis go back into that forum time after time, even after Nowotny said what he did? He must have known from that moment, and long before, that as an economist he had nothing to gain there. He might as well have sent his cleaning lady. And she might have come up with a better result to boot.

Why did Syriza never insist that the people involved be changed, and the venue, to be limited to Merkel and Hollande and Tsipras?

The question that lingers is why these talks are set up the way they are, where failure is all but certain. Is that intentional, as in where the lawyers are sent in because they are supposed to halt all sensible discussion no matter what?

Or, arguably more interesting, is it that when it comes to purely political issues, nobody really knows who to put forward? Who can really discuss exclusively political issues other than actual political leaders?

Well, we know it’s not economists, and we can count out cleaning ladies (though we could get lucky). We also know we shouldn’t let lawyers do the trick. They’re too narrow in their range. So who? I would almost say there’s no-one, but that automatically leads to the only possible option: the highest political ‘functionaries’.

Which in the case of the Troika vs Greece means Merkel, Hollande, perhaps Renzi, and Tsipras. The people who’ve been elected (or quasi) to be their nations’ top-notch political leaders. No Dijsselbloem, or Schäuble, or any of those guys. No Varoufakis either.

The ECB is both a participant in the talks and a creditor, a stakeholder. That pushes it painfully close to being a political participant, something a central bank should never ever be.

But the breaching of red lines and grey areas has become so ubiquitous in the whole ‘discussion’ that nobody seems to notice anymore, or wants to notice, for that matter.

The same goes for the role of the IMF. What do they think they’re doing? The Fund should stay far away from any political discussion, or it loses its credibility.

Both the ECB and the IMF try to keep up the illusion that their decisions are a-political and within their respective mandates, but that idea can only be maintained if and when the Greece issue were an economical one. We’ve already seen it’s not.

We end up concluding that the entire process has been a disaster, unless one’s aim from the get-go was to gut the Greek economy even more, and the outcome is -therefore- a disaster too.

But it’s still economists who keep holding the talks. The “technical experts” from the Troika that re-enter Athens as we speak may be a bit more knowledgeable when it comes to economics that the EU finance ministers, but still, they are loaded with their own issues.

If I were Tsipras I’d refuse to have any of my people talk to any Troika ‘negotiators’ from here on in, and insist on direct talks with Merkel and Hollande only (I’d have done that a long time ago, too). See what the real intentions are amongst those that have real power, and only after that, have staff, like economists and lawyers, discuss specifics and fill in details.

Things have been moving the 180º other way around now, and it could never even possibly have led to a positive result. You can’t start with the details.

Here’s still wondering why they all insist on doing things that way. Isn’t it obvious? Or has the whole thing simply been intentional all along?

Oh, and before I forget, most commentaries on the Greek issue in the media also come from economists. Some of those are palatable, even smart. But at the same time, they haven’t yet gotten the message either: it’s all about politics. If it were just economics, Greece would be solved in 2 seconds flat.

But it’s not. And there’s a reason for that which lies way beyond economics.

Mar 142015
 
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DPC Launch of freighter Howard L. Shaw, Wyandotte, Michigan 1900

I think I should accept that I will never in my life cease to be amazed at the capacity of the human being to spin a story to his/her own preferences, rather than take it simply for what it is. Your run of the mill journalist is even better at this than the average person – which may be why (s)he became a journalist in the first place -, and financial journalists are by far the best spinners among their peers. That’s what I was thinking when I saw another Bloomberg headline that appealed to my more base instincts, which I blame on the fact that it shows a blatant lack of any and all brain activity (well, other than spin, that is).

Here’s what Bloomberg’s Craig Torres and Michelle Jamrisko write: “American Mystery Story: Consumers Aren’t Spending Even In a Booming Job Market”. Yes, it is a great mystery to 95% of journalists and economists. Because they have never learned to even contemplate that perhaps people can be so deep in debt that they have nothing left to spend. Instead, their knowledge base states that if people don’t spend, they must be saving. Those are the sole two options. And so if the US government reports that 863,000 underpaid new waiters have been hired, these waiters have to go out and spend all that underpayment, they must consume. And if they don’t, that becomes The American Mystery Story.

For me, the mystery lies elsewhere. I’m wondering how it ever got to this. How did the capacity for critical thinking disappear from the field of economics? And from journalism?

American Mystery Story: Consumers Aren’t Spending Even In a Booming Job Market

It’s an American mystery story: More people have jobs and extra pocket money from lower gas prices, but they aren’t buying as much as economists expected. The government’s count of how much people shelled out at retailers fell in February for a third consecutive month. Payrolls are up 863,000 over the same period. The chart below shows retail sales and payrolls generally move in the same direction, until now. The divergence could portend lower levels of economic growth if Americans’ usually reliable penchant to spend is less than what it once was.


YoY growth in U.S. retail and food services sales (red) against year-over-year change in non-farm payrolls (blue).
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics

Inevitably, when faced with such a mystery, Bloomberg’s scribblers dig up a household savings graph. Et voilà, problem solved:

“The expenditures that add up to gross domestic product are coming in a lot softer than employment,” said Neil Dutta at Renaissance Macro Research. “Why would retailers be hiring if sales are falling? Why would they be boosting hours if sales are falling and why would they be paying more?” Also, take a look at the household saving rate. It’s gone up as gas prices fell:

And why are all those crazy American waiters hoarding all that cash they, as per economists, just got to have lying around somewhere? You knew it before I said it: it was cold! Crazy cold!

Ben Herzon at Macroeconomic Advisers isn’t that worried yet. As usual, the data is quirky. First, he notes, “it was crazy cold in February.” Aside from stocking up on milk in the snowstorm, staying indoors was probably a more attractive option for most shoppers.

And it gets better. How about this for a whopper?

Herzon notes that lower gas prices also depressed the count in prior months. The government is adding up dollars spent, so fewer dollars to fill a gas tank results in lower sales.

Let’s see. Gas was cheaper, so people spent less on that. And that drove down retail sales. But wasn’t it supposed to drive them up? Wasn’t that the boost the economy was predicted to get? You mean to tell me that lower gas prices actually function to drive spending down? That our newfound platoon of waiters took all that newfound money and spent it on .. nothing at all? Not to worry. March will be much better or “Our story would be wrong…” And how likely is that, right?

That even bleeds into narrower measures of retail sales because grocery stores such as Safeway, Wal-Mart and Sam’s Club also sell gasoline. Herzon is counting on a March rebound. There won’t be the weather to blame anymore, and gas prices have rebounded off their lows of late January and early February. “Payroll employment has been great, and it is generating a lot of labor income that you think would be spent,” Herzon said. “March should be a rebound. Our story would be wrong if it doesn’t happen.”

Halle-bleeping-lujah. Is this creativity on the part of the writer and interviewee, or is it just a knee-jerk reaction? Don’t they understand because they don’t have the appropriate grey matter, or don’t they simply want to?

And Bloomberg takes us from mystery to surprise (I’m guessing that’s one level lower on the What? scale), The surprise is that the US has not lived up to what Bloomberg and its economists had dreamt up all by themselves.

Surprise: US Economic Data Have Been the World’s Most Disappointing

It’s not only the just-released University of Michigan consumer confidence report and February retail sales on Thursday that surprised economists and investors with another dose of underwhelming news. Overall, U.S. economic data have been falling short of prognosticators’ expectations by the most in six years. The Bloomberg ECO U.S. Surprise Index, which measures whether data beat or miss forecasts, fell to the lowest since 2009, when the nation was in the deepest recession since the Great Depression. There’s been one notable exception to the gloom, and it’s a big one: payrolls. The economy added 295,000 jobs in February and 1.3 million over four months, a reflection of a healthier labor market in which the unemployment rate has fallen to the lowest in almost seven years.

Most everything else? Blah. This month alone, personal income and spending, manufacturing as measured by the Institute for Supply Management, auto sales, factory orders, and retail sales have all come in a bit weak. Citigroup keeps economic surprise indexes for the world, and its scoreboard shows the U.S. is most disappointing relative to consensus forecasts, with Latin America and Canada next, as of March 12. Emerging markets were supposed to be hurt by falling oil prices but are now delivering positive surprises. U.S. policymakers frequently talk about weakness in Europe and China, though both are exceeding expectations.

In short, Bloomberg and its economists were once again embarrassingly off target. Though they prefer to use different terminology:

And there’s one rub. The surprise shortfall in the U.S. doesn’t necessarily mean the world’s largest economy is in dire straights. It’s just falling short of some perhaps overly elevated expectations.

Perhaps? What do you mean perhaps? US data are the biggest disappointment of all of your numbers. There’s no perhaps about it. Just admit you get it wrong all the time.

Maybe they are mystified because of data like the following, coming from the Fed, no less.

Fed: US Household Net Worth Hits Record $83 Trillion In Q4 2014

Household net worth rose by $1.5 trillion in the fourth quarter of last year to a record $83 trillion, the Federal Reserve said on Thursday. The gains were driven by a surging real estate market. Household real estate holdings rose to their highest level since 2007. Real estate equity levels also hit a 2007 high. Household stock holdings also rose with the broader markets.

Since those 683,000 waiters would only qualify for subprime loans, you can bet that only a few of them profited from this ‘surging real estate market’. Household net worth may have hit a record, but that has nothing to do with the lower rungs of society. Which we can prove by looking at the second part of the piece:

But at the same time, the central bank reported debt was on the rise. Total debt – including households, governments and corporations – rose 4.7% , the most since 2012.

No doubt that this additional debt can be made to show up somewhere as a positive thing. How about: look, consumers feel confident enough to take on more debt again.

Nomura’s Richard Koo elegantly lays bare the global – and American – economic conundrum in just a few words: “When no one is borrowing money, monetary policy is largely useless..”

Why We’re At Risk Of A QE Trap: Koo (CNBC)

The problem with central banks’ massive bond-buying programs is that if consumers and businesses fail to borrow money to stimulate economic growth, the policy is rendered mostly “useless,” one Nomura economist said Friday. The U.S. and U.K. embarked on asset-purchase, or QE programs, following the 2007-2008 global financial crisis. Japan joined the QE club in 2013 and the ECB began its €1 trillion bond-buying stimulus this week. “Both the U.S. and Europe are facing the same problem– which is that we are in a situation where the private sector in any of these economies is not borrowing money at zero interest rates or repairing balance sheets following what happened in the crisis,” Richard Koo, Chief Economist at Nomura, told CNBC on the side lines of the Ambrosetti Spring Workshop in Italy.

“When no one is borrowing money, monetary policy is largely useless,” he added. In the run-up to the launch of QE in the euro zone, loans to the private sector, which are a gauge of economic health, contracted. Data published late last month showed that the volume of loans to private firms and households fell by 0.1% on year in January, compared with a 0.5% drop in December. According to Koo, major central banks are holding reserves far in excess of levels they need because of the monetary stimulus. This has not led to a rise in private sector spending because big economies are struggling with a balance sheet recession – a situation where companies are focused on paying down debt rather than spending or investing – increasing the risk of QE trap.

“In a national economy if someone is saving money, you need someone to borrow money and this is the part that is missing. They [central banks] are pumping money but no one is borrowing, so you get negative interest rates and all sorts of distortions,” Koo said. He added that instead of looking to raise interest rates, the U.S. Federal Reserve should first focus on reducing its balance sheet which stands at over $4 trillion. The Fed, which meets next week, is widely expected to raise rates this year against a backdrop of improving economic data. “They [Fed policy makers] should not rush into a rate rise; they should reduce the balance sheet when people are not worried about inflation,” Koo said.

That’s all you need to know, really. Americans don’t spend, and they don’t borrow. That makes all QE measures useless for the larger economy, and a huge windfall for the upper echelons of society.

You could also say QE is a criminal racket, but I’m pretty sure journalists, economists, central bankers and politicians alike will only admit to stupidity, not to being accomplices in such a racket. Or perhaps not even stupidity; they’ll just claim nobody could have foreseen this, like they always do when they run into room size elephants.

Still, you have to love a piece like the following by Thad Beversdorf:

The Fed Gives A Giant F##k You to Working Class Americans

I was shocked today by the absolute gaul of the Fed releasing a statement about Net Worth in America reaching record levels. Now I get that they are under extreme pressure to sell the story that everything is rainbows and butterflies. But surely they understand that working class Americans are going along with the story because they really don’t have any say in our nation’s policies anymore. That doesn’t mean they want it thrown in their faces that the Fed has spent 6 years now inflating the wealth of the top 10% so much that it actually lifts the total wealth of the nation’s citizens to record highs. The ugly reality is that the bottom 80% of Americans experienced none of that gain. That’s right: a big ole goose egg.

And so when the Fed via its ass pamper boy, Steve Liesman, start banging on about the fact that some sliver of society is being handed extraordinary wealth while the working class has lost 40% of their net worth since 2007, well a big fuck you right back at ya bub! The Fed is very aware that the bottom 80% of Americans own less than 5% of US equity markets. And so the Fed is very aware that its manipulation of stock prices such that it creates immense unearned wealth to those in the markets doesn’t reach the bottom 80%. So why celebrate the results of the stock market price manipulation?? It is embarrassing that our policymakers are either that inconsiderate or that stupid to celebrate such a brutal dislocation between the haves and have nots.

I don’t know what one can even say about the Fed making a celebratory statement like that today. It is somewhat beyond words. And really paints the picture as to how little thought goes into the lives and well being of the bottom 80%. Just to give you something to compare and contrast the situation of the bottom 80% here in the US to counter the Fed’s celebration today. I want you to think about how lucky we are not being in one of the PIIGS nations of Europe. These are the nations that are essentially bankrupt and just hanging on by the kindness of the Troika.

So there it is. While the average net worth of Americans is 4th in the world pulled up by the top 10%, the median net worth of Americans comes in the 19th spot. Yep, behind Spain, Italy and Ireland so 3 of the 5 PIIGS nations. Meaning the bottom 80% in these broke ass barely hanging on nations have more wealth than the bottom 80% of us here in America. So I’d like to ask the Fed, is it that you just hate the working class here in America and thus like to torment them or are you truly that stuck up your own asses that you just cannot see the light?

Rest assured, Thad, the Fed has seen the light. And they don’t actually hate working class America, they just don’t give a flying f#ck about them.

Imagine the founding fathers looking down on all of this. Hell imagine those who fought on the beaches of Normandy looking down at what America has become. Knowing that they sacrificed everything just to hand the nation over to a group of foreign sociopaths. Imagine those men having to see that Americans no longer have any sense of dignity other than to yell loudly that “we are still great”[..]. How incredibly disheartening it would be for those WWII soldiers to see us now.

Plenty of those guys are still alive. So we could ask them. But the gist is clear, and all those who died on those beaches can no longer speak for themselves, so we need to do it for them. Is this the world they died for? Is this the freedom they gave their lives for, the freedom to turn America into a nation of debt slaves?

There is no mystery anywhere to be found in the fact that US retail sales don’t follow the jobs trend. Not if you look at what kind of jobs they are, let alone at all the other made up and manipulated numbers that are being thrown around about the US economy.

The only mystery is why everyone persists in talking about a recovery. That recovery will never come, simply because all 90% of Americans do is pay for the other 10% to get richer. There are many other factors, but that all by itself makes a recovery a mathematical mirage.

Aug 192014
 
 August 19, 2014  Posted by at 7:39 pm Finance Tagged with: , , ,  11 Responses »
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Harris&Ewing Safest driver of Washington DC, 32 Years Without Crash 1936

It’s Jackson Hole week, and we’re going to hear a lot of fairy tales and otherwise invented-from-scratch material. Since it may not always be easy to distinguish between pure mud and actual information, let’s destroy a few fantasy piñatas right here and now. So when Yellen and Draghi speak on Friday, you’ll be able to tell a few things apart. It’ll be hard enough, the speech writers and spin doctors won’t get much sleep this week.

But in the end, it’s all terribly simple. Central bank governors, finance ministers, government leaders and media have built up an image of ‘mere’ economic cycles and recovery and promises, boosted stock markets to new records, and gotten everybody’s hopes up. And now they won’t be able to deliver on those promises. Still, they can play along for a while longer. And they will.

There’s not a major central banker who can raise interest rates without risking severe damage to their economies. Simply because those economies wouldn’t look half as promising as they do today without the highly manipulative actions of ultra low rates and ultra loose credit. Without that pair, it’s going to be the crumbling walls of Jericho. In every single formerly rich nation.

There is no escape velocity – and there won’t be -, there are only stories and fantasies. Where do you think housing would be where you live if mortgage rates were 2-3 times higher – as in normal – than they are now?

At the same time, the enormous distortion of the economies caused by ultra low rates and ultra loose credit cannot last forever. Because fixed income, pensions, will be bled so dry grandmas will start thirsting for blood before they keel over because of a lack of care. And because markets need the mechanism of price discovery, lest the only companies left to invest in will be the weaker ones (since every single one will be weak).

They have to, but they can’t. They must, but they don’t dare. So much for forward guidance, it doesn’t mean a thing when central bankers are stuck in a trap of their own BS spin.

Don’t Hike Alone Is Jackson Hole Bear Warning for Central Banks

The message from [Yellen] and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation. Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.

Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages. When the pack picks up the speed away from stimulus will therefore depend on Yellen, Draghi and Kuroda. If economic growth or inflation accelerates more than anticipated they may even push ahead faster …

Both the Fed and the Bank of England, if the forward guidance they so abundantly advertize would have actual meaning, would, given the targets they set in the past, have to raise rates. But they can’t, and this ‘having to do it in concert’ idea is a welcome distraction. There are others.

To justify not raising rates despite earlier guidance targets, Yellen uses the overloaded on part-time US jobs market, and the ‘broken record’ wages that just won’t move up no matter how great the economy is supposedly doing. Carney uses wages and an opaque story about disappointing exports. And then, obviously, they use each other as lightning rods.

They can also quite safely hide behind the ECB and the Bank of Japan, both of which oversee economies that are by most standards doing so poorly that a rate hike by either would be seen as suicidal.

Not that they’re in the same boat: the ECB, a.k.a. Berlin, hasn’t loosened credit enough over the past 7 years to achieve the short term upticks the US and UK have shown (and which both claim are not short term). Japan, on the other hand, has stimulated so much it has reached the end of the road in ‘stimuland’. Japan’s PM Shinzo Abenomics can look forward only to frightening statistics, and BOJ boss Kuroda will soon either move to Paraguay or be humbly requested to commit harakiri.

Carney’s case is a tad peculiar. Only this weekend he declared his willingness to risk a complete collapse of Britain’s economy just to show his never tried and certainly never proven theories are right:

Interest Rates Will Rise Before Real Pay Stops Falling, Says Carney

The governor of the Bank of England has warned interest rates might start to rise before workers see a sustained real-terms pick up in their pay. Signalling further pain for households, Mark Carney said it was possible that borrowing costs – on hold at 0.5% for more than five years – would increase before wage growth catches up with inflation. “We have to have the confidence that real wages are going to be growing sustainably [before rates go up]. We don’t have to wait for the fact of that turn to do so,” Carney said.

That’s at least sort of funny, because it’s exactly what Abe said about Abenomics before it started to fall apart entirely: that if only the Japanese had faith and confidence that it would work, it magically would. Looking at his mindset, you can expect him to repeat until his dying day that if only they had believed!

But that still doesn’t make Carney’s line any less crazy, of course. What he proposes is to make everyone in Britain pay more for everything, mortgages, services, you name it, without getting paid more so they can afford it. “We have to have the confidence”.

Inflation has outpaced wage growth for the vast majority of the period since 2008, bringing a prolonged period of falling real pay and living standards for UK workers. Last week the Bank’s rate-setting Monetary Policy Committee slashed its forecast for pay growth by half to 1.25% by the end of 2014, as wage rises have failed to materialise despite rapidly rising employment. With inflation expected to be just below the 2% target by the end of 2014, average real pay is expected to fall for the rest of the year, with rises not expected until 2015. Markets are forecasting a first rate rise in early 2015, and the pound has strengthened in recent weeks as investors bet that Threadneedle Street will be the first major central bank to raise rates.

Carney said he would be “comfortable” being the first to move. “We will do what we need to do.” Hinting at the growing division among MPC members over the appropriate timing of the first hike, Carney said: “In terms of our broader message, and where the committee is united and has the same view, is that as the expansion continues, rates are going to go up,” he said. “People might have different views on the exact timing, but it will happen and people should plan accordingly. Second, our best judgment of the path is that it will be limited and gradual, a new normal if you will.”

Carney, no matter what he says, isn’t “comfortable being the first to move”. He just finds himself with a big sweaty – but undoubtedly well pedicured – foot in his mouth. He’s looking for a way out, and covering his donkey with lines like “as the expansion continues, rates are going to go up”, so if there’s no expansion, he’s off the hook.

But that contradicts his earlier “forward guidance”, and it head-on collides with the insane loose credit-induced housing boom he himself created and now realizes he must stop, lest three quarters of the nation end up underwater.

As for that so-called “inflation”, British CPI was announced to be 1.6% today. Way below anyone’s target. Should that make him more, or less, likely to raise rates? One could argue either way, but he could certainly make a case for not raising them on account of it, and so he will. But it’s all hot air.

Because inflation cannot be measured – just – by looking at rising prices. Inflation is the money/credit supply – which recent policies have raised to stupendous levels – multiplied by the velocity of money, better known as consumer spending. Given the rise in credit, one can only surmise, looking at low CPI numbers, that spending is dropping rapidly. Despite all that credit pumping. But then, with stagnant wages, and a nation already swamped in debt, who would expect anything else?

British MPs are on to Carney’s behind-wiggling too, but they’re seeking a political reason behind it.

Bank Of England’s Mark Carney Accused Of Delaying Rate Hike Ahead Of General Election

A second MP has attacked Bank of England Governor Mark Carney, claiming the Canadian is “clearly” attempting to delay rate rises until after the next general election. Treasury Select Committee member John Mann’s intervention comes in the wake of accusations from Conservative MP Mark Field of a “clear bargain” between Carney and Chancellor George Osborne to keep rates low until the country goes to the polls next May. A dovish inflation report from the Bank last week meanwhile dampened prospects for an interest rate rise this year. Mann said: “It is abundantly clear that Mark Carney is attempting to delay interest rate increases until after the election when they rise immediately.”

Mann previously clashed in public with Carney in November last year when he accused him of being “in danger of being too close to the Chancellor and acting as a politician rather than a Governor”. Carney responded that he was “more than mildly offended” by the thrust of Mann’s comments. The Bank of England – operationally independent since 1997 – and the Treasury deny any kind of backroom deals between Osborne and Carney, following Field’s claims. The Bank said there “was no agreement between the Governor and the Chancellor over Bank rate and never has been”. One insider added: “The idea is absolutely mad. The monetary policy committee guards its independence fiercely.”

Right. Independence. Only a fool would believe in that, and regardless, Carney still doesn’t need pressure from politicians to make up his mind. He has nowhere to turn, whatever he does is going to work out terribly wrong. All he’s got is the ‘official’ 3.2% GDP growth for the UK. That looks good. For now. So he might as well go for the rate hike in an ‘after me the flood’ move.

But then, there’s Jackson Hole. And all those other hugely important people who want a say.

For Interest Rates, Low Is the New Status Quo

It’s time to get used to near-zero savings-account interest rates and 10-year bond yields that don’t get much higher than 3%. Yes, the Federal Reserve is preparing to raise rates as soon as next spring. But even that won’t produce the interest-rate “normalization” that many assume to be on the way.

That overdue reversion to the mean of recent decades—pined for by retirees and other risk-averse savers, feared by holders of higher-yielding bonds—isn’t coming. Blame it on the persistent sources of fragility in the global economy: banks that remain reluctant to lend to Main Street, a looming debt crisis in China, and the alarming prospect that deflation will come to Europe’s shores and return to Japan’s. All that will keep inflation reined in and make the Fed extremely hesitant to do follow-up rate hikes after its first one breaks an almost decadelong drought.

In other words, whatever or whoever may be wrong, it’s not the central bankers. It’s global fragility , China, Europe, Japan. If not for that all that reality, theories would look just great, thank you.

Scott Mather, deputy CIO at bond fund manager Pacific Investment, says the eventual resting point for rates will be much lower and “the Fed will take a lot longer to get there than in previous cycles. And a chief reason for that is all the overhangs that we have.” The initial move, certain to be a mere quarter of a percentage point, will have only the slightest impact on money-market rates, since banks will still be borrowing short-term money at not much more than 0%.

Yet because of underlying economic weakness, even this modest credit tightening could temper growth and reflexively give the Fed pause. It isn’t hard to imagine that first increase being followed by a six-month or even yearlong hiatus. That’s a far cry from past periods of policy normalization, when signs of economic recovery would send the Fed off on a multiyear campaign of repeated interest-rate increases.

The bond market seems to know this. Even as forecasts for Fed rate increases have come forward in response to better U.S. employment data, the 10-year Treasury yield is at a 14-month low beneath 2.4%. Pimco’s Mr. Mather thinks the 10-year yield won’t get much higher than 3%. But it is very difficult for economists to abandon their old normalization models.

Translation: Bond markets don’t believe there will be a recovery, or at least not one that looks anything like what we’ve been told for 7 years is just around the corner.

Even though there is intellectual appreciation that liftoff will be slower than in the past and implicit acknowledgment of former Treasury Secretary Lawrence Summers’s “secular stagnation” thesis, routine policy normalization is baked into base-case projections.

The Federal Open Market Committee’s own “blue dot” projections for the federal funds rate capture this. In June, its 16 members’ median forecast stood at 1.13% for the end of 2015, then sloped up to 2.5% at end-2016 and to 3.75% in the “long run” beyond that.

While that long-run forecast marked a modest reduction from March’s 4% median, it is far higher than the 2% or less that believers in the secular-stagnation thesis are now citing. This group, which includes Pimco, says the long-run “neutral fed funds” rate—a theoretical equilibrium for an economy running at full capacity—is now much lower because the economy’s ingrained growth capacity is weaker.

That last bit is just absolutely hogwash. Actually, it all is. There is no “fragility” in the global economy, there is nothing left that could lift it out of its misery. To call that fragility is like calling a boulder that’s about to land on your head a ‘nuisance’. Economists are completely useless when it comes to understanding the economy. All they have is theories and models and graphs and ideas of how things ‘should’ go.

Today’s leading – Keynesian – ideas in economics claim that loose credit and low interest rate ‘should’ lift any economy out of any hole it’s dug itself into. It doesn’t get sillier than that. And it certainly doesn’t work, other than in in tales fabricated by media and spin doctors.

As for “the Fed will take a lot longer to get there than in previous cycles”, all I got is: Cycles? Author Mike Casey himself states that “it is very difficult for economists to abandon their old normalization models.” Well, the first thing they should get rid of is the notion of cycles – well other than 70-year Kondratieff, perhaps -.

Cycles imply a move upward at some point. There’ll be no such thing in our formerly rich economies for a long time to come.

We might have arrived at an upward turn in the cycle if debt had been allowed, and forced, to be properly restructured. As things stand, however, the debt is still all or mostly there, and it has continued to bloat, swell and fester for 7 long years as well. And that could only be achieved by increasing debts at governments and central banks.

Altogether, we’re in a much worse situation than we were 7 years ago. We’re just getting better as we go along at hiding how bad it is.

Me, personally, I can’t wait for the first central banker to raise rates. Because it will be the best opportunity we will have for price discovery, for finding out what things really look like, and are worth, behind the veil of abundant credit that fogs our mirrors.

It’ll be very ugly when those rates go up, because there is nothing to catch our fall. But the only alternative is for our children to fall even deeper than they already must because of our illusionary media-induced visions of recovery and escape velocity and American Dreams.

One thing’s for sure already: for our kids, the American Dream will be nothing but a Hollywood driven illusion or video game. They will hardly understand that once their ancestors really believed it to be true, and for a short few decades seemed to achieve that dream.

A few last words on Ferguson. Everyone so far has done everything wrong over there that they could. Why the first black US president 10 days after it started still hasn’t shown his face is beyond me. Obama’s sending Eric Holder, and only tomorrow. As if people either know who Holder is, or care one damn bit.

Obama needs to watch out by now. because more people will be drawn towards Ferguson, police already said they arrested people from California and New York. And protests will spread as long as Ferguson is not handled in a proper and respectful way; the first ones were in St. Louis, New York, Seattle and Oakland last night.

This can get out of hand in a way that nobody, not even the most war party minded Americans, should look forward to. And it’s really easy: send Obama, make sure he can deliver a sure-fire way to assure an independent investigation, and deliver the guilty parties to justice. There are too many Fergusons in the US not to.

The by far best summary of the situation comes from John Oliver, a British comedian: “let’s totally demilitarize the police; and if and only if they can get through a month without killing a young black man can they get their toys back.”.

Oliver was a Daily Show correspondent for Jon Stewart until recently, the show that was elected the most trustworthy news program not long ago by Americans. So that Oliver should provide the best coverage of this topic, fits a pattern.

But come on, how sad is that?


Finally, the saddest thing I’ve seen in ages must be this:

Americans Eat Most Of Their Meals Alone

Americans eat most of their meals alone, new research finds, with families finding it more difficult to find time to eat together and a dramatic increase in the number of single-person households. The majority of meals (57%) are eaten by solo diners.

That depicts a nation in despair, and demise.

Americans Eat Most Of Their Meals Alone (MarketWatch)

It may have taken more than half a century, but Miss Lonelyhearts from Alfred Hitchcock’s “Rear Window” finally has some company. Americans eat most of their meals alone, new research finds, with families finding it more difficult to find time to eat together and a dramatic increase in the number of single-person households. The majority of meals (57%) are eaten by solo diners, market researcher NPD Group found. Snacks have the highest percentage of lone diners (72%) followed by breakfast (61%) and lunch (55%). (Solo lunches include workers eating at their desk.) Although 34% of Americans spent dinner time alone, half of American families still choose to eat dinner with each other five times a week. Would this make Ward Cleaver proud — or not? “A generation ago, the ‘Leave it to Beaver’ television family ate dinner together,” says Warren Solochek, vice-president of client development for NPD’s food service practice. “Today, that traditional eating arrangement is much harder to achieve.”

Although this was the first time NPD carried out the survey, experts say the trend of a person cooking for just themselves or requesting tables for one will continue. Single-person households jumped from 17% in 2008 to 27% in 2012, according to the U.S. Census Bureau. “People are marrying later in life and starting families later in life,” says Andy Brennan, a lead analyst at research firm IBISWorld. “A lot of restaurants are accommodating single diners with more bar space. There isn’t the stigma there once was to dining alone.” Restaurants – still struggling after the Great Recession – are happy to cater to the new wave of single diners. Breakfast menus are the only growth area on fast-food and casual dining menus, studies show. “Breakfast sales rose over 5% to $27.4 billion last year at quick-service and fast-casual restaurants, according to analysis of BLS data by research firm Mintel. What’s more, fast-casual restaurants were the only segment to see traffic growth in the restaurant industry last year — increasing 7% in 2013 and 9% in 2012.

With the popularity of on-demand entertainment via DVRs and mobile devices, it’s no longer easy to blame the fall-off in family dinner time on TV, says Jonathan Wai, a psychologist at the Duke University Talent Identification Program. He sees it as part of a broader unravelling of the “social fabric” and cites the high number of hours worked by Americans and the fact that commutes are getting longer every year. The 40-hour work week in the U.S. is longer than the work week in many European countries. And around 2.2 million U.S. workers have a daily commute of at least an hour to and from work, according to the U.S. Census.

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Preserving Disorder in Ferguson (Bloomberg)

The rioting that erupted in Ferguson, Missouri, over the weekend calls to mind Chicago Mayor Richard Daley’s 1968 gaffe: “The policeman is not here to create disorder. The policeman is here to preserve disorder.” In Ferguson, the police are doing an outstanding job of that. That’s partly why Missouri Governor Jay Nixon was right to call in the National Guard today. Yet he must know that the move will not quell the anger among protesters, who are motivated not only by a sense of injustice over an unarmed teenager’s death but also out of frustration with a truculent police force. Only when political leaders do a better job of holding police accountable — an urgent necessity in Ferguson right now, and a priority nationwide — will tensions truly begin to ease. Last week, police in Ferguson seemed to take every opportunity to ratchet up tensions over the shooting death of 18-year-old Michael Brown.

They mishandled the release of information about the case, attempted to intimidate residents with displays of military power, and were unable to provide basic answers about chain-of-command decisions. When Nixon on Thursday finally appointed State Highway Police Captain Ron Johnson to lead the police response, an evening of calm ensued. Johnson not only pulled back the heavily artillery, but he also walked among the protesters. Unfortunately, this goodwill evaporated on Friday when the local Keystone Cops released a video — before releasing Brown’s initial autopsy report or a photo of the officer who shot him — of what appears to be Brown lifting some cigars from a local convenience store minutes before he was killed. The officer who shot Brown did not stop him in connection with the robbery, a fact the police failed to disclose until questioned about it later in the day.

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John Oliver: Ferguson, MO and Police Militarization (HBO)

In the wake of the shooting of Michael Brown in Ferguson, MO, John Oliver explores the racial inequality in treatment by police as well as the increasing militarization of America’s local police forces.

“let’s totally demilitarize the police; and if and only if they can get through a month without killing a young black man can get their toys back.”

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For Interest Rates, Low Is the New Status Quo (WSJ)

It’s time to get used to near-zero savings-account interest rates and 10-year bond yields that don’t get much higher than 3%. Yes, the Federal Reserve is preparing to raise rates as soon as next spring. But even that won’t produce the interest-rate “normalization” that many assume to be on the way. That overdue reversion to the mean of recent decades—pined for by retirees and other risk-averse savers, feared by holders of higher-yielding bonds—isn’t coming. Blame it on the persistent sources of fragility in the global economy: banks that remain reluctant to lend to Main Street, a looming debt crisis in China, and the alarming prospect that deflation will come to Europe’s shores and return to Japan’s. All that will keep inflation reined in and make the Fed extremely hesitant to do follow-up rate hikes after its first one breaks an almost decadelong drought.

Scott Mather, deputy chief investment officer at bond fund manager Pacific Investment, which has $2 trillion in assets under management, says the eventual resting point for rates will be much lower and “the Fed will take a lot longer to get there than in previous cycles. And a chief reason for that is all the overhangs that we have.” The initial move, certain to be a mere quarter of a percentage point, will have only the slightest impact on money-market rates, since banks will still be borrowing short-term money at not much more than 0%. Yet because of underlying economic weakness, even this modest credit tightening could temper growth and reflexively give the Fed pause. It isn’t hard to imagine that first increase being followed by a six-month or even yearlong hiatus. That’s a far cry from past periods of policy normalization, when signs of economic recovery would send the Fed off on a multiyear campaign of repeated interest-rate increases.

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Don’t Hike Alone Is Jackson Hole Bear Warning for Central Banks (Bloomberg)

“Hiking alone is not recommended” goes the warning to walkers in Wyoming’s Grand Teton National Park. Central bankers should perhaps heed the same advice when it comes to interest rates as they fly this week to the Tetons and their annual symposium on monetary policy in Jackson Hole. Currency bulls rather than grizzly bears are the reason there is safety in numbers for them. The point is highlighted in recent research by Joachim Fels and Manoj Pradhan, economists at Morgan Stanley in London, who use a cycling rather than walking analogy to make it. Reviving a 2009 analysis, they note cyclists prefer not to ride solo because of wind drag and to instead stick to a group – or peloton – to reduce headwinds by as much as 40%. For those who try to go it alone in monetary policy, the work can be harder too. Raising rates before counterparts or signaling plans to do so often trigger higher exchange rates, which sap demand in their economies and often force them back into the pack.

“In cycling, the peloton is usually led and controlled by the strongest and largest teams,” Fels said in a report yesterday, citing a longer study he and Pradhan released on July 30. “It’s the same with the global monetary peloton where the easy policy stance of the Group of Three central banks sets the pace for the entire group.” For Tour de France winner Vincenzo Nibali, read Federal Reserve Chair Janet Yellen. The message from her and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation. Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.

Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages. Economists at Citigroup and Berenberg Bank were among those to revise their forecasts to show the U.K. central bank raising rates in the first quarter of 2015 rather than the last few months of this year. The pound responded by falling for a sixth week against the dollar, its longest run in four years. Carney isn’t alone. New Zealand also has tightened policy more slowly than its domestic economy would suggest, according to Morgan Stanley. The central banks of Sweden, South Korea, Mexico and Israel have all cut their benchmarks lately, while Canada and Australia have turned more dovish. Most noted currency strength or global economic conditions in explaining their decisions.

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Not one inch.

How Independent Is The Independent Bank Of England? (Telegraph)

A CPI reading of 1.6% is below the City’s expectations, and makes it – for now, anyway – at little bit less likely that the Bank of England will raise interest rates this year or early in 2015. Cue relief and even a bit of jubilation in the Government; Danny Alexander has gone so far as to say that “subdued inflation is now becoming the norm as the economy recovers”. Ministers, it is clear, do not want rates to rise any time soon. Higher rates mean it’s more costly to borrow, and in an election season that will focus heavily on talk of the cost of living, no one seeking re-election wants anything that eats into household disposable income. (Yes, higher rates mean better returns for savers, but for unfortunate reasons best explored on another day, politicians tend to care more about borrowers than savers.) The decision on rates, of course, rests with the Bank of England. Since 1997, the Bank has had operational independence over monetary policy.

Central bank independence is a relatively novel feature of British political life that has become part of the orthodoxy, accepted by just about everybody as a Good Thing. It means no more political interference, no more ministers keeping rates artificially low before elections and generally skewing the economy for political purposes. But just how independent is the independent Bank of England? Some people have their doubts about the Bank under its current governor, Mark Carney. Mark Field, the Conservative MP for the City and Westminster, makes a habit of saying in public things that other politicians only mutter privately. Today, he’s suggested that Mr Carney is setting rates for reasons that are not wholly economic. The Governor is under a “political imperative” to delay an increase until after the election, Mr Field suggests: “From the moment Mark Carney became governor in July 2013, it was pretty clear forward guidance was an indication rates would not rise this side of the election – for all the talk of Bank of England independence, there was a clear bargain between him and George Osborne.”

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For Markets, Any Re-Escalation Is Simply Pent Up De-Escalation (Zero Hedge)

A quick reminder of how geopolitics governs markets: on Friday, the market plunged 0.005% over fears Ukraine and Russia may be about to go at it all out after a fake report Ukraine shelled a Russian military convoy. On Monday, the same “market” soared just under 1% as the news that had caused the “crash” was refuted. That has been the dominant rinse, repeat theme for the past month and will continue to be well after Yellen’s Friday speech at Jackson Hole (although one does wonder why she is not speaking on Wednesday when the symposium begins). Not surprisingly, with only modest re-escalation news overnight (that Russia is preparing further retaliatory sanctions against the West), which is simply “pent up de-escalation” in the eyes of Keynesian algos, futures are again up a solid 0.2% and rising, and the way the rampy USDJPY is being manipulated before its pre-market blast off, we may well see the S&P hit 1980, if not a new all time high before 9:30am, let alone during today’s cash session.

In any event, whatever you do, don’t you dare suggest that algos should care one bit about Ferguson and its implications for US society. Taking a closer look at the geopolitical stories, as DB summarizes, no bad news is certainly viewed as good news for now. Following the four-way diplomatic talks in Berlin on Sunday, Russian Foreign Minister Sergei Lavrov yesterday told the press that the talks have failed to produce positive results in establishing a ceasefire and (starting) a political process. According to Reuters, Lavrov accused Ukraine for changing their demands over what it would take to establish a truce between government troops and pro-Russian insurgents. The good news though is that some progress was made on allowing the delivery of Russian humanitarian aid to eastern Ukraine. Lavrov said that “all questions” regarding the humanitarian convoy had been removed and agreement had been reached with Ukraine and the International Committee of the Red Cross (ICRC).

Bloomberg news overnight said that the ICRC expects to work out the details of a safe-passage plan for the convoy into Ukraine “soon”. The four-way talk is expected to resume again sometime this week but we don’t have specific timing on that yet. Despite the ongoing volatility, it is interesting to see the strong performance in Russian equities over the past week. The MICEX index has rallied every single day for the past 7 trading sessions and is currently about 7% off its early August lows. One wonders which Russian oligarchs are selling into the latest liftathon.

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Robert Shiller Wonders Why Stocks Are ‘Very Expensive’ (MarketWatch)

“The United States stock market looks very expensive right now.” And with that, Yale professor Robert Shiller is at it again, telling us to worry. He’s got plenty of company these days among those who fear this bull market can’t possibly keep going. Shiller’s particularly uncomfortable about the CAPE ratio (cyclically adjusted price-earnings), a stock-price measure that he helped create. He said something similar in June. (Just Google Robert Shiller bubble for more instances of his bubble theories.) Otherwise known as the Shiller P/E, the ratio basically takes average inflation-adjusted earnings for the S&P 500 over the previous 10 years. In Shiller’s New York Times article from Saturday, he notes that when he touched on this topic over a year ago, that ratio stood around 23, far above its 20th-century average of 15.21. It now stands at 25, a level that since 1881 has only been surpassed in three other periods — the years surrounding 1929, 1999 and 2007. And we all know what came next after the market peaks in those years.

Shiller says the CAPE was never intended to indicate timing on when to buy and sell, and that the market could remain at these valuations for years. But given that this is an “unusual period,” investors should be asking questions, he says. His question: Given that the ratio shows valuations have been elevated for years, are there legitimate factors that could keep stock prices high for decades longer? He points that his own questionnaire surveys show investors are getting more worried. Other than that, unfortunately there is no “slam-dunk” explanation for these high valuations, says Shiller. “I suspect the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before,” says the Nobel-Prize winner. “If the mood changes again, stock market investments may disappoint us.”

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Keep your eye on him. He’s not kidding.

George Soros Is Not The Only Big Investor Playing Defense (MarketWatch)

George Soros isn’t the only big-shot investor who seems to be suffering from a bit of a backache. The question is whether it’s just a twinge or something more serious. Soros, whose astounding long-term success as a trader has reportedly been shaped at least in small part by his reactions to physical discomfort, raised eyebrows when a regulatory filing on Thursday showed he had significanty upped his holdings of puts on the SPDR S&P 500 ETF. As you may recall, Soros reported that he held nearly 11.3 million puts on the ETF as of June 30, a position with a market value of more than $2.2 billion. That was a 605% rise from the end of the first quarter and made the stake his largest single position, constituting nearly 17% of his total portfolio. That is the biggest such put position Soros has had since 2008, noted Raul Moreno, chief executive of iBillionaire, an index that tracks investment choices by big investors, including the likes of Soros, Warren Buffett and Carl Icahn.

So in a portfolio that’s around 80% long equities, the position appears clearly to be a hedge rather than an outright bet on a market fall, Moreno said. Still, the size of the position would seem to indicate Soros had grown more worried about the potential for a pullback, Moreno said in a phone interview. Maz Jadallah, founder of AlphaClone, a research firm that collects, aggregates and clones data from 13F filings, emphasized that while the shift indicates Soros believes the risk of a pullback has increased, it shouldn’t be read to indicate he is betting on one. In fact, the data shows Soros’s long exposure increased by 9% over the second quarter, a time when the S&P 500 rose 5%. Michael Vachon, the spokesman for Soros Fund Management, said the increase in put holdings was “not a story.”

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Run, Forrest, run!

Fed Says SEC Money-Market Rule Could Spark, Not Reduce, Runs (MarketWatch)

A new Securities and Exchange Commission rule designed to reduce runs in the money-market mutual-fund industry could instead spark them, the New York Federal Reserve said Monday. At issue is part of the new SEC rule giving funds the ability to limit outflows — through gates or restrictions to redemptions — when liquidity runs short. New York Fed economists, in a blog post, said that a study of academic literature concludes these gates may ultimately just make investors run sooner.

“The possibility of a fee or any other measure that is costly enough to counter investors’ strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures.”

A spokeswoman for the SEC. said the agency had no comment on the blog post. One SEC. commissioner, who ultimately voted against the rule, raised concerns about a rush to redemption in the debate. Fed officials do like other parts of the SEC rule, especially the fluctuation in net asset values of shares for some of the funds instead of a fixed value of $1 a share. Boston Fed President Eric Rosengren last week called that part of the new rule a “meaningful improvement.”

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Yes, it is.

Is Rising Unrest In China A Threat To The Economy? (CNBC)

Incidents of unrest in China are increasing, and analysts told CNBC the country’s one-party government may be getting more concerned about the broader impact on social and economic stability. Protests are illegal in China, an authoritarian state where freedom of speech is limited. “[The government] places arbitrary curbs on expression, association, assembly and religion; prohibits independent labor unions and human rights organizations; and maintains Party control over all jurisdictions,” according to Human Right Watch’s 2014 World Report. Yet, according to official police statistics, the number of annual protests rose to 87,000 in 2005 from approximately 8,700 in 1993. Currently, there are 300-500 protests in China each day, with anywhere from ten to tens of thousands of participants, the 2014 World Report said.

Protests ranged from farmers contesting land grabs to environmental protests organized by the middle classes and deadly ethnic minority riots. “Most of these protests have involved farmers pushed off their land and sometimes poorer people in urban areas kicked out of their houses to make way for development,” said James Miles, China editor at The Economist. “Often these protests have involved the weakest, poorest, most marginalized sectors of Chinese society. They are poorly organized and their grievances are localized – so a protest might flare up in one particular location, but not spread like wildfire across the country,” he added. But more recent large-scale environmental protests by the middle class, long viewed as a crucial government support, have caused for alarm among authorities, he said. “The way in which these demonstrations have rapidly formed using social media has clearly unnerved authorities and made them wonder about how quickly middle class unrest could spread,” Miles told CNBC.

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Just the start.

Abandoned Homes Swell Bad Debt in China’s Wenzhou (Bloomberg)

Falling property prices in China’s eastern city of Wenzhou triggered 6.4 billion yuan ($1 billion) of bad loans as buyers abandoned homes and stopped making mortgage payments, the Economy & Nation Weekly reported. Purchasers of 1,107 properties halted payments as prices dropped for 34 straight months, the Xinhua News Agency-affiliated magazine said yesterday on its website, citing data from the local banking regulator. A press officer at the Wenzhou branch of the China Banking Regulatory Commission declined today to confirm the data. China’s slumping property market is a drag on the world’s second-biggest economy and banks’ profits, with lenders’ soured loans increasing for almost three years. New-home prices fell last month in 64 of 70 cities tracked by the government.

In Wenzhou, about 56% of the homes were abandoned due to falling values and most were high-end apartments, according to the report. Homes were also abandoned by borrowers left with liabilities after making guarantees for companies in financial trouble, the report said. Real-estate lending accounts for 26% of outstanding bank loans in Wenzhou, 8%age points higher than the national level, according to the report, which didn’t specify a time period for the data. The city’s economy expanded 6.8% in the first half, according to the local government, compared with a 7.4% expansion nationwide. China’s economy is forecast to expand 7.4% for the full year, the slowest pace since 1990.

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China to Cut ‘Overly High’ Income of State-Owned Firm Executives (Bloomberg)

Chinese President Xi Jinping plans to regulate income distribution in state-owned companies, cutting the top salaries, as part of the nation’s anti-extravagance and anti-corruption campaigns. “Unreasonably high income will be adjusted,” and top managers can’t have excessive spending beyond what’s stipulated by government regulations or companies’ financial policies, according to a statement posted on the central government’s website, citing Xi. Leaders of central-government-controlled enterprises should actively support the changes, Xi was cited as saying in a meeting of the Communist Party’s reform group yesterday.

Xi started a broad campaign to cut corruption and excessive spending by government officials after he took over as head of the ruling Communist Party in November 2012. In the wake of the campaign, growth in retail sales dropped to a three-year low in April. Yesterday’s meeting also discussed plans to build a few influential media groups, and changes to the national examination and enrollment systems. In another meeting yesterday, Xi urged innovation to promote development, according to a statement posted on the central government’s website.

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Subprime China.

China Banks On First-Time Buyers To Prop Up Housing (CNBC)

Jiang Lu is the proud owner of a 450 square foot apartment in the Chinese capital of Beijing. The 28-year-old web editor invested her entire life savings and took advantage of easier mortgages in China to buy her new 250,000 dollar home. “It is very easy to get a mortgage. Any bank will give one to you,” she said. “Without one, I wouldn’t even think about buying.” Jiang is one of the first time buyers Chinese authorities hope will help prop up China’s flagging property market. In Beijing and many other cities across China, the housing market is starting to weaken. New home prices dropped in July for the third month in a row with 64 out of 70 cities surveyed showing month-on-month declines. Based on data from the National Bureau of Statistics on Monday, the average price of new homes slid 0.9% from June, slipping faster than June’s 0.5% drop. “The acceleration in home price declines is probably due to more projects offering discounts and slower sales in July,” Bank of America Merrill Lynch analysts said in a research note.

Housing sales in China have dropped this year in total value by 10.5% compared to last year, according to official data. China’s home prices have been skyrocketing for years, with the government encouraging development and offering few other ways for regular citizens to invest their cash. Concerned that prices were becoming out of reach for average citizens, policymakers began to put in restrictions in 2010 to stop speculators. After several false starts, the market appears to be cooling finally but there are now fears the market could fall too fast and trigger a hard landing. With property so important to China’s growth, accounting for an estimated 20-percent of GDP, some economists worry about the impact a housing downturn could have on China’s economy and the rest of the world. The country’s real estate market drives global growth with construction fueling prices in commodities.

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The lunatics take over. And no-one sees the difference.

Tycoon Palmer: China Wants to Take Over Australia Resources (Bloomberg)

Australian mining magnate Clive Palmer, whose political party effectively holds the balance of power in the Senate, accused China of trying to take over the nation’s resources — earning a rebuke from Prime Minister Tony Abbott’s government. “They want to take over our ports and get our resources for free,” Palmer said on Australian Broadcasting Corp. television late yesterday. Palmer also labeled a unit of China’s state-owned Citic Pacific Ltd., his partner in the world’s biggest magnetite iron ore mine in Western Australia, as “mongrels”. Abbott’s government attacked Palmer’s comments as “hugely damaging”, and stressed the importance of Australia’s relationship with its biggest trading partner. The Australian Industry Group condemned Palmer’s comments as “ill-considered and inappropriate.”

Palmer is embroiled in legal battles with Citic Pacific, which has alleged he used funds from a joint account to help finance his political campaign. His nascent Palmer United Party has three senators in Parliament’s upper house, making it an influential force that Abbott’s government must win over to pass legislation should it be opposed by Labor and the Greens. On the ABC’s Q&A show last night, Palmer denied Citic’s allegations, calling them “Chinese mongrels.” “I’m saying that because they are communists, they shoot their own people, they haven’t got a justice system and they want to take over this country,” Palmer said.

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Next goal for US.

Bulgaria Halts South Stream Gas Pipeline Project For Second Time (RT)

All operations on Russia’s Gazprom-led project South Stream have been suspended, as they do not meet the requirements of the European Commission, Bulgaria’s Ministry of Economy and Energy said on its website. “Minister of Economy and Energy Vasil Shtonov has ordered Bulgaria’s Energy Holding to halt any actions in regards of the project,” the ministry said. This specifically means entering into new contracts. There has been mounting pressure from the EU to put the project on hold, and now the European Commission will be consulted each step of the way to make sure it complies with EU law. European ‘anti-monopoly’ laws prohibits the same company to both own and operate the pipeline. However, Gazprom and Bulgaria had previously struck a bilateral agreement regarding that aspect of the project.

This is the second time Bulgaria has called for a suspension of the South Stream project. In early June, the country’s Prime Minister Plamen Oresharski ordered the initial halt. Bulgaria is the first country traversed by the pipeline on land, after a section that runs beneath the Black Sea from Russia. The branch that begins in Bulgaria is planned to continue through Serbia, Hungary, Slovenia and Austria. Other participating countries have confirmed their commitment to the South Stream’s construction. Gazprom’s $45 billion South Stream project, slated to open in 2018 and deliver 64 billion cubic meters of natural gas to Europe, is a strategy by Russia meant to bypass politically unstable Ukraine as a transit country, and help ensure the reliability of gas supplies to Europe.

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And Russia’s aid will never be delivered?!

East Ukraine Under Massive Artillery Fire (Itar-Tass)

The Ukrainian army’s artillery delivered massive artillery strikes on large populated areas and industrial enterprises in the Donetsk and Luhansk Regions in east Ukraine on Tuesday. The Ukrainian military’s howitzers and multiple launch rocket systems shelled residential quarters in Donetsk, Horlivka, Yenakiyevo and Makeyevka The Donetsk city council said that artillery shells had exploded in a residential neighborhood near the airport and destroyed a local school while local residents were hiding in basements and bomb shelters The shelling started on Monday evening and continued until Tuesday morning. Water supply has been disrupted in the area. Donetsk People’s Republic PM Alexander Zakharchenko earlier said that the Ukrainian army’s shelling had destroyed electricity transmission lines supplying power to water filtration stations.

“Teams have been dispatched to restore water supply to populated areas and there are plans to use reserve water reservoirs,” Zakharchenko said, adding that “facilities were located on the territory occupied by the Ukrainian army,” which complicated restoration efforts. The situation in the Donetsk Region is close to critical due to incessant shelling. In addition to the absence of water, local residents are experiencing food shortages. Food stocks in stores are running out while supplies have almost stopped. The prices of available food products have jumped almost 50%.

Local residents have to stand in line to get bread, milk and drinking water, eye-witnesses said. The Samsonovskaya-Zapadnaya coalmine in the Luhansk Region has halted work over artillery shelling, the press office of the Metinvest company reported on Tuesday. “The mine’s work has been suspended. Specialists are restoring power supply to switch to a regime of maintaining the mine’s vital systems. The operations headquarters and the special commission are assessing the scope of damage,” the press office said. The Ukrainian army’s shelling has also halted production at the Yenakiyevo metallurgical plant, the Yenakiyevo coke and chemical enterprise and the Khartsyz pipe factory.

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“As long as they’re betting on a military solution, and as long as the authorities in Kiev are using military victories over their own people to shore up their position in Kiev, I don’t think there’s any point to what we’re trying to do now,” Lavrov said.

Red Cross Makes Progress on Russian Aid Convoy to Ukraine (BW)

The Red Cross is making progress on details of a safe-passage plan for a Russian aid convoy intended for southeast Ukraine, after four-way talks on a halt to the fighting reached an impasse in Berlin. The crisis, in which Ukrainian troops have been battling pro-Russian separatists for months, can only be stemmed once the government in Kiev calls off its army as part of an unconditional cease-fire, Russian Foreign Minister Sergei Lavrov said yesterday in the German capital. Ukraine says it will declare a truce if the pro-Russian rebels lay down their arms and Russia stops supplying them with weapons. Galina Balzamova, a spokeswoman for the International Committee of the Red Cross, said today she expects agreement “in the very near future” on security guarantees for the Geneva-based agency to accompany the Russian aid trucks, though she said she couldn’t give a specific time. The ICRC says it’s “extremely concerned” about the humanitarian crisis in eastern Ukraine.

In Kiev, military spokesman Andriy Lysenko said yesterday that separatists shelled a column of civilian vehicles in the Luhansk region, killing “dozens of people.” There was no independent confirmation. Government troops have been shelled 10 times since yesterday, the Defense Ministry said on its Facebook page. Government forces are fighting rebels in Yasynuvata in the Donetsk region in eastern Ukraine and blockading Ilovaysk to the east of Donetsk, the ministry said. Meanwhile, paratroopers and infantry are battling to keep control of the villages of Novosvitlivka and Khryashchuvate in the neighboring Luhansk region.

Ukraine’s central bank raised its overnight refinancing rate to 17.5% today from 15% as it seeks to support the hryvnia. The Ukrainian currency fell 0.9% to 13.15 per dollar today, taking its decline for the month to 6.7%. Russia’s benchmark Micex stock index gained for an eighth day today, rising 0.8% at 12:47 p.m. in Moscow. “As long as they’re betting on a military solution, and as long as the authorities in Kiev are using military victories over their own people to shore up their position in Kiev, I don’t think there’s any point to what we’re trying to do now,” Lavrov said. He said no resolution was reached in the talks with his Ukrainian, German and French counterparts. No date has been set for a resumption.

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Must read.

Occupation Forces (International Man)

When I was growing up in Berlin, after the war (World War II), we lived in the American sector and the American soldiers were everywhere—on the streets, in the cafes. No one wanted them there, but whenever we made disparaging remarks, our own authorities tell us we must not do this. They tell us the Americans can do what they like and we just have to accept it. So, we stop using the words, “Yankee” and “American.” They are the occupying forces, just like the Romans were at one time, so, amongst ourselves, we refer to them as “the Romans.” So, we talk freely in the cafes about the “Romans” and the American soldiers don’t know that we mean them.

The snippet above was from taken from a conversation I had recently in a café with Klaus, a German who is now in his late sixties. He had a long career as a pilot for the German air force and had been stationed in many countries. In spite of his own career as an “occupier,” he never got over the resentment he had for the occupation of his homeland by American troops. (Berlin was occupied from 1945 to 1994.) The US is unique in the world with regard to occupation. It has been estimated that the US has over 325,000 military personnel in over 1,000 overseas military bases in more than 150 countries, but statistics are widely conflicting. Generally, the American troops arrive to deal with some sort of conflict (either invited or uninvited), but unlike most other armies, they tend to remain for a long time beyond the stated “need.”

There are those who praise this policy, stating that the US “keeps the world safe for democracy;” however, the US is known (at least to us outsiders) as a country that typically routs elected governments, installs corrupt and ineffectual puppet leaders, and seeks to control the occupied country as a satellite state. There are three major downsides to this policy:

1. Occupation Forces Are Always Resented Most Americans, during the Cold War, perceived the Russian forces in Berlin to be hated by the Berliners, but assumed that Berliners were grateful to have American occupiers to “keep them safe.” The truth, as Klaus states, was that all occupiers were hated, not just the Russians. Long after the war was over and it was time for Berlin to return to normal, the Russians and Americans maintained a standoff in Berlin that did not end for another forty-nine years. Only in 1994 did Germans “get their city back.” Not surprisingly, many Germans, even today, feel that neither the Russians nor the Americans can be trusted, as they are seen as “empire builders” who play out their ambitions in foreign lands. Although today, there is a fair bit of cooperation between the governments of the US and Germany, the German people themselves have, even recently, expressed their distrust by asking that the Bundesbank demand the return of their $141 billion in gold from the US Federal Reserve, and have additionally railed against NSA spies in Germany.

2. Occupation Is Extremely Costly Two thousand years ago, the Romans created an empire by training its own people as troops, then invading other countries, stripping them of their wealth. They then left troops behind in each country as occupiers to maintain Roman control. Unfortunately, after the initial pillaging, there was little ongoing wealth to be taken, and the occupations became expensive liabilities. Eventually, the once-wealthy Rome sank into debt and relied more and more on mercenary troops—troops that had no real loyalties to Rome and would eventually turn on Rome, when the money ran out. The US is now in a similar state. There is no more military draft in the US, and the majority of soldiers occupying the 150 countries are mercenaries (or, in today’s nomenclature, “defense contractors”). As the US is technically bankrupt, it is only a question of time before the cheques stop coming. As in Rome, it can be expected that the mercenaries will drop their “loyalty” with little or no warning at some point.

3. A Government that Believes in Occupation as a Policy is a Danger to its Citizens The US Government clearly believes in the concept of occupation, as it is actually increasing the number of countries where it has troops in occupation. In addition, in the last decade, the US has been dramatically ramping up its preparedness for war at home. Not since World War II has the US spent so much money building tanks, buying bullets, and training troops to get ready for a major conflict. However, this time, it is not for a war overseas, but at home. The armaments are being deployed to localised law enforcement departments and the Department of Homeland Security (DHS), which is charged solely with domestic enforcement. Similarly, the training of police officers and other authorities has changed dramatically from the traditional “Protect and Serve” policy to one of riot control and combatting “domestic terrorism.” Of the three downsides to occupation, this is the one that should concern American citizens most greatly, as, for the first time since 1865, the American continent itself is planned to be the occupied territory.

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Remember how many flights were cancelled a few years ago?

Iceland Tells Airlines Volcano Under Glacier May Erupt (Bloomberg)

Iceland warned airlines that there may be an eruption at one of the island’s largest volcanoes located underneath Vatnajokull, Europe’s biggest glacier. The alert level at Bardarbunga was raised to “orange,” indicating “heightened or escalating unrest with increased potential of eruption,” the Reykjavik-based Met Office said in a statement on its website. Over 250 tremors have been measured in the area since midnight. The agency said there are still no visible indications of an eruption. The volcano is 25 kilometers (15.5 miles) wide and rises about 1,900 meters above sea level. Bardarbunga, which last erupted in 1996, can spew both ash and molten lava. Ash from Iceland’s Grimsvotn volcano forced flight cancellations in Scotland, northern England and Germany in May 2011. An eruption of the Eyjafjallajokull volcano in April 2010 caused the cancellation of more than 100,000 flights on concern glass-like particles formed from lava might melt in aircraft engines and clog turbines.

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Jun 052014
 
 June 5, 2014  Posted by at 6:46 pm Finance Tagged with: , , , ,  7 Responses »
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Detroit Publishing Co. Excursion steamers Tashmoo and Idlewild at wharf, Detroit 1901

This is one of those days where I wonder what I’m going to say about this one. It’s all too convoluted six ways to Sunday. Yeah, Mario Draghi delivered for markets and investors, and stocks rise a bit more. Like they’re not high enough yet, setting records in . One thing he didn’t do is commit to asset backed securities purchases, and so that is now what markets will be demanding from him next time around. Who cares anymore that ABS were the main conduit to blew up the same markets in 2008? Investors are happy, and Jack and Jill are ignorant. The Great QE Bubble lives to see another day. Yay!

The ECB has lowered its refinancing rate to 0.15%, its marginal rate to 0.4% and the deposit rate to -0.1%. Negative interest sounds like a big deal, but there are hardly any bank deposits left with the ECB, so despite the giamt novelty made out of it, this is just a paper measure. They took all these “bold steps” ostensibly because Draghi et al find inflation rates too low. But how would lowering interest rates fix that? Wouldn’t it be better to raise them, wouldn’t that be more inflationary (in the inflation equals rising prices sense)? It seems obvious it would, but that would kill the housing sector, among other things, and we want to keep people tied in to their mortgages, don’t we?

Still, at least raising rates would have been surprising, and volatility would have gone up, which is just what central bankers say they want – even if they don’t say out loud they badly need it -. Maybe the disparity between the Fed and BoE, who threaten to raise rates, and the ECB that lowers them, will lift the VIX. But that’s not certain by any means.

The newly announced $640 billion LTRO channel for business loans sounds nice, but interest rates are already very low, so they were not the reason businesses didn’t borrow. The real reason is in all likelihood hidden in the demand side of the real economy. Which, simple as it may be, is very poorly understood in economics. The ECB’s decisions are all based around economists’ extreme -and extremely wrong – focus on demand, which manifests itself in terms like aggregate demand and pent-up demand (of course the magical option is increased demand).

What they are (seemingly?) incapable of getting into their heads is that demand is not some sort of constant – let alone constantly growing – metric. That, like for instance this past winter when Americans were forced to spend far more than usual on heating and healthcare costs, there was no pent-up demand left come spring, because people were maxed out (they had spent their “demand”). For economists, when sales numbers have been low(er) than expected/desired during a certain period of time, that must mean more sales are just around the corner. Something went wrong, so you repair it. There is no risk that it can’t be repaired. That’s about as close to religion as one can possibly shirk without coming out on the other side of it.

The entire interest rate circus happens because the overriding “philosophy” amongst economists and politicians is that banks are more important than people. the idea is that if banks are doing well, that will automatically trickle up/down to the people. But why wouldn’t the opposite be true? If policies were aimed at making sure people as as well off and – economically – protected as they can be, wouldn’t that trickle down/up to banks? If stocks are up, then the economy must be good. If banks make solid profits, the economy must be good. And people are nowhere in sight, they’re an afterthought as best.

In the eyes of Draghi and Yellen and all the clowns who think like they do, our economies exist of banks and investors, not of you and me. But we are 70% or so of those economies, even if we can’t keep up with the demand they tell us their theories tell them we should be exhibiting. As societies, we clearly don’t have our priorities in order; we instead let others set them for us, but they’re not ours. The sooner we acknowledge this, the more damage to the lives and well-being of our children and grandchildren we can prevent from being unloaded upon them.

But we need to start doing that like about now. We need to realize that there is very little left that is being decided for us that actually benefits us, and that there are a million things being concocted that are only dragging us down ever further. Mario Draghi and Janet Yellen and Washington and Brussels are not trying to make this world a better or happier place for us, but for their banker friends. That is what I take away from Draghi’s performance today, from the whole financial world circus around it, and most of all from the silence in the real world as that circus put on its show. Will we really only react when we have nothing left at all? It’s starting to look that way. And you won’t have anyone to blame anyone but yourself.

ECB Cuts Refi Rate To 0.15%, Deposit Rate To -0.1% (FT)

The European Central Bank has cut interest rates to a fresh record low, lowering one of its benchmark rates below zero in a radical move that policy makers hope will help the currency bloc stave off the threat of deflation. The ECB cut its main refinancing rate to 0.15 per cent, from 0.25 per cent, and its deposit rate from zero to -0.10 per cent, becoming the first major central bank to venture into negative territory. Neither the Federal Reserve, the Bank of Japan nor the Bank of England, have tried the measure, which the ECB hopes will lift inflation by weakening the euro and spurring lending in the bloc’s more unsettled periphery.

Both decisions were widely forecast following hints from policy makers that, after more than six months of standing firm, the ECB would take concrete steps in June. A lower-than-expected figure for May inflation, which at 0.5 per cent is well below the central bank’s target of just under 2 per cent, had cemented expectations that the governing council would act. Analysts also expect Mario Draghi, ECB president, to announce measures to ease borrowing constraints on the currency bloc’s smaller businesses at the post-meeting press conference, to begin at 1.30pm GMT.

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ECB Throws Cash At Sluggish Euro Zone Economy (Reuters)

The European Central Bank said on Thursday it will offer banks a targeted long-term refinancing operation (LTRO) to persuade them to lend, was preparing to purchase asset-backed securities in future and will discontinue sterilising previous bond purchases. The decision came after the ECB had cut its main interest rate to 0.15% and imposed negative interest rates on banks’ overnight deposit. The measures are designed to offer the euro zone economy stimulus, but stop short of the large-scale effect the ECB could unleash with a big plan of quantitative easing (QE) – money printing to buy assets. “In pursuing our price stability mandate today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy,” ECB President Mario Draghi told a news conference.

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Ambrose doesn’t quite get it yet, but he does provide the data. Good on him.

The Nagging Fear That QE Itself May Be Causing Deflation (AEP)

The way we are going, the whole world will end up with zero interest rates or some variant of quantitative easing before long. Such is the overwhelming power of deflation in countries with burst credit bubbles. Such too is the implication of a global savings rate that has spiralled to an all-time high of 25pc of GDP, starving the world of demand. The European Central Bank looks poised to cut the discount rate below zero on Thursday, becoming the first of the monetary superpowers to venture into these uncharted waters. Banks will be charged to park money in Frankfurt. More than €800bn of money market funds will sink below the water line, so the funds will go elsewhere. The chief purpose is to drive down the euro, an attempt to pass the toxic parcel of incipient deflation to somebody else.

The ECB is expected to map out future purchases of asset-back securities, “unsterilised” and intended to steer stimulus with surgical precision towards small businesses in what amounts to light QE This is not yet the €1 trillion blitz already modelled and sitting in the ECB’s contingency drawer. Germany’s DIW institute is calling for €60bn of bond purchases each month, equal to 0.7pc of total EMU sovereign debt, and roughly in line with moves by the US Federal Reserve. Such radical action will have to wait. In China the new talk is “targeted monetary easing”, with the first hints of outright asset purchases. Railways bonds have been cited, and local government debt. The authorities are casting around for ways to keep the economy afloat while at the same gently deflating a property boom that has pushed total credit from $9 trillion to $25 trillion in five years. [..]

The Bank for International Settlements says the world is suffering from addiction to stimulus. “The result is expansionary in the short run but contractionary over the longer term. As policy-makers respond asymmetrically over successive financial cycles, hardly tightening or even easing during booms and easing aggressively and persistently during busts, they run out of ammunition and entrench instability. Low rates, paradoxically, validate themselves,” it said. Claudio Borio, the BIS’s chief economist, says this refusal to let the business cycle run its course and to purge bad debts is corrosive. The habit of turning on the liquidity spigot at the first hint of trouble leads to “time inconsistency”. It steals growth and prosperity from the future, and pulls the interest rate structure far below its (Wicksellian) natural rate. “The risk is that the global economy may be in a deceptively stable disequilibrium,” he said.

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It doesn’t hold up in theory either.

Why Central Bank Stimulus Cannot Bring Economic Recovery (Mises Inst.)

Central bank credit expansion is the best example of the Keynesian disregard for the inevitable consequences of violating Say’s Law. Money certificates are cheap to produce. Book entry credit is manufactured at the click of a computer mouse and is, therefore, essentially costless. So, receivers of new money get something for nothing. The consequence of this violation of Say’s Law is capital malinvestment, the opposite of the central bank’s goal of economic stimulus. Central bank economists make the crucial error of confusing GDP spending frenzy with sustainable economic activity. They are measuring capital consumption, not production.

The credit expansion causes capital consumption in two ways. Some of the increased credit made available to banks will be lent to businesses that could never turn a profit regardless of the level of interest rates. This is old-fashioned entrepreneurial error on the part of both bankers and borrowers. There is always a modicum of such losses, due to market uncertainty and the impossibility to foresee with precision the future condition of the market. But the bubble frenzy fools both bankers and overly optimistic entrepreneurs into believing that a new economic paradigm has arrived. They are fooled by the phony market conditions, so bold entrepreneurs and go-go bankers replace their more cautious predecessors. The longer the bubble lasts, the more of these unwise projects we get.

Another chunk of increased credit goes to businesses that could make a profit if there really were sufficient resources available for the completion of what now appears to be profitable long term projects. These are projects for which the cost of borrowing is a major factor in the entrepreneur’s forecasts. Driving down the interest rate encourages even the most cautious entrepreneurs and bankers to re-evaluate these shelved projects. Many years will transpire before these projects are completed, so an accurate forecast of future costs is critical. These cost estimates assume that enough real capital is available and that sufficient resources exist to prevent costs from rising over the years. But such is not the case. Austrian business cycle theory explains that absent an increase in real savings that frees resources for their long term projects, costs will rise and reveal these projects to be unprofitable.

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Snow! Ice!

US Q1 Productivity Misses; Plunges By Most In 6 Years (Zero Hedge)

Nonfarm productivity in the frost-bitten US in Q1 plunged at its fastest pace since Q1 2008. The 3.2% drop is considerably bigger than the 3% expected but was accompanied (oddly) by a rise in employee hours (so despite the catastrophic weather, everyone was going to work and working more) but producing less. Unit labor costs soared 5.7% – the most since Q4 2012.

From the report:

Nonfarm business sector labor productivity decreased at a 3.2% annual rate during the first quarter of 2014, the U.S. Bureau of Labor Statistics reported today, as hours increased 2.2% and output decreased 1.1%. (All quarterly% changes in this release are seasonally adjusted annual rates.) The decrease in productivity was the largest since the first quarter of 2008 (-3.9%). From the first quarter of 2013 to the first quarter of 2014, productivity increased 1.0% as output and hours worked rose 2.8% and 1.7%, respectively. Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers. The measures released today are based on more recent source data than were available for the preliminary report.

In the first quarter of 2014, nonfarm business productivity fell 3.2%, a greater decline than was reported in the preliminary estimate. The revised figure reflects a 1.4%age point downward revision to output and a 0.2%age point upward revision to hours. Unit labor costs were revised up due to the downward revision to productivity, and grew 5.7% in the first quarter of 2014. In the manufacturing sector, productivity growth in the first quarter was revised up to 3.8%, due to an upward revision to output and a downward revision to hours worked. Unit labor costs declined 0.4%, rather than increasing 0.1% as previously reported.

And notably: 1.8% increase in hours worked in a quarter in which, supposedly, nobody could get to work. Huh???

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On and on we go …

What Q2 GDP Rebound? US Trade Deficit Soars To 2 Year High (Zero Hedge)

The US trade balance collapsed in April dashing hopes for the exuberant hockey-stock rebound in Q2 GDP. This is the biggest trade deficit since April 2012 and the biggest miss from expectations since October 2008. The last 2 months have seen the biggest slide in the deficit in a year as trade gaps with the European Union and South Korea reach records and the deficit with China surged by $7billion to $28 billion. Impots of capital goods, autos, and consumer goods all set records. And Q2 GDP downgrades in 3…2…1…

The details: The U.S. monthly international trade deficit increased in April 2014 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $44.2 billion in March (revised) to $47.2 billion in April as exports decreased and imports increased. The previously published March deficit was $40.4 billion. The goods deficit increased $3.3 billion from March to $65.8 billion in April; the services surplus increased $0.2 billion from March to $18.6 billion in April.

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Yeah, blame the people for your failures, why not?

President Of Eurogroup Issues ‘Self-Fulfilling’ Deflation Warning (CNBC)

President of the Eurogroup, Jeroen Dijsselbloem, warned on Thursday that deflation fears plaguing the euro zone could become a “self fulfilling prophecy” as investors grow increasingly wary. Dijsselbloem, the head of the group euro zone finance ministers and Dutch finance minister, said the European Central Bank had “grounds to act” at an interest rate decision meeting on Thursday as inflation is off moving in the wrong direction. Euro zone inflation fell unexpectedly to 0.5% last month, intensifying pressure on Mario Draghi, President of the European Central Bank, to act against the rising threat of deflation. “The ECB have a mandate, they have to make sure that in the mid-term the inflation stays close to the 2% target — it is not going in that direction, so there seems to be grounds to act.

We will wait for today and see what they do within their mandate,” the Eurogroup chief told CNBC. The euro zone’s inflation reading is well below the ECB’s target of just under 2 per cent and on a par with March, when it hit its lowest level since autumn 2009. He warned that the market is expecting too much from just one meeting and the euro zone deflation issue cannot be tackled by ECB intervention alone. “If you listen to some of the expectations that some of the commentators have shown in the last couple of days, they will probably be disappointed anyway because no way can you deliver such big results in such short time,” he said.

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Lemme guess: not the poorest.

Who Wins If Europe Moves To Quantitative Easing? (SMH)

Investors will be closely watching the European Central Bank’s monthly interest rate decision later tonight But this meeting will be anything but normal, with ECB president Mario Draghi widely tipped to launch quantitative easing measures, pumping more liquidity into the eurozone to help fight the threat of deflation So if the ECB follows the US, how will this affect global asset markets French bank Societe Generale has a few thoughts, including how Australian investors might benefit. If the ECB adopts a quantitative easing policy and enters a negative deposit rate scenario, high carry trade currencies that react positively to risk appetite, like the Aussie, are expected to react strongly. Societe Generale global head of research Patrick Legland says the euro against the Aussie and Norwegian Krone are key pairs to benefit, given Australia and Norway are the only two G10 economies where the inflation rate is at least at their respective central banks’ targets.

Commodities is expected to be the asset class least sensitive to ECB quantitative easing because it is driven by the strength of US growth, Mr Legland said. But there is still expected to be some movement, given the divergence between 10 and two year US and euro rate spreads, which are rising and declining respectively. Mr Legland said as eurozone rates drop relative the US, making the US dollar stronger, it made commodities more expensive, since they are mostly priced mostly in US dollars. “This seems to have the greatest impact on gold as its increase is significantly lower than the other commodities in this environment”. Mr Legland says emerging market investors are focused mainly on the US monetary policy outlook, particularly the risk of early Fed rate hike.

But “bold” ECB easing is likely to trigger a “major risk sentiment boost” for high yielding assets in emerging markets. “The positive impact is likely to be felt across all global emerging markets,” he said. “An ECB move will reinforce the bullish environment for emerging market fixed income. “Our top picks … include Romania, South Africa and Mexico.” If the ECB was to buy government bonds directly this would cause government credit default risk to disappear and reassure markets, Mr Legland said. “We believe eurozone periphery country spreads will continue to tighten, pushing domestic equity markets and overall eurozone bank valuations higher.” Mr Legland said QE could also end volatility in eurozone equities. “Whether the ECB purchases [asset-backed securities] or government bonds, it will increase its balance sheet and print money. This would partly reduce the current risk premium on European equities which is due to deflationist fears.”

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Not even susprising anymore. But still dark.

ZIRP Unmasked: Zero Growth In Private Labor Hours Since 1998 (Stockman)

Every now and again the apparatchiks who dutifully tend Washington’s statistical sausage factories accidently let loose a damning picture of what actually goes on inside. In that vein the BLS has just published the equivalent of a smoking gun. Namely, a study showing that in 2013—the year of 32% stock returns—the business sector of the US economy generated no more labor hours than it did way back in Bill Clinton’s blue dress period (1998) yet purportedly produced 42% more output in real terms:

“…workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998 – approximately 194 billion labor hours.1 What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period….. it is perhaps even more striking that American businesses still managed to produce 42% – or $3.5 trillio – more output in 2013 than they had in 1998, even after adjusting for inflation.

Striking indeed! The most important thing we know about those 194 billion labor hours is that the mix of labor supplied to the US economy deteriorated drastically during that 15 year period owing to the sharp decline of the goods producing economy in the US and its replacement by the low productivity HES Complex (health, education and social services). So the implication of the BLS study is that business sector productivity soared—at about 2.4% annually over the period— even as factory materials handlers were replaced by bedpan handlers in the labor mix. Needless to say, to smell a skunk in that woodpile does not take a lot of sniffing.

Here is the reason. The BLS claim that real business sector output grew by 42% during the period, and therefore that private productivity grew by leaps and bounds, is based on an arithmetical derivative, not a direct measure of output. Stated differently, what the GDP accounts measure directly is spending by households, business and government—a metric which is then “deflated” by patently low-balled guesstimates about the inflation rate. Subtract from that figure for “real GDP” actual government consumption and investment spending (plus a small amount for household sector output) and, presto, you get a fiction called “business sector output”. According to the BEA’s official publication of the NIPA accounts, that figure was $8.4 trillion in 1998 and just shy of $12 trillion in 2013.

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That still means 3 out of 10 do.

7 In 10 Americans Believe The Crisis Is Not Over (Zero Hedge)

For all the talk about a recovery, pundits, especially those who peddle expensive newsletters, continue to forget one key distinction of the New Normal: there are those for whom the recovery has never been stronger, well under 10% of the population, i.e., the already wealthy whose net worth is allocated in financial assets. And then there is everyone else, that vast majority of Americans, who not only have not benefited by the Fed’s relentless balance sheet expansion and accompanying asset reflation but whose incomes just posted the first decline in real terms since 2012. It is this latter segment that should be concerned by a recent survey conducted by the MacArthur Foundation titled “How Housing Matters”.

According to the survey during the past three years, over half of all U.S. adults (52%) have had to make at least one sacrifice in order to cover their rent or mortgage. Such sacrifices included getting an additional job, deferring saving for retirement, cutting back on health care and healthy foods, running up credit card debt, or moving to a less safe neighborhood or one with worse schools. More disturbing, the survey also found that while there are some indicators that the American public’s views about the housing crisis are shifting toward the positive, large proportions of the public are not feeling the relief: seven in 10 (70%) believe we are still in the middle of the crisis or that the worst is yet to come. And no, it is not just the high school graduates who are desperate: a whopping 60% of college grads agree: the worst is yet to come (perhaps after looking at their student loan balances).

As MarketWatch reports, “although mortgage rates are still quite low, down payments, poor credit and tighter lending standards remain three of the biggest hurdles for buying a home, especially among young people, Blomquist says. “The slow jobs recovery for young adults has made it harder for them to save and to get a mortgage.” Some 84% of young people are delaying major life decisions due to the poor economy, according to a 2013 survey by Generation Opportunity, a nonprofit think tank based in Arlington, Va.” What’s more, at least 15% of American homeowners (or residents of 78 counties across the country) were living in housing markets where the monthly mortgage payment on a median-priced home requires more than 30% of the monthly median household income — long considered the maximum for rent/mortgage repayments.

Housing costs above that threshold are “unaffordable by historic standards,” says Daren Blomquist, vice president at real estate data firm RealtyTrac. In New York county/Manhattan, mortgage payments represent 77% of the median income and in San Francisco County represents 70%. As a result of a broken economy and lack of good job opportunities the “American dream” is now on its last legs: more than half of Americans, or 54%, believe that buying a home has become less appealing than it once was while some 43% of respondents have indicated that it is no longer the case that owning a home is “an excellent long-term investment and one of the best ways for people to build wealth and assets.” Even as seven in 10 renters (70%) aspire to owning a home, high proportions (58%) believe that “renters can be just as successful as owners at achieving the American Dream.”

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BNP Paribas looks set to become a major roadblock in US-France relations.

Dimon’s Raise Haunts BNP Paribas as US Weighs $10 Billion Fine (Bloomberg)

When JPMorgan Chase’s Jamie Dimon got a 74% raise in January, U.S. Attorney Preet Bharara fumed. He had forced the bank just weeks before to pay $1.7 billion for enabling Bernard Madoff’s Ponzi scheme. And yet Dimon was being rewarded. Now, five months later, Bharara’s frustration is directed at another bank. In the next few weeks, BNP Paribas could face criminal charges and a fine of up to $10 billion for doing business in sanctioned countries such as Iran and Sudan. That penalty would far exceed the fines incurred by six other banks that escaped criminal charges for similar offenses since President Barack Obama took office in 2009 — and would be the largest-ever criminal penalty in the U.S.

The potential severity in BNP’s case stems in part from Bharara’s determination to punish banks that have repeatedly evaded harsher penalties by warning that a wave of unforeseen consequences could result, the egregiousness of BNP’s conduct and the bank’s apparently slow response to the U.S. investigation during its early stages, according to two people familiar with the matter. The case has strained relations between the U.S. and France, with French President Francois Hollande set to confront Obama today at a Paris dinner over what he says is a threat to his country’s financial system. This story, the result of interviews with more than two dozen people with knowledge of the BNP investigation, illustrates how France’s largest bank became the target of the U.S. in its effort to show that large financial institutions shouldn’t expect special treatment under the law. It also describes a previously unreported letter that shows prosecutors’ dissatisfaction with the bank’s cooperation.

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BNP Paribas Hit By Downgrade Warning From Standard & Poor’s (Guardian)

France’s biggest bank, BNP Paribas, has been threatened with a downgrade to its credit rating as it braces for a potential $10bn (£6bn) fine from US regulators for busting sanctions. The warning by the Standard & Poor’s agency came amid fresh estimates of the regulatory costs facing the European banking industry, which could leave a $104bn bill for a catalogue of errors ranging from tax evasion and mis-sold financial products to manipulation of financial markets. Analysts at Credit Suisse doubled their estimates for the costs of the scandals which have gripped the industry since the financial crisis.

Upping their estimate to $104bn from $58bn, the Credit Suisse analysts forecast that litigation facing Royal Bank of Scotland could further delay the government selling off its 83% stake. US authorities accuse BNP Parisbas of breaking sanctions on Sudan, Iran and Syria over a seven-year period to 2009. S&P said that the potential settlement with the US had forced it to consider a potential downgrade to BNP’s A plus rating and place the bank on “credit watch negative”, until the outcome of the discussions with the US authorities is known. The situation facing BNP is causing concern in France where it has emerged that president François Hollande had written to Barack Obama in April to complain the fine would be disproportionate. The pair are due to meet in Paris over dinner where Hollande will raise the situation in person with the US president, according to the Reuters news agency.

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What an insane record. When’s the last time GDP actually beat expectations?

The History Of Consensus Expectations For US GDP (Zero Hedge)

Same Stuff, Different Year. How many more of these annual disappointments does it take before the world gets the joke…

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3 articles on the mysteious missing 100,000 tons of copper and aluminum that could have far reaching repercussions in commodities and financing markets. As if it’s not nuts enough to use metals as collateral for more metals, what if they were never even there? And how widespread is this?

Chinese Port Stops Metal Shipments Due To Missing Inventory Probe (Reuters)

China’s northeastern port of Qingdao has halted shipments of aluminium and copper due to an investigation by authorities, causing concern among bankers and trade houses financing the metals, trading and warehousing sources said on Monday. “We were told we can’t ship any material out while they do this investigation,” a source at a trading house said. The port of Qingdao is China’s third-largest foreign trade port and the world’s seventh-largest port, trading with 700 ports in more than 180 countries, according to its website. “Banks are worried about their exposure,” one warehousing source in Singapore said. “There is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists,” he said.

Metal imports have been partly driven in China as a means to raise finance, where traders can pledge metal as collateral to obtain better terms. In some cases the same shipment can be pledged to more than one bank, fuelling hot money inflows and spurring a clampdown by Chinese authorities. “It appears there is a discrepancy in metal that should be there and metal that is actually there,” said another source at a warehouse company with operations at the port. “We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper, but we hear that the volumes will actually be higher. It’s either missing or it was never there – there have been triple issuing of documentation,” he said.

Beijing last year set new rules to curb currency speculation amid signs that hot money inflows helped push the yuan to a series of record highs. The rules required banks to tighten the management of their foreign exchange lending and types of clients that are able to access those loans. “It’s such a massive port I would think virtually everybody has exposure,” the trading source said. “Once the investigation is over, it could be bearish for metals. I think that a lot of Western banks will try to offload material and try not to deal with Chinese merchants,” the trading source added.

Read more …

TEXT

China Commodity Financing Probe Could Lead To Heavy Losses (CNBC)

A more severe crackdown on the use of commodities as collateral to finance deals in China could lead to heavy losses across the asset class, analysts warn. “The profitability of the [commodity financing] schemes is being eroded, and the authorities are stepping up efforts to curb some forms of shadow banking,” said Caroline Bain, senior commodities economist at Capital Economics in a note. In typical commodity financing deals Chinese companies obtain a letter of credit, use it to import a commodity – copper for instance – sell that commodity in the local market or deploy it as collateral and use that money to invest in higher yielding assets before paying back the original loan. The practice isn’t new but recently came into focus following reports that such deals accounted for one third of China’s money supply growth in 2013.

Commodity financing drives hot money inflows which can negatively affect the economy, creating a credit boom and driving inflation, while eventual outflows could lead to sharp asset price deflation. The resulting buildup of large unofficial commodities stockpiles in China makes markets look artificially tight. Unofficial copper stocks, for instance, could be as high as 700,000 tonnes, according to Capital Economics. “A disorderly unwinding of the deals could lead to sharply lower prices as stocks are offloaded to the market,” Bain said. Chinese authorities took action in May, with the China Banking Regulatory Commission warning banks to tighten controls on letters of credit for iron ore imports.

Read more …

TEXT

China Qingdao Port Metals Inventory Probe Fuels Worries (Reuters)

Worries over a probe into commodity stockpile financing at China’s Qingdao port appeared to deepen on Wednesday as Standard Bank and a part-owned unit of Louis Dreyfus warned of potential losses and copper prices fell further. The inquiry, first reported by Reuters and other media earlier this week, has revived concerns about the impact of China’s deepening credit crisis on its metal imports, much of which piles up in warehouses to be used as collateral. London copper prices have fallen 2% in two days. Responding to queries about the probe at Qingdao, which has not been officially confirmed, South Africa-based Standard Bank said it was “working with local authorities” to investigate potential irregularities at China’s third-largest port, a major source for metal and iron ore imports. “Standard Bank Group is not yet in a position to quantify any potential loss arising from these circumstances,” the bank, whose Standard Bank Plc subsidiary conducts commodities trading, said in a statement.

Singapore-based logistics provider GKE Corporation warned shareholders that it was “assessing the potential impact” of the investigation on its GKE Metal Logistics unit, a joint-venture 51% owned by global commodities merchant Louis Dreyfus. They are the first companies to publicly discuss the issue since the inquiry came to light on Monday, when Reuters reported the port in northeastern China had halted shipments of copper and aluminum as it launched an investigation into metal stockpiles used for collateral on loans. According to traders and warehousing sources, port authorities at Qingdao’s Dagang wharfs have been examining whether there had been multiple issuing of receipts for single cargoes of metal tied to a trading company and linked companies. The tumult has revived concerns that first surfaced in March, when China’s first domestic bond default fueled fears of further financing woes and triggered one of copper’s steepest drops in years, with prices tumbling 8% in three days.

Read more …

Actually, a link to an RT section on Snowden and the NSA. The quoted article is the first in the section.

One Year Ago, Total Surveillance Was A Conspiracy Theory (RT)

A year has passed since Edward Snowden started telling us what really was going on in the world. Since that date, various holders of power have been struggling – without success – to reclaim the control of the narrative, the control of the news flow. But in the age of the net, the power of narrative rests squarely with the many, rather than with the elite. People have become aware of mass surveillance, even if they haven’t become aware of its full consequences yet. But the story is out. The proverbial cat isn’t just out of the bag, but has left the entire city and is halfway across the continent. This hasn’t prevented an ivory tower establishment from playing “no see, no hear, no speak” monkey games, pretending Snowden does not exist and that people don’t already know what we know.

Carl Bildt, the Swedish Minister of Foreign Affairs, has been one of the strongest proponents of NSA-style mass surveillance and trying to “control” the net – completely ignoring the fact that this necessarily means controlling (effectively eliminating) free speech. He’s even gone on record stating that mass surveillance doesn’t violate human rights because it is covert: as if security services don’t violate people when doing so doesn’t leave traces. Bildt’s favorite alibi conference has been the Stockholm Internet Forum, which is supposed to be about net liberty and development in general. He has been inviting freedom activists from all over the world to show himself in their presence, trying to polish his image as pro-freedom and pro-liberty. However, his actions say the opposite: He has been negotiating spy deals with the United States at the same time. This year, the arrangers of the Stockholm Internet Forum suggested – naturally and obviously – Glenn Greenwald, Edward Snowden, and similar activists like Jacob Appelbaum as speakers. However, this did not sit well with Bildt. His Department of Foreign Affairs unceremoniously blacklisted them from speaking at the Stockholm Internet Forum, as reported by Cicero..

Read more …

Quite a movement.

‘Don’t Ask For Privacy, Take It Back’: Anti-NSA #ResetTheNet Campaign (RT)

Internet activists and rights groups have launched a massive online campaign against mass government surveillance, urging users and websites to use encryption. The campaign’s inspiration – NSA whistleblower Snowden – has called to join ResetTheNet. A year to the day since the first revelations of the US National Security Agency’s (NSA) warrantless and huge-scale web surveillance were published in the media, the international June-5 campaign for data encryption kicked off. Hundreds of websites and organizations, including Reddit, Imgur, Mozilla, Greenpeace and Amnesty International are promoting the campaign with a splash screen, which everyone can install on their pages by adding a script.

Meanwhile, thousands of social network users are readying to bombard Twitter, Facebook and Tumbrl with a giant ‘Thunderclap.’ More than 9 million of people are within the reach of the action, and it is hoped some will spread the word further. Initiated by Fight for the Future, the campaign does not simply aim to raise awareness of the encryption means necessary for secure communication online – it actually provides a detailed list of tips and software for both mobile and desktop operating systems. The listed tools and services do not promise 100% immunity against NSA snooping – but they are said to be able to make mass state surveillance difficult and economically not viable. US internet giant Google, which initially refrained from joining the campaign, has been added to the list of participants, with a note saying that the company will be “releasing email encryption tools and data, and supporting real surveillance reform.”

Read more …

This land is our land to drill, not yours to protect!

N.Y.’s Local Fracking Bans Spur Debate Before Top Court (Bloomberg)

New York’s cities and towns shouldn’t be able to block hydraulic fracturing within their borders because such prohibitions are trumped by state law, opponents of the bans told the state’s highest court. Lawyers defending such measures enacted by the upstate towns of Dryden and Middlefield argued to the Court of Appeals in Albany today that local governments are within their rights to bar fracking, which uses chemically treated water to free gas trapped in rock. If pro-fracking forces prevail, they will still face a six-year-old statewide moratorium instituted in 2008. Governor Andrew Cuomo, who inherited the ban, may decide by next year whether to lift it. If the court rules for the towns, the lifting of the state ban may instead leave a patchwork of municipalities across the nation’s third-largest state by population that allow or block the drilling method.

Fracking in states from North Dakota to Pennsylvania has helped push U.S. natural gas production to new highs in each of the past seven years, according to the U.S. Energy Information Administration, while the practice has come under increasing scrutiny from environmental advocates. Parts of New York sit above the Marcellus Shale, a rock formation that the Energy Information Administration estimates may hold enough natural gas to meet U.S. consumption for almost six years. The state barred fracking in 2008 while studying the environmental effects of the process, which is allowed in more than 30 states. Since then, more than 75 New York towns have banned fracking, while more than 40 have passed resolutions stating they support it or are open to it, according to Karen Edelstein, an Ithaca consultant affiliated with FracTracker Alliance, which analyzes the effects of oil and gas drilling.

Read more …

How crazy would you like it?

Scientists Warn Against China’s Plan To Flatten Over 700 Mountains (Guardian)

Scientists have criticised China’s bulldozing of hundreds of mountains to provide more building land for cities. In a paper published in journal Nature this week, three Chinese academics say plan to remove over 700 mountains and shovel debris into valleys to create 250 sq km of flat land has not been sufficiently considered “environmentally, technically or economically.” Li Peiyue, Qian Hui and Wu Jianhua, all from the School of Environmental Science and Engineering at Chang’an University, China, write: “There has been too little modelling of the costs and benefits of land creation. Inexperience and technical problems delay projects and add costs, and the environment impacts are not being thoroughly considered.” One of the largest projects began in April 2012 in Yan’an in the Shaanxi province, where the aim was to double the city’s area by creating an additional 78.5 sq km of land.

Local officials expect the project to generate billions of yuan from the sale or lease of the new land and spare agriculture land elsewhere in the country, which otherwise may have been used for development. Soil erosion increases the sediment content of local water sources. In Shiyan, Hubein province, pounding hills into valleys caused landslides, flooding and altered water courses. This had serious implication for the city as it lies close to the headwaters of the South-North Water Transfer project, an endeavour to divert river waters along channels to Beijing. In Langzhou, Gansu province, work was temporarily halted because of air pollution levels caused by dirt from the excavation. No one had thought to damp the soil to stop it flying in the wind. Mountain top removal has been performed before, especially in the strip mines of the eastern United States, but nothing has been performed on the scale of the Chinese earthworks.

Read more …

Apr 152014
 
 April 15, 2014  Posted by at 2:57 pm Finance Tagged with: , , , ,  22 Responses »
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National Photo Co. The House Without Children, Poli’s theater, Washington DC 1920

Update:

Michael Ruppert Has Committed Suicide

RIP

Let’s start the day with the best – or should I say the funniest – graph I’ve seen in a while, picked up from Tyler Durden. It speaks for itself.



If this means things are going according to plan, we might want to wonder what the plan is.

American markets went up yesterday, and it was suggested that this had something to do with March retail numbers, which were up 1.1%. But then in ‘the back pages’ today, Bloomberg added this:

When the year started, analysts estimated retailers’ first-quarter earnings would grow more than 13% [..] That average had dropped to 7.5% on March 1 and now stands at 3.2%

Again, if this is according to plan, what plan? And who are those “analysts”? Do they still have a job? Also, don’t let’s forget Monday’s news that US mortgage lending fell to a 17-year low, i.e. is now lower than immediately after the financial crisis.

Next, two reports that are perhaps even more devastating for America than that graph above already is.

First, a joint report, due out this fall, by Martin Gilens at Princeton and Benjamin I. Page at Northwestern, leaves little standing of the notion that America is a democracy, or at least not what they label a Majoritarian Electoral Democracy. Instead, the US political system is, in their view, an Economic Elite Domination.

Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens

Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.

Despite the seemingly strong empirical support in previous studies for theories of majoritarian democracy, our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts. [..] Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, [but when] the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.

RT adds:

The authors say that even as their model tilts heavily toward indications that the US is, in fact, run by the most wealthy and powerful, it actually doesn’t go far enough in describing the stranglehold connected elites have on the policymaking process. “Our measure of the preferences of wealthy or elite Americans – though useful, and the best we could generate for a large set of policy cases – is probably less consistent with the relevant preferences than are our measures of the views of ordinary citizens or the alignments of engaged interest groups,” the researchers said. “Yet we found substantial estimated effects even when using this imperfect measure. The real-world impact of elites upon public policy may be still greater.”

Lovely. And that’s before we turn to Seymour Hersh’s The Red Line and the Rat Line: Obama, Erdogan and the Syrian rebels, in which one of America’s few remaining real journalists explains how President Obama leads the Warfare State according to, once more, a plan that few Americans would recognize or approve of, being on the cusp of all-out war in Syria one day and calling it off the next, and in which US ally Turkey supplied the sarin gas that US-supported rebels, not President Assad, used in an attack. A great read of a very unappetizing chapter in recent US history.

And that must make us, again, wonder about the role the US plays in Ukraine. A role that is certainly plenty shady, from the botched kingmaking of Under Secretary of State Victoria Nuland, handing out pastries on Maidan Square with John McCain, to the presence of Blackwater mercenaries in the very eastern cities that are now under siege (doing what exactly?). And now the visit of CIA director John Brennan to Kiev over the weekend, which led ousted President Yanukovich to state Brennan had “de facto sanctioned” the use of weapons and thus provoked the bloodshed now taking place as Ukraine has declared war on the ethnic Russian rebels it calls “terrorists”, who occupy buildings in several cities. Certainly in light of the US role in Syria as described by Hersh, it’s time someone, anyone stateside start asking what the White House and Pentagon are up to.

More bad data out of China. After the 18% February plunge in exports was followed by a 6.6% fall in March, confirming that Lunar New Year went only so far to explain events, now a 19% y-o-y drop in new credit surfaces. And while you may at first think the shadow banking system might be good for the difference, the crackdown on that system is serious enough that that’s not likely. Which means we could be looking at a substantial downsizing of the Chinese economy.

The soy importers who defaulted on orders from Brazil and the US, did so because they could not get Letters of Credit, probably because they didn’t have good collateral. But who ever did in the Middle Kingdom? I’m not saying no-one did, but that the question was never asked. One iron ore load bought on credit would be used as collateral for the next load, before the first one was paid for. Works like a charm, and whoever’s on the right side of it gets to buy a home in London or Hongcouver or a patch of US farmland, but stick a spoke in the wheel and you risk creating a game of multi million falling dominoes. A new way to measure China GDP hints at a much lower growth rate than Beijing’s opaque official 7+% number. I said it before, there’s a power game going on there between the Communist party and the market place it seeks to create. And rigid central control doesn’t rhyme with a free market.

Still, I doubt that there’s an economist alive today who has the knowledge to gauge the risks and dangers that are playing out in China. Or Japan, EU and US, for that matter. So this Guardian headline was a welcome stress relief:

Financial Crisis Won’t Have Long-Term Impact On UK Growth: Economists

On the second question, over the extent of long-term damage from the crisis, the economists were not as divided. Almost two-thirds (61%) thought that the financial crisis will either have no effect on long-term UK growth rates or a small negative effect that pushes GDP down by less than 2.5% in total over a 10-year horizon.

The headline should have been: “Economists Are Useless Twits”. These people have no idea whether UK growth will be long term impacted by the crisis, they merely have models, taken straight from their school books, that suggest all is well. There’s a model for everything. But I don’t want to bash economists all the time, there are more useful things to do in life and it’s too easy. But let me close with the announcement I received recently from our close buddy Steve Keen, that rare economist with a functioning brain, that he is now chief economist at IDEA Economics.

One of the first things to come out of IDEA after Steve joined is a revised US unemployment chart, depicting the IDEA Effective Unemployment Rate, which takes note of the Labor Participation Rate.

March 2014: Headline: 9.7%. All-In (U6): 15.7%.

This is where we say good night and good luck?!


March Retail Gain Brings Little Relief to US Stores (Bloomberg)

For companies such as Bed Bath & Beyond and Family Dollar Stores, a rebound in March retail sales may prove too little late. While the Commerce Department yesterday said retail sales gained 1.1% last month, Moody’s cut its forecast for 2014 sales, saying that March’s results will give little comfort to companies whose sales were crimped by frigid temperatures in January and February. And even as spending thawed last month, analysts continued to slash estimates for retailers’ first-quarter profits.

The government report suggested warmer temperatures brought shoppers back into stores and enticed them to make purchases the blizzards had forced them to delay. Yet with incomes still stagnant and the job market still sluggish, it remains to be seen whether the momentum will carry into April, said Rick Snyder, an analyst at Maxim Group LLC in New York. “You can’t take this short-term data and jump to the conclusion” that spending is primed for big gains, Snyder said yesterday in an interview. “Things got better, but it’s relative. How bad did they start off?”

Sales dropped 0.7% in January, the biggest decline since March 2013, and rose 0.7% in February. Retail sales this year will rise 3% to 4%, Moody’s said in a statement yesterday. That’s down from its original range of 4.5% to 5.5%. When the year started, analysts estimated retailers’ first-quarter earnings would grow more than 13%, Retail Metrics Inc. said. That average had dropped to 7.5% on March 1 and now stands at 3.2%, the researcher said.

Read more …

US Is An Oligarchy, Not A Democracy, Americans Have ‘Near-Zero’ Input On Policy (RT)

The first-ever scientific study that analyzes whether the US is a democracy, rather than an oligarchy, found the majority of the American public has a “minuscule, near-zero, statistically non-significant impact upon public policy” compared to the wealthy. The study, due out in the Fall 2014 issue of the academic journal Perspectives on Politics, sets out to answer elusive questions about who really rules in the United States. The researchers measured key variables for 1,779 policy issues within a single statistical model in an unprecedented attempt “to test these contrasting theoretical predictions” – i.e. whether the US sets policy democratically or the process is dominated by economic elites, or some combination of both.

“Despite the seemingly strong empirical support in previous studies for theories of majoritarian democracy, our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts,” the researchers from Princeton University and Northwestern University wrote. While “Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association,” the authors say the data implicate “the nearly total failure of ‘median voter’ and other Majoritarian Electoral Democracy theories [of America]. When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.”

The authors of “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens” say that even as their model tilts heavily toward indications that the US is, in fact, run by the most wealthy and powerful, it actually doesn’t go far enough in describing the stranglehold connected elites have on the policymaking process. “Our measure of the preferences of wealthy or elite Americans – though useful, and the best we could generate for a large set of policy cases – is probably less consistent with the relevant preferences than are our measures of the views of ordinary citizens or the alignments of engaged interest groups,” the researchers said. “Yet we found substantial estimated effects even when using this imperfect measure. The real-world impact of elites upon public policy may be still greater.”

Read more …

Look, if I can make a profit by making people’s lives miserable, I have a Constitutional right to do so, right?

TurboTax Maker Spends Millions To Kill Simplified IRS Tax Filing (RT)

A software company that promises to help Americans avoid the annual misery of filing their IRS returns has, in fact, spent years trying to convince lawmakers to make sure filing taxes remains difficult, thus protecting its business, a new report found. Every year Americans spend an estimated $2 billion and 225 million hours preparing their tax returns by April 15. The process can include obtaining information from a bank or employer, intensive financial disclosures, and, for many Americans, an appointment with a professional accountant who is qualified to evaluate how much money the state and federal government is due.

The annual drudgery could be avoided with “return free-filing.” The process would involve an Americans’ employer and bank sending information to the US Internal Revenue Service (IRS), the government sending a bill to an individual, and that person essentially returning their payment in mere minutes, free of charge. Denmark, Sweden, and Spain already rely on pre-filed returns, and the US could as well if it were not for Intuit Inc. The owner of Turbo Tax, Intuit has spent at least $11.5 million on a federal lobbying effort over five years (spending more than Amazon or Apple) in an attempt to make sure the way Americans pay their taxes doesn’t change.

The ploy was first unveiled by a ProPublica investigation last year, although reporters found that Intuit used the same tricks through spring of this year. Lobbyists have portrayed return free-filing as a big-government intrusion, although the idea has previously been endorsed by Republican President Ronald Reagan and Democratic President Barack Obama when he was campaigning in 2008. William Gale, co-director of the Urban-Brookings Tax Policy Center, told ProPublica return free-filing is the next logical step for frustrated taxpayers.

Read more …

Seymour Hersh’s Blockbuster: Obama On The Red Line And On The Rat Line (Stockman)

Read Seymour Hersh’s devastating account of Obama’s Red Lines and Rat Lines and weep for the Republic. It is no more. For the first time in a half-century American voters actually elected the “peace candidate” in 2008 and sent Obama to the White House to end the interventionist foreign policy that had lead to disaster in Iraq, and, implicitly, to wind down the vast war machine that had been left over from the Cold War.

The latter had been converted by the Bush’s and Clintons into an armada of invasion and occupation that had rained death and destruction from Bosnia to Baghdad to Kandahar for no reasonable or justifiable purpose of national security. These aggressions were simply what a war machine does, making up rationalizations as it goes along. But the Warfare State was not about to let peace happen.

Soon Obama learned the Washington pivot, rehired the core of Bush’s War Cabinet and became enmeshed in the “national security” plots and schemes which were in the pipeline when he arrived at 1600 Pennsylvanian Avenue— much like JFK inherited the disastrous Bay Of Pigs invasion. Like the despicable Alan Dulles, he inherited ambitious scoundrels like so-called General David Petraeus, who soon had him convinced that the non-sensical and bloody “surge” in Anbar Province had been a roaring success, and that it should be exported to the quagmire in Afghanistan.

Read more …

It looks to be a slow one.

Kiev Launches Military Operation In Eastern Ukraine (RT)

Ukraine’s coup-appointed acting President Aleksandr Turchinov has announced a crackdown on anti-government protesters in the north of the Donetsk Region, eastern Ukraine. “The anti-terrorist operation started overnight Monday,” said Turchinov. “The aim of these actions is to protect the citizens of Ukraine.” According to Turchinov, this ‘anti-terrorist operation’ also aims to prevent “attempts to break Ukraine apart.” The anti-government protesters in south-eastern Ukraine have recently been protesting against coup-appointed Kiev authorities. They demand constitutional reform that would take into consideration the interests of all Ukrainian regions.

They also propose the federalization of the country and to make Russian the second official language in the regions. Earlier, a clip posted to YouTube showed local people in the town of Rodinskoye, Donetsk Region, have stopped a tank allegedly on its way from Kiev to take part in the crackdown against south-eastern Ukrainian cities. Meanwhile, the first battalion of Ukraine’s National Guard have left Kiev for the south-east, said the head National Security and Defense Council of Ukraine, Andrey Parubiy. According to Parubiy, the “battalion is comprised of volunteers from the Maidan self-defense troops”.

Read more …

Big Oil, the military-industrial complex, what could be more dangerous than that?

Ukraine’s Great Unraveling, Brought To You By Corporate America (RT)

… one nation’s crisis is another corporation’s windfall. Indeed, developments in Ukraine certainly spell big bucks for America’s bloated defense industry, which has used the Ukraine crisis in general, and the Crimean “annexation” in particular, to warn Capitol Hill of Russia’s “return to imperialism.” Never mind that Russia has not violated the territorial integrity of a single foreign country – without being attacked first, as was the case with Georgia – since the collapse of the Soviet Union. “Everybody in the Pentagon and in the defense industry is using the Ukraine crisis as a warning for why the department needs to spend more on military technology,” Loren Thompson, chief operating officer for the Lexington Institute, told AP.

Military advantage, however, is not the only reason for Washington imposing itself on Kiev. To understand the full picture, it is only necessary to consider the corporate circus that US Congress has become, in which the “people’s representatives” now take their marching orders from boardrooms across corporate America. Consider, for example, efforts by the American Petroleum Institute to take advantage of Kiev’s chaos. “We’ve just had a consistent drumbeat going since the beginning of last year,” Erik Milito, API’s director of industry operations, told Bloomberg. “We just kept doing it, and this became a more heightened debate during the whole Ukraine situation.”

Read more …

China New Credit Falls 19%, Money-Supply Growth Slows (Bloomberg)

China’s broadest measure of new credit fell 19% from a year earlier and money supply grew at the slowest pace since 2001, underscoring risks of a deeper slowdown as the government tries to curb financial dangers. Aggregate financing was 2.07 trillion yuan ($333 billion) in March, the People’s Bank of China said in Beijing today, down from 2.55 trillion yuan a year ago. M2, China’s broadest gauge of money supply, rose 12.1% from a year earlier. Policy makers are trying to rein in a credit binge and prevent defaults from spurring broader financial turmoil, while meeting a target for economic expansion of about 7.5% this year.

The State Council earlier this month outlined what some analysts have dubbed a “mini-stimulus” package of railway spending and tax relief, with first-quarter growth projected to be the slowest since 2009 in a report due tomorrow. “Deleveraging will for sure help China’s long-term growth, but the pressing issue for now is to handle the deceleration in economic growth,” said Li Wei, a Shanghai-based economist at Standard Chartered Plc. “That’s why monetary policy has to be more flexible.” Authorities may lower banks’ reserve requirements in May to send a clearer signal that they will ensure expansion, he said.

Read more …

Chinese Stocks Decline Most in 3 Weeks as Money Growth Slows (Bloomberg)

China’s stocks declined the most in three weeks, led by financial companies and commodity producers, as the slowest increase in the nation’s money supply since 2001 underscored risks of a deeper economic slowdown. Poly Real Estate Group Co. and Industrial Bank Co. fell more than 2.5% as a gauge of financial shares headed for its biggest loss in a month, while the one-year interest-rate swap dropped as much as eight basis points to a one-month low. China Shenhua Energy Co., a unit of the nation’s largest coal producer, slid 1.7%, while Sinopec Shanghai Petrochemical Co. lost 1.5%. China Mobile Ltd. slumped in Hong Kong.

The Shanghai Composite Index fell 1.1% to 2,107.98 at 1:20 p.m., heading for its biggest retreat since March 20. Stocks extended losses after data showed M2, China’s broadest measure of money supply, rose 12.1% in March from a year earlier, compared with 13.3% in February. New yuan loans were 1.05 trillion yuan ($169 billion), topping economist estimates of 1 trillion yuan. “Investors are a bit worried because M2 is quite low,” Zhang Haidong, an analyst at Tebon Securities Co., said by phone in Shanghai. “New loans may be better than expected by a little, but it’s still not considered good data; we still think liquidity is very tight.”

Read more …

Hong Kong Stocks Decline Most in a Month on China Data (Bloomberg)

Hong Kong stocks slid, with the benchmark index heading for the biggest drop in almost a month, after data showed China’s new credit fell in March from a year earlier and money supply grew at the slowest pace since 2001. Agricultural Bank of China Ltd. lost 1.8%. Guotai Junan International Holdings Ltd. tumbled 8.4% after the brokerage said it plans to sell shares. Great Wall Motor Co. sank 5.7% after JPMorgan Chase & Co. cut its rating. Hong Kong Exchanges & Clearing Ltd., the world’s second-biggest bourse operator by market value, slipped 3.6% after jumping 14% in the past two sessions on plans for cross-border equity trading with Shanghai’s exchange.

China is due to release first-quarter gross domestic product data tomorrow. “Investors are using the money supply data as an excuse to take profit and lock in gains ahead of China’s GDP data,” said Louis Tse, a Hong Kong-based director at VC Brokerage Ltd. The money supply data shows not enough liquidity, and “the lower the GDP, the higher the expectation the government will pour money into the market, but that’s already discounted.”

Read more …

Deeper China Slowdown Seen In Quarterly Than In Yearly GDP (Bloomberg)

China’s loss of economic momentum in the first quarter was deeper than the most widely-cited data will show, according to analyst forecasts for a gauge that’s gaining increasing recognition. Gross domestic product grew 1.5% from the previous three months, according to the median estimate in a Bloomberg News survey ahead of data released tomorrow, down from 1.8% in the fourth quarter. That indicates a sharper deceleration than the median projection for 7.3% growth from a year earlier, down from 7.7%.

Investors are focused on the scale of a slowdown that prompted Premier Li Keqiang to provide what some analysts dubbed a “mini-stimulus” of spending and tax relief. While the indicator suffers from flaws including the government’s failure to give details of methodology, it provides an extra tool to analyze an economy that bond-fund manager Bill Gross calls the “mystery meat” of emerging markets.

Read more …

Strong euro killing PIIGS.

Spain Anxiety on Euro Leaves Rajoy With Two-Front Battle (Bloomberg)

Spanish Prime Minister Mariano Rajoy is counting on Mario Draghi’s help in a battle on two fronts against the strength of the euro. With the currency reaching a level high enough to provoke the European Central Bank president to threaten action, data today and tomorrow will show the latest damage it has caused to inflation and trade. For Spain, the effect has already been double-edged, depressing consumer prices enough to cause annual declines in an economy still overburdened with unemployment, while also threatening its export-based recovery. Rajoy said on April 7 that he would like “a different exchange rate,” and Draghi said as much in Washington five days later when he told reporters that the euro’s strengthening “requires further monetary stimulus.”

Such assistance can’t come soon enough for Spanish companies including Cosentino SA, a manufacturer of bathroom and kitchen quartz surfaces. “The economic rationale of maintaining all our factories in Almeria is becoming weaker and weaker,” Chief Financial Officer Luis de la Haza said in a telephone interview from the southern region of Spain, where the company has 10 facilities and two fifths of its workforce. “We’ve been suffering for months without any respite from the euro’s exchange rate. The single currency has appreciated more than 5% against the dollar in the past 12 months, undermining euro-area exporters’ cost-cutting efforts to win business outside the 18-nation bloc. At the same time, slowing inflation makes competition within the region tougher.

Read more …

Spanish Bank BBVA Warns Of 10-Year Jobs Blight (Guardian)

Spanish unemployment could take 10 more years to return to the levels seen before the financial crisis, according to a report that paints a picture of an economy hampered by low wages, low skills and lack of investment in research. Spanish workers earn 20%-40% less than those in other leading European countries, according to the study by Spain’s second-biggest bank, BBVA. The earnings gap is partly explained by very high unemployment, which BBVA said “derives from a labour market that functions substantially worse than in other countries”. The bank found Spanish spending on research and development is 70% below the US or EU average, and said the economy suffered from low skills and a lack of technology in the workplace.

“All of these differences derive from an inadequate legal and institutional system of incentives,” the report said. The researchers forecast that even if employment increased at a rate of 2% it would take 10 years to reach 2007 levels. Calling for long-term “balanced, solid and inclusive” growth to bring per capita income in line with the US and eurozone competitors, the report urged Spain’s traditionally small- and medium-sized firms to enlarge and seek international markets. “Large companies are more productive, have more human capital, survive longer, invest more in R&D and export more,” it said, adding that this enlargement would only occur if legal, financial and fiscal obstacles were removed.

It noted that for each percentage point fall in unemployment there was a 0.6% rise in GDP, so reducing unemployment also cuts public debt, which is now at record levels. Figures released on Monday by the Bank of Spain show public debt rose by €8.1bn (£6.7bn) in February, taking the total owed by central and regional government to a record €988bn, equivalent to 95% of the nation’s annual GDP.

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Why do I find this headline appealing?

Two Chinese Executives Awarded $600 Million For US Pork Deal (Guardian)

Two executives at the Chinese company that bought the US firm Smithfield Foods, the world’s biggest pork producer, last September have been awarded more than $600m (£360m) of shares for their part in the $4.9bn deal. WH Group and some of its shareholders launched an initial public offering for up to $5.3bn in Hong Kong last week, the second biggest ever listing by a food and beverage company. Wan Long, the company’s 73-year-old chief executive and chairman, sometimes known as China’s “chief butcher”, and Yang Zhijun, an executive director in charge of investment, merger and acquisitions and financing, were granted shares with an estimated value of $597m, the filing showed.

David Webb, a Hong Kong-based corporate governance advocate, said: “This is very unusual. Normally you would incentivise management for overall long-term performance and not simply for executing a transaction, which is part of their job. Especially given there’s no evidence yet that the transaction is value-accreting. Let’s hope they don’t continue that kind of remuneration policy after they go public.”

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Financial Crisis Won’t Have Long-Term Impact On UK Growth: Economists (Guardian)

Fears that the financial crisis will have a significant negative impact on long-term UK economic growth are unfounded, according to the results of a new survey that brings together views from a broad range of economists. The first poll by the Centre for Macroeconomics asked just two questions, albeit meaty ones: on the size of the output gap and on the long-term effect on growth rates from the financial crisis. The responses, from economists in the City, at thinktanks and universities, provide more food for thought over the permanence of the drop in GDP over the downturn.

Economists were divided down the middle when asked whether they agreed the output gap – a measure of how far the level of output is below the potential level of output of the economy – was 3% or larger (in other words more than the Office for Budget Responsibility estimates). According to the OBR, the output gap in the last quarter of 2013 was 1.7%. That estimate implies that the drop in GDP relative to its pre-crisis trend, which may be as much as 10% on some estimates, is for the most part permanent.

In this survey, 46% of the respondents either agreed or strongly agreed the output gap was noticeably larger than the OBR estimate, among them Jonathan Portes of the NIESR thinktank and Morten Ravn from University College London. An equal number disagreed or strongly disagreed, and many of those commented that they supported the OBR estimate. On the second question, over the extent of long-term damage from the crisis, the economists were not as divided. Almost two-thirds (61%) thought that the financial crisis will either have no effect on long-term UK growth rates or a small negative effect that pushes GDP down by less than 2.5% in total over a 10-year horizon.

But among those who disagreed with that view, several highlighted losses in the financial sector that may be felt for many years in the wider economy. George Buckley at Deutsche Bank and John Driffill at Birkbeck College, London, both commented that growth before the financial crisis was unsustainable and that the financial crisis therefore could have an impact on growth rates by bursting that bubble.

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We’re reaching the life cycle of the average upswing. Who knew?

‘Time for a new recession’ (RT)

The US economy bottomed out in June 2009. May 1 will mark the 59th month of expansion. The average upswing since 1945 has been 58.4 months. True, averages are, by their very definition somewhat middling, as their precision is perpetually open to negotiation. However the upswing’s days are clearly numbered we re just haggling over how many months it will be. Given the severity of the last recession, the rebound recovery will probably be slightly longer than average, but can it last for another 60 months to equal the longest post-war expansion? After all, that was during the 1960s, with heady optimism surrounding the white heat of technology. Likewise, the 1980s saw a lengthy expansion. However, President Reagan was pro-business, as opposed to the big government anti-enterprise Obama administration.

Let s consider those two words between which we often experience a chasm in the real world: hope and reality. The hopey-changey one of 1600 Pennsylvania Avenue clearly clings to a certain blind faith in his divine right ability to enjoy economic growth as he dithers stylishly over most every decision. Likewise, many investors cling to the last swinging reed of optimism in any bull market as they are all long, hoping for a greater fool to drive the market further up. Ultimately, the music stops and the invisible hand of the market removes a few chairs before the cycle starts again. The reality is the band has played a full set and could become bored playing encores anytime soon, leaving the fat lady to belt out her final number.

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Edward Snowden: A Whistle-Blowing Outlaw With A Pulitzer Prize To His Name (LA Times)

A few months ago, I wrote that it was wrong to try to classify Edward Snowden as either a whistle-blower or a traitor, because he’s a bit of each. Only now he’s a whistle-blowing outlaw with a Pulitzer Prize to his name. Formally, of course, the prize went to the newspapers that published articles based on Snowden’s massive data leak, the Washington Post and the Guardian. They don’t give the Pulitzer Prize to sources. But the Pulitzer board members, a gilt-edged group drawn from such institutions as the New York Times, the Wall Street Journal and Columbia University, knew they were giving Snowden a signal honor too. Were they right?

If it’s a question of impact, that’s easy: Snowden’s revelations forced the Obama administration and Congress to launch significant reforms of NSA’s practices, reforms that weren’t happening before. These were the most important newspaper investigations of the year. If it’s a question of journalistic quality, that’s pretty easy too. The two newspapers didn’t just summarize the digital mountain of documents Snowden gave them; they assembled teams of reporters — the Post listed 33 contributors — to turn data into intelligible reports.

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Yeah, just make ’em dumber. They’ll learn from their smartphones?!

Small US Colleges Battle Death Spiral as Enrollment Drops (Bloomberg)

The number of private four-year colleges that have closed or were acquired doubled from about five a year before 2008 to about 10 in the four years through 2011, according to a study last year by researchers at Vanderbilt University in Nashville, Tennessee, citing federal data. Plus, among all colleges, 37 merged in the three years through 2013, more than triple the number from 2006 to 2009, according to Higher Education Publications Inc., a Reston, Virginia-based directory publisher.

“There will clearly be some institutions that won’t make it and there will be some institutions that will be stronger because of going through these difficult steps,” said David Warren, president of the Washington-based National Association of Independent Colleges and Universities. Harvard Business School professor Clayton Christensen has predicted that as many as half of the more than 4,000 universities and colleges in the U.S. may fail in the next 15 years. The growing acceptance of online learning means higher education is ripe for technological upheaval, he has said.

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Should we celebrate?

Canada’s Climate Warms to Corn as Grain Belt Shifts North (Bloomberg)

The snow is piled waist-deep outside the Southern Manitoba Convention Centre as more than 400 farmers gather to consider the once-unthinkable: growing corn on the Canadian prairie. At one end of the packed auditorium last month in Morris, home of the Red River Wild hockey club, an Ohio farmer brought in by DuPont Co. is making a presentation with a slide that reads “Ear Count 101.” At the other end, Deere & Co. is showing off tractors and other equipment from a booth while Daryl Gross explains planters and corn-dryers to curious men wearing seed caps.

“This is here to stay,” said Gross, who sells CNH Global NV tractors for Southeastern Farm Equipment Ltd. in nearby Steinbach. His customers are increasingly devoting acreage to corn. “There are a lot of guys who are experimenting with it and looking at it,” he said. Corn is the most common grain in the U.S., with its production historically concentrated in a Midwestern region stretching from the Ohio River valley to Nebraska and trailing off in northern Minnesota. It had been ungrowable in the fertile farmland of Canada’s breadbasket. That is changing as a warming climate, along with the development of faster-maturing seed varieties, turns the table on food cultivation. The Corn Belt is being pushed north of what was imaginable a generation ago.

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Money quote: “Shale gas drilling and fracking [in OZ] are over three times as costly as in the US”.

Is A US-style Shale Revolution Coming For Australia? (CNBC)

Australia, home to the world’s seventh largest recoverable shale gas reserves, has several characteristics conducive for commercializing the resource including existing infrastructure, industry know-how and low population density in shale-rich regions. So, what is the potential for a U.S.-like shale revolution in the country? Australia has an estimated 437 trillion cubic feet of recoverable shale gas reserves, according to the Energy Information Administration (EIA), around two-thirds of the U.S.’s 665 trillion cubic feet – the world’s fourth largest – and two-fifths of China’s 1,115 trillion cubic feet – the world’s largest.

“Broadly most people would recognize Australia is the closest analogy [to the U.S.], with our infrastructure position and unconventional shale gas opportunities,” James Baulderstone, vice president, Eastern Australia at oil and gas firm Santos, told CNBC. The Australian shale gas industry is still in its infancy, but exploration has increased in the last few years. The sector has been drawing international interest from global players. The likes of Chevron, ConocoPhillips, Statoil, Total, BG Group, have invested over $1.55 billion in Australia’s shale gas industry as of mid-2013, according to EIA. [..]

Shale gas drilling and fracking are over three times as costly as in the US, according to industry estimates. Another key difference is the regulatory environment, in particular the mineral rights ownership, say industry participants. In the U.S., landowners possess the rights to the resources beneath their land and are entitled to royalties. This has ensured local communities are able to benefit financially, thus helping to temper local opposition to the industry. In Australia, the state owns any underground resources. Australian landholders have to provide access, in return for some compensation, to energy companies that want to explore and exploit their land.

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Not exactly surprising. For money, we’ll burn anything.

Coal Rises Vampire Like as German Utilities Seek Survival (Bloomberg)

What’s a beleaguered utility to do when forced by the government to close its profitable nuclear power plants? It turns to lignite, a cheap, soft, muddy-brown colored form of sedimentary rock that spews more greenhouse gases than any other fossil fuel. The story of German power giant RWE is a parable of the crisis facing that nation’s utility sector – in fact, many utilities across Europe — as nuclear power plants get shuttered in the wake of the Fukushima disaster, renewables steal away revenue and consumers and companies complain about rising power costs that are three times higher than in the U.S.

Chancellor Angela Merkel’s decision in 2011 to shutter all 17 of Germany’s nuclear power stations by 2022 struck a blow to RWE’s profit stream, particularly for a company that has almost no presence in renewables. RWE posted its first loss last year since World War II and may face worse losses going forward. The Essen-based company, founded in 1898 to produce power for Germany’s industrial heartland, has had no choice except to ramp up production from its profitable coal-fired plants, most of which burn lignite. The result: RWE now generates 52% of its power in Germany from lignite, up from 45% in 2011. And RWE isn’t alone. Utilities all over Germany have ramped up coal use as the nation has watched the mix of coal-generated electricity rise to 45% last year, the highest level since 2007.

Read more …

Sad.

Surge In Deaths Of Environmental Activists Over Past Decade (Guardian)

The killing of activists protecting land rights and the environment has surged over the past decade, with nearly three times as many deaths in 2012 than 10 years previously, a new report has found. Deadly Environment, an investigation by London-based Global Witness documents 147 recorded deaths in 2012, compared to 51 in 2002. Between 2002 and 2013, at least 908 activists were killed in 35 countries – with only 10 convictions. The death rate has risen in the past four years to an average of two activists a week, according to the report, which also documents 17 forced disappearances, all of whom are presumed dead.

Deaths in 2013 are likely to be higher than the 95 documented to date, the environmental rights organisation warned, with under-reporting and difficulties verifying killings in isolated areas in a number of African and Asian nations. Reports from countries including Central African Republic, Zimbabwe, and Myanmar, where civil society groups are weak and the regimes authoritarian, were not included in the Global Witness count. “Many of those facing threats are ordinary people opposing land grabs, mining operations and the industrial timber trade, often forced from their homes and severely threatened by environmental devastation,” the report said. Others have been killed for protests over hydroelectric dams, pollution and wildlife conservation.

Brazil, the report found, is the world’s most deadly country for communities defending natural resources, with 448 deaths between 2002 and 2013, followed by 109 in Honduras and Peru with 58. In Asia, the Philippines is the deadliest with 67, followed by Thailand at 16. More than 80% of the recorded deaths were in Latin and Central America. There have been only 10 successful prosecutions connected with the killings in Brazil over the past 12 years. Isolete Wichinieski, national coordinator of the Brazilian group Commisão Pastoral da Terra, said: “what feeds the violence is the impunity”.

Read more …

Dire UN Climate Reports Raise Questions About Global Willpower (NatGeo)

A trio of United Nations-sponsored climate reports released over the past seven months point to a dangerously warming planet, but big questions remain about whether the world’s nations will take action and, ultimately, about whether the reports will matter. On Sunday, the Intergovernmental Panel on Climate Change (IPCC) released its third major climate assessment, rounding out a process that began in September and plays out every seven years. The reports indicate that sharp greenhouse gas emissions cuts worldwide need to begin now, with a 40% to 70% reduction by mid-century, to avert the worst effects of climate change.

“We cannot play a waiting game where we bet on future technological miracles to emerge and save the day,” said Christiana Figueres, head of the UN Framework Convention on Climate Change (UNFCCC), in a statement on the report. The UNFCCC has hosted international summits aimed at fostering worldwide agreements on halting global warming since the 1990s, with the next big one scheduled for Paris in 2015. The UN reports have been aimed largely at world leaders attending the summit, the most anticipated since a 2009 meeting in Denmark.

“Above all, governments must strengthen and expand bold policy incentives to reduce emissions at home and together construct a new climate change agreement in Paris next year,” Figueres said. There are doubts about whether governments will go that far, but the IPCC reports indicate that such action is needed. Among the reports’ findings:

• Humanity’s influence on a warming climate is “clear” and has accelerated since the 1950s largely due to burning oil, coal, and other fossil fuels that release atmosphere-warming greenhouse gases.

• Global warming is already harming agriculture, the environment, and human health in real ways worldwide.

• Greenhouse gas emissions rates have accelerated since 1970, with the steepest increase coming in the past decade. About 80% of those emissions are tied to fossil fuel use.

Read more …

Apr 142014
 
 April 14, 2014  Posted by at 3:07 pm Finance Tagged with: , ,  4 Responses »
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Harris & Ewing Pennsylvania Avenue becomes “Road to Mecca” for Shriners Parade June 1923

It’s hard enough to be optimistic about the future of mankind, and his habitat, on any given day of the week. And then there are days when it’s impossible not to lean towards utter despair. There was a meeting in Washington this weekend, organized by the IMF, during which all kinds of economists discussed how to squeeze more and faster growth out of the world, and it people. Because, as all economists have learned, and just about everyone else believes, if we don’t have enough growth, we are doomed. That yet another IPCC report, presented at the same time, strongly suggests it may be our growth that dooms us, not the lack thereof, is of course completely lost on economists, and, again, on just about everyone else. Here’s how Bloomberg reports on the meeting. I’d say just listen to this gobbledy-gook, as you realize that these are the people shaping the future of your economies and therefore your societies, and indeed your lives:

Raising World Economy’s Speed Limit Emerges as Challenge

Global finance chiefs are trying to soup up their crisis-hit economic engines. How to do so was a theme of weekend talks of the International Monetary Fund’s spring meetings in Washington as economists from JPMorgan Chase estimate the financial crisis and subsequent world recession knocked the potential growth rate of rich countries down to about 1.5% from 2%.

Such a decline in the speed limit of the growth rate at which inflation ignites is troubling because it risks pressuring central banks to raise interest rates sooner than they might otherwise want. The weaker potential also hurts the ability of businesses to boost profits, workers to win pay increases and governments to cut debts. “It is clear to me and not just to the IMF but many other players around the world that there is a real significant potential” to be tapped, IMF Managing Director Christine Lagarde [said].

The debate marks a pivot after six years of worrying over how to spur demand to considering how to increase the supply side of economies so they can handle faster expansion. While growth rates for a time can exceed potential – which is determined by the growth of the labor force and of worker productivity – it cannot do so for an extended period. The IMF predicts advanced nations will grow faster than 2% this year for the first time since 2010.

The problem according to these sages is no longer that there isn’t enough demand for stuff, but that not enough stuff is being produced. And you’re not supposed to ask if, or why, we need more stuff: the economy they want to see simply demands that we buy more. And more still the year after. Rinse and repeat. Exponentially. They got their jargon down just fine, those economics books are good for something:

“Driving growth that creates jobs and raises living standards is now the top priority for the global community, and that focus marks a turning point in the global recovery,” U.S. Treasury Secretary Jacob J. Lew said. Singapore Finance Minister Tharman Shanmugaratnam said there is now “a focus on the medium term more than the short term, and a much greater focus on structural reforms.”

Oh, the sweet promise of reforms. See, economics is one of those fields where, if reality doesn’t fit with the models, reality must be wrong, and needs to be changed. Because, just look, the potential is there to make and sell far more stuff:

The challenge they face was illustrated in a Washington presentation by Bruce Kasman, chief economist at JPMorgan. His estimates show the potential rate of developed economies is about 5.2% of gross domestic product below what it would have been had the 2008 trend held intact. In a sign demand still remains weak, the new trend is still about 4% of GDP above current performance.

[..] Possible solutions include revamping how labor markets work, increasing competition and productivity in non-tradable sectors, paring the size of governments and looking to improve state spending, IMF chief economist Olivier Blanchard said. The lender estimated in February that reforms could add $2.25 trillion to the global economy by 2018.

” … reforms could add $2.25 trillion to the global economy by 2018″. And that would make us happy how exactly?

[..] Central bankers in Washington also trained their eyes on the lack of current demand, as represented by the gap between potential and actual growth. Bank of Canada Governor Stephen Poloz said the gap’s existence is “pushing inflation lower than our traditional model would expect.” That doesn’t mean monetary policy makers aren’t worried about where their economies’ cruising speed is. At the Federal Reserve, the central tendency of forecasts for long-run growth fell to 2.2% to 2.3% in March from 2.3% to 2.5% a year ago.

I can only read this kind of thing anymore as blind nonsense. There is no real discussion going on here, it’s a religious group-think phenomenon in which certain questions are off limits and will get you excommunicated. Which is why I was not exactly thrilled to see this bit at RT either. I understand that there are many well-meaning people involved, but all the IPCC scientists seem to be doing here is to find a way to keep economies growing. And they may say they’re not economists, but they could still argue that we need to not do things, instead of figuring out how to keep on doing them, but differently. Why not focus on simply using much less energy? That is something economists wouldn’t appreciate at all, and it would have some nasty side effects, but why would climatologists be hindered by that?

UN: ‘World Must Triple Nuclear And Renewable Energy’

‘Clean’ power plants and nuclear stations need to triple their energy output to avoid a global warming doomsday. More than $17 trillion in investment in the next 21 years is needed to meet electricity demand alone, UN research has found. Governments worldwide need to speed up renewable and nuclear energy developments to replace carbon emissions and cut down on greenhouse gasses, United Nations researchers said at the Intergovernmental Panel on Climate Change in Berlin on Sunday.

Fresh investment into renewables, nuclear, and carbon energy capture and storage must rise by $147 billion, and an increase of $336 billion is needed on making buildings and transportation more energy efficient, the researchers said. Polluting fossil fuel plants such as coal-fired stations need to be wound down, and spending should fall by $30 billion to make sure that global warming is limited to a 2 degrees Celsius increase by 2030. Another top priority is to slash greenhouse gases by anywhere from 40% to 70% by 2050.

The panel found that the significant decrease in costs of wind and solar power make the goal increasingly realistic. Scientists from 194 different nations said that emissions growth has increased to an average of 2.2% a year between 2000 and 2010, nearly double the annual growth of 1.3% from 1970-2000. “The longer we wait to implement climate policy, the more risky the options we’ll have to take,” Ottmar Edenhofer, a co-chair of the 235 scientists who drafted the report, told Bloomberg News. “We need to depart from business as usual, and this departure is a huge technological and institutional challenge,” Edenhofer said.

I think I’m just going to quote myself, because I’ve written about this many times before. And no matter what anybody thinks, we need to radically change our way of thinking, and our leadership, to make room for both the questions and the answers, if the latter exist, or we’re bound to plunge like so many lemmings off the very steep cliff that exponential growth can’t keep itself from climbing. This is from October 2008:

The Lord of More

There is a completely unfounded and utterly irrational picture of the world being touted that claims all will be fine, and soon too. When the economy rebounds, in that familiar imaginary place that’s just around the corner beyond the horizon, the wonderful certainty of unbounded growth will dissolve all debt and make us richer than we’ve ever been before. All of us.

It would not be correct to call this a fantasy. It is much more. It’s religion. It’s chasing the golden calf. And it does not condone critical views and questions. Growth is such a powerful deity that taking on additional, even unlimited, debt, in order to get to the promised land tolerates no scrutiny, a principle not unlike the mind-frame of your everyday suicide-bomber.

Growth, in the eyes of its believers, knows no more limits than do the powers of any of the all-seeing ever-present gods found in the monotheistic religions, Judaism, Islam and Christianity. The faithful growth flock, after having grown from A into A+, accumulating already seemingly infinite earthly possessions, blindly follows their shiny calf along its unidirectional and one-dimensional path to more of the same. The Lord of More. And as long as no questions are ever asked, the only limits will be those imposed by another deity, Gaia.

I have a question. I would like to know why no-one ever asks what exactly is is that they wish to grow into. Where it is they want to go. We have all seen the surveys that show, without missing a beat, that the happiest people on the planet do not live in the richest communities, but in the closest knit ones. Happiness is not two and a half people in a 10000 square foot mansion with wall-size TV’s and a garage filled with vehicles modeled after rhinoceroses.

So why do the faithful of the Lord of More keep chasing the glittering bovine? They do because they know of no other reality. They do because their brains are genetically preconditioned for lies and deceit. What we think sets us apart from everything out there that is alive, this quality we call consciousness, comes at a bitter and fatal price. You cannot be ‘fully’ aware of ourself and others without being able to fool yourself into thinking that you are better and more than you really are. [..]

Even though we can easily rationally understand that the principle of always more is ridiculously impossible, and fatal to our survival, we cannot escape the trap it lures us into. The human mind is as unidirectional and one-dimensional as the religion of More. And we have no choice but to lie to ourselves about that. We must believe that we do the things we do because our rational brain tells us to, even though, when we take a step back, we are all perfectly capable of seeing that it just ain’t so.

Today, in a sort of ultimate tragedy, we convince ourselves that it is possible to take on more debt in order to get out of debt, as long as there is more growth awaiting us in our fantasy future. It’s no more than yet another lie we can’t escape, simply because we can’t escape who we are. The Lord of More will always in the end leave you with less.

And on April 22 2013 I asked what I think may well be the pivotal question, one for which I still haven’t seen an answer. None.

What Do We Want To Grow Into?

[..] … there’s an urgent need for ideas about what to do in case growth does not return. But there are no such ideas. Turns out that the Spend! and the Cut! sides of the controversy are one and the same. The only real discussion should be whether we do or do not need growth, but instead the discussion is about how much growth is needed. And the answer to that is identical for both sides: as much as we can.

The only good thing about all this is that if and when it becomes clear that there is no growth left in the system, all its one-dimensional advocates, from both the Spend! and the Cut! parties, will disappear into a great void. They have no idea what to do without growth. There is no economics class that teaches them, and they don’t have the brains to come up with an answer themselves. Indeed, perhaps it’s even true that a “not necessarily growth” situation, simply of its own accord, selects for other “leaders”. That power hungry psychopaths, in all the various degrees to which they float to the top of the dungheap, are wiped out and alienated by such a situation.

That could be a very good thing. It’s on the way there, however, that we will see unimaginable damage, mayhem and bloodshed. The forever and always growth classes have an iron grip on everyone’s lives. If only because everyone believes them. Still, just because they can’t change their ways and views doesn’t mean you can’t. You can see quite easily that, in a material sense, you have more than enough already. And many of you have clued in to the destruction ever more growth brings to your children’s living world (not to mention their brains). Unfortunately, quite a few then fall for the “more growth, but more greener” delusion. Or some steady state one (we don’t do steady, we don’t stand still).

When you get down to the heart of it, the only reason we need more growth is to pay off our debts. Which we owe largely to the same small group of rich, psychopathic and powerful that incessantly repeat the “need for growth” message, and makes sure it’s the only message available out there. But we will have to have the discussion some day, and it won’t be initiated by the people and powers that rule our societies today; that one’s up to us.

It’s a very simple discussion. You can start it today with Krugman or one of his alleged adversaries: Why do you advocate economic growth? Why do you see a period of non-growth or shrinkage as a necessary evil that needs to be brought down to its knees at – quite literally – all cost? And what is it you want to grow into? Can you explain that? I’ve never seen that properly defined. Isn’t it perhaps true that if you don’t know the answer to that question, you are by definition blindly chasing a mirage? If you don’t know where you’re going, or why you’re going there, why go at all?

This discussion is far more important to us than the one about how we’re going to shift from coal to wind. We need to define what we want the world of our children to look like. And we do have the ability to possess a pretty good idea today (we’ve actually had it for quite some time) of what that world will resemble if the blind growth religion continues to rule.

But not all is black out there. 10 days ago, our Kiwi friend Nelson Lebo (Nicole and I stayed with him and his wonderful little family for a few days 2 years ago) sent me this article he wrote for the Wanganui Chronicle. Some people answer the question “What Do We Want To Grow Into?” simply by being it in their daily lives. They live the answer.

Financial Independence Through Bicycling

My position is that more people are receptive to messages of saving money than “saving the planet”, and that in many cases both are possible by designing win-win situations. For example, I graduated from University in 1990 with student loans and without a car. Some unexplained thrifty gene in my DNA told me to forgo buying a car until I had paid off my loans. In other words, don’t take on more debt until you’ve paid off the existing debt.

That experience was faster and less painful than I expected, so I carried on living car-free for seven more years before buying my brother’s old ute for $500. I continued bicycling and taking public transit for most of my transport needs but drove about twice each month until early 2000. At that point, after living nearly car-free for over a decade I had saved enough money to buy a small farm…on a teacher’s salary. To clarify, this was by no means a flash farm, and I did work every school holiday for most of those years to earn and save more money. On 1st June 2000 I took title of 38 acres and a 214 year-old farmhouse. I called it Pedal Power Farm.

Over the next eight years I used eco-thrifty thinking and lots of blood, sweat and tears to renovate the farmhouse, build a post and beam barn by hand, and improve soil fertility. In 2008 – at the start of the housing crisis in America – I sold the farm for nearly twice what I paid. Proceeds of the sale paid for four years of doctoral research at Waikato, a second-hand Subaru wagon, and a fully renovated but once run-down villa in Castlecliff.

While car-free living cannot be attributed for all of this, it provided a platform to get out of debt and to get onto the ‘property ladder’ debt-free. Other contributing factors were fiscal conservatism and working my bum off for 18 years. At 45 I am semi-retired with plenty of time to spend with my toddler daughter and to volunteer in the community. If you think about it carefully enough, I suppose you are reading these words in today’s paper because I made a choice 24 years ago to ride a bike.

Ouch! What happend to the recovery?

US Mortgage Lending Plunges to 17-Year Low as Rates Curtail Borrowing (Bloomberg)

U.S. mortgage lending is contracting to levels not seen since 1997 — the year Tiger Woods won his first of four Masters championships — as rising interest rates and home prices drive away borrowers. Wells Fargo and JPMorgan, the two largest U.S. mortgage lenders, reported a first-quarter plunge in loan volumes that’s part of an industry-wide drop off. Lenders made $226 billion of mortgages in the period, the smallest quarterly amount since 1997 and less than one-third of the 2006 average, according to the Mortgage Bankers Association in Washington.

Lending has been tumbling since mid-2013 when mortgage rates jumped about a percentage point after the Federal Reserve said it might taper stimulus spending. A surge in all-cash purchases to more than 40% has kept housing prices rising, squeezing more Americans out of the market. That will help push lending down further this year, according to the association.

“Banks large and small are going to have to adapt to a new reality because mortgage origination volumes going forward aren’t going to support the big businesses they’ve had in place for the last few years,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “They’re going to have smaller, leaner operations, and we’re seeing them make that shift.” At Wells Fargo, home-loan originations exceeded $100 billion for seven straight quarters, ending in June 2013. The figure plunged to $36 billion in the three months through March, the San Francisco-based bank said April 11.

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Wonder how far this will go.

High-Frequency Traders Get Curbs as EU Reins In Flash Boys (Bloomberg)

European Union lawmakers are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first crackdown in the aftermath of Michael Lewis’s latest book, “Flash Boys.” The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

“With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world,” EU financial services chief Michel Barnier said in an e-mail. “While HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability, and isn’t a source of market abuse. That’s what these rules set out to achieve.”

High-frequency trading in stocks grabbed the headlines after the plunge known as the flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. Controversy returned with the publication of Lewis’s book on March 31. Lewis argues that the $22 trillion U.S. stock market is rigged in favor of speed traders, who he says prey on slower investors by getting faster access to information.

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Another great piece by Stockman.

The Mother Of All Financial Bubbles Is Beginning To Crack (David Stockman)

At the turn of the century, the US had about $25 trillion of credit market debt outstanding; now it is pushing $60 trillion. About 14 years ago, China had debt of $1 trillion; now its nearly $25 trillion. And similar credit explosions occurred in much of the rest of the world. It was all central bank enabled, and it caused world wide investment booms and asset inflations which defy every law of sound money and economics, and which cannot be sustained indefinitely. The bottom line of those destructive policies is that “cap rates” are artificially low and so their reciprocal, asset values, are enormously inflated.

Likewise, nearly zero money market interest rates in virtually every major economy of the world have fueled the most fantastic expansion of “carry trades” ever imagined. As I have frequently pointed out, the short-term market for repo and other wholesale funding represents the cost of goods (COGS) for financial gamblers; its what they use to fund their speculations in higher yielding currencies, corporate debt, equities, and every manner of derivatives and OTC concoctions that Wall Street trading desks can engineer.

So when the central banks drive the money market rates to just 5-50 bps, they are offering ZERO-COGS to speculators. This is a massive incentive to bid up the price of anything that has a yield north of 50 basis points or a short-run appreciation prospect of the same—in order to capture the spread. This is what has turned the so-called capital markets of the world into dangerous casinos. This is what led speculators this week to gorge on $4 billion in Greek debt carrying the lunatic coupon of just 4.75%.

The latter is not even a remotely plausible pricing of the risk of a government with a 170% debt to GDP ratio—- sitting atop an eviscerated economy that has shrunk by more than 20% and has nothing much left except tourism, yogurt plants and a 27% unemployment rate. Instead, it evidences the fast money traders who swooped in to buy a 475 bp coupon funded by free money from the central banks, and who did so in the confidence that the ECB will do “whatever it takes” to prop up the price of member country sovereign debt.

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Hey, what else is new? Isn’t that what they’re there for?

IMF Is Sleepwalking Into Another Global Economic Catastrophe (Guardian)

The complacency is palpable. Despite some dire warnings about risky trading and the threat posed by overly indebted banks, the mood last week at the International Monetary Fund’s spring conference was one of calm. We have turned a corner since the financial crisis, the Washington-based organisation says. Normality is returning. And this will mean establishing normal interest rates (up from 0.5% in the UK to 2%-3%, according to Mark Carney), restoring normal inflation and generating steady growth in the west of 2%-3%.

Officials expect the US to lead the way. As consumer-in-chief, it will propel the world economy and global growth much as it has in the last 60 years. The dynamism of the US economy and its huge capacity to buy stuff will make life better for everyone, goes the rather tired argument. The legacies of the crash will be disposed of quietly. Having spent north of $3 trillion pumping funds into its economy and maintaining the cheapest borrowing costs in more than 100 years, the US central bank will find a way to sell this money back to the market, while at the same increasing rates, without much more than a ripple disturbing the markets.

Central bankers in London, Frankfurt, Tokyo and especially in the Federal Reserve will make sure it all works smoothly. Suddenly officials at the IMF are using the term “finely calibrated” in their discussions. No longer are governments involved in crude, large-scale pump-priming to rescue bankrupt banks. Today they execute technical exit strategies that magically restore the old order without any losses or panic. One official called this the “Goldilocks exit”, by which he meant the transition would be one that involved the patient getting neither too hot nor too cold, but with a temperature that was just right.

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Draghi: ECB Will Unleash Stimulus If Euro Strengthens Further (Telegraph)

Further strengthening of the euro will prompt the European Central Bank (ECB) to launch a fresh wave of stimulus in order to maintain its loose policy stance and fight low inflation, its president has said. Mario Draghi said the single currency, which has appreciated by 14% against the dollar since July 2012, had helped to push eurozone inflation down to a four-year low of 0.5% in March. Mr Draghi added that any further strengthening would warrant further action by the ECB, including non-standard measures such as quantitative easing.

“Over the past few months [the exchange rate] has become more and more important for price stability, Mr Draghi said at the International Monetary Fund (IMF) spring meeting on Saturday. “We are aware it’s not the only element, but it has been an important element. So in a sense if you want monetary policy to remain as accommodative as it is today, a further strengthening of the exchange rate … would require further monetary policy stimulus.” Mr Draghi said last month that the strength of the euro had undermined the ECB’s attempts to stabilise the single currency bloc. He emphasised on Saturday that the euro exchange rate was not a policy target and declined to state a specific level that would trigger further stimulus.

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15 years later, a spitting image.

The Higher They Rise, The Harder They Fall: Just As In The Dotcom Boom (Guardian)

“Those who cannot remember the past are condemned to repeat it” was the oft-repeated maxim of philosopher George Santayana. And investors may now be finding out that they ignored the story of the dotcom boom and bust at their peril. At the start of 2000, shares were at record highs, technology companies could do no wrong, and scores of loss-making internet businesses were racing to market at improbable valuations. But the bubble burst, partly thanks to the Federal Reserve raising interest rates. As a consequence, many companies that had neglected to worry about making a profit simply ran out of cash.

Fast forward to today, and we have seen a new wave of dotcom businesses join the market, even as the US central bank is beginning to rein in the supply of cheap money that has supported stock markets for the past five years. For the lastminute.com flotation of 2000, which turned out to be a perfect signal for investors to start selling, read Just Eat or AO World, or perhaps even lastminute itself, since its current loss-making parent, Sabre Corporation, is planning an imminent $5bn flotation. For the Fed raising interest rates then, read the gradual trimming – or “tapering” in the vernacular – of its monthly bond-buying programme now.

So last week we saw the technology-heavy Nasdaq fall by 3.1% on Thursday, its biggest daily decline since 2011. The much-hyped tech stars were among the hardest hit, with Facebook falling 17% from its recent high in April and Twitter losing a quarter of its value over the same period.

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How To Predict The Next Global Financial Crisis (Guardian)

History suggests that certain conditions have to be in place for a crisis to develop. The first is that a decent period of time has to elapse after the previous crash. When bubbles burst, a cavalier approach to risk is replaced, almost instantaneously, by risk aversion. It takes time for those burned by their losses to forget. In the UK, for example, there was a property boom in the early 1970s, another in the late 1980s and a third in the early to mid 2000s. A 15-year gap is the norm.

The second condition is a sustained period of solid growth, by the end of which individuals convince themselves that the good times will go on and on. Accordingly, the property boom of the early 1970s came after 25 years of strong growth; the overheated market in the late 1980s stemmed from a belief that Thatcher’s reforms had eradicated all the economy’s problems; that in the 2000s came amid a period of uninterrupted growth lasting more than 60 quarters.

A third crucial factor is belief in those running the show. The runup to the Great Recession of 2007-09 was the heyday of independent central banks, which preened themselves on their ability to deliver solid non-inflationary growth. There were a few, such as Bill White at the Bank for International Settlements, who warned that bubbles could develop in low-inflationary periods, but they were ignored. The public assumed that central banks were fully in control – a misplaced confidence as it turned out.

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Nice tax hike you got there, Shinzo.

Japan Risks Public Souring on Abenomics as Prices Surge (Bloomberg)

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump. Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5%, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg.

The challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.” Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.”

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Oh well, they eat to much of it anyway. The majority eat too much, period.

US Beef Prices Reach Highest Level Since 1987 (AP)

The highest beef prices in almost three decades have arrived just before the start of grilling season, causing sticker shock for both consumers and restaurant owners — and relief isn’t likely anytime soon. A dwindling number of cattle and growing export demand from countries such as China and Japan have caused the average retail cost of fresh beef to climb to $5.28 a pound in February, up almost a quarter from January and the highest price since 1987.

Everything that’s produced is being consumed, said Kevin Good, an analyst at CattleFax, a Colorado-based information group. And prices likely will stay high for a couple of years as cattle producers start to rebuild their herds amid big questions about whether the Southwest and parts of the Midwest will see enough rain to replenish pastures. Meanwhile, quick trips to the grocery store could drag on a little longer as shoppers search for cuts that won’t break the budgets. Patrons at one market in Lubbock seemed resigned to the high prices, but not happy.

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Promises, promises.

ECB Pioneer Confronts Too-Big-to-Fail Banks With Newly Won Clout (Bloomberg)

Sirkka Hamalainen, Finland’s first female central bank governor and a founding member of the European Central Bank, is returning to the region’s highest policy circles to help reshape its banks. “The only thing which is still missing in the banking union structure is the question of how to deal with too-big-to-fail banks,” Hamalainen said in an interview in Helsinki on April 11, three weeks before taking up her role as a member of the ECB’s new Supervisory Board. “The link between the banks and the sovereigns will never be totally and finally broken, but certainly it will be weakened crucially. The principle that the losses are socialized and the profits privatized can’t be accepted in the future. Both must be privatized.”

The ECB, founded in 1998 to conduct monetary policy, is about to become Europe’s most powerful financial watchdog in response to a crisis that almost destroyed the single currency it was created to defend. Hamalainen, 74, was appointed in March to the new panel, which will run financial supervision directly for about 130 of Europe’s biggest banks from November. “Banking-sector and financial-market functioning are vitally important for the whole economy,” Hamalainen said. “That’s why these preventive measures are also vital.”

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It’s a cute spectacle to watch, isn’t it? I see “experts” claim that China will be a well-oiled market economy in a few years’ time. I doubt it.

New Shadow Banking Crackdown In China (Reuters)

China has issued stricter guidelines governing trust companies, two sources with direct knowledge of the rules told Reuters on Monday, in a bid to counter systemic risks posed by the biggest players in the country’s shadow-banking sector. Trust companies are non-bank lenders that raise funds by selling high-yielding investments known as wealth management products (WMPs) and use the proceeds to fund loans to risky borrowers such as property developers, local governments and others to whom banks are reluctant to lend.

The new rules from the China Banking Regulatory Commission (CBRC) aim to reduce liquidity risks associated with off-balance-sheet WMPs by forbidding trusts from operating so-called “fund pools” that enable them to fund cash payouts on maturing products with the proceeds from new WMP sales. The latest guidelines appear consistent with regulators’ overall approach to shadow banking, which has become an important funding source for weak borrowers. Policymakers have encouraged the rise of non-bank lending as a means to diversify China’s bank-dominated financial system, while issuing targeted rules to curb the riskiest practices.

The guidelines also require trust companies to develop clear mechanisms for shareholders to provide emergency support to the trust firm during periods of liquidity stress. Regulators are concerned that liquidity problems with a single trust product has the potential to ignite systemic risk, said a trust industry executive who has seen the document. He said the document signals that liquidity risk will be a key focus for regulators this year.

“Fund pools” refer to pools of cash and credit assets from various different WMPs that banks and their trust company partners maintain. Regulators have increasingly focused on such structures over the last year, targeting the liquidity risk posed by the practice of using proceeds from the sale of new WMPs to finance cash payouts on maturing products. China’s securities regulator has compared such practice to a “Ponzi scheme”.

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The USA as a feudal society?

“It’s Not A Bubble,” But The Smart Money Bails Out (Wolf Richter)

“Biotech Stocks’ Rout Perplexes Analysts” is how the Wall Street Journal headlined the phenomenon. The Nasdaq Biotech Index had plunged 21% from its intraday high six weeks ago, to which it had ascended in an ever steepening curve that culminated in a beautiful spike. I wrote about that craziness at the time [NASDAQ 10,000 – Or Something]. The Biotech bubble had become so glaring that even I could see it. So what’s perplexing is that analysts would now be perplexed. To add some color, the WSJ quoted ISI Group analyst Mark Schoenebaum: “Horrible day in #biotech. I’m frankly at a loss for an explanation. And it’s my job to at least know why. Humbling day.”

He has been a stock analyst following the Biotech sector since 2000. If he’d started three years earlier, he would have seen the bubble build, pick up momentum, go crazy, and pop in early 2000. He would have seen Biogen dive so fast so far it would have knotted up his stomach. He would have experienced the implosion viscerally. And he might not have forgotten – though many analysts have. But not having been through this before, he was “at a loss.” And something is cracking.

Of the 14 IPOs planned for this week – the busiest since 2007 at the eve of the last implosion – five were postponed, pending better weather. But Farmland Partners started trading on Friday, and got plowed under. An hour before the close, it was down over 10% from its offering price of $14 a share. A last-minute rally brought it up to $12.98, for a loss of 7.3%. “People are pretty nervous,” explained CEO Paul Pittman. “This is about building long-term value in an asset class that for all kinds of macro reasons we believe is certainly going to keep appreciating.” That endlessly appreciating asset class is farmland. The company, which expects to get taxed as a REIT, doesn’t own or do much yet. But it’s gonna “acquire high-quality primary row crop farmland … throughout North America … upon completion of a series of formation transactions.” It’ll own 38 farms with 7,300 total acres, mostly in Illinois.

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Well, it’s a free market for some …

Tech Insiders Dumped Shares Ahead Of Slide (FT)

Insiders at some of the hottest private and publicly traded internet companies unloaded substantial personal stakes ahead of the slump in tech stocks that started at the beginning of March. The selling has stirred unease among some investors, who see the sales as opportunistic moves revealing a lack of confidence in their companies’ stock prices as shares in the fastest-growing internet companies soared in 2013. Selling by founders and other insiders at private companies – taking advantage of a bubble in valuations in start-ups thought to be close to launching an initial public offering – raises some of the biggest concerns, according to investors.

“Individuals selling before going public is always a bad sign,” said Mr Sebastian Thomas, a portfolio manager at Allianz Global Investors. “If you believe in the business, why would you take out money at what is presumably a lower valuation in the private market?” As the lock-ups which prevented insider sales after their 2012 IPOs expired, executives and directors at companies such as Workday, ServiceNow and Splunk have sold steadily, raising almost $750 million between them over the past 12 months. Shares in these so-called “software as a service” companies, which sell online access to software applications running in their own data centres, have fallen 30-45% from peaks hit six weeks ago.

“It was a great deal for them – they took advantage of a big run-up,” said one tech investor. Many of the sales were made through pre-arranged stock trading plans that spread disposals over a long period of time, so that corporate insiders have no discretion over the timing of individual transactions. Also, the slump in tech stocks has in many cases only wiped out the gains of the past six months, leaving share prices still above the levels at which insiders were selling for much of last year.

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Behind The Fed’s Monetary Curtain: Wizards? Or Scarecrows? (Alhambra)

The last few years the underlying theme of the markets is one of central bank omnipotence. Don’t worry about X, the Fed or the ECB or the BOJ has your back and will do whatever it takes to make sure nothing bad happens. The acceptance of this meme by market players has pushed all manner of assets to prices that in more normal times would make no sense whatsoever. It has been a wholesale rejection of safety and prudence in favor of the risk taking the central banks believe is necessary for the global or local economy to improve.

The BOJ has convinced not only themselves but the world that currency devaluation and inflation will cure what has ailed Japan’s economy for over two decades. The ECB has somehow convinced the world that Greece is a worthy borrower for 5 years at less than 5% per annum. And the Fed has convinced themselves and the entire world that a rising stock market is evidence that their policies are working in the real economy. No matter that the economic data doesn’t support that conclusion and that it gets the causation backward.

Of course, it hasn’t just been empty headed scarecrow talk that has produced this effect. The BOJ and the Fed (and maybe soon the ECB) have been buying assets in the open market to back up their talk and create the illusion of activity, the equivalent of the Wizard of Oz’s smoke and mirrors. In the case of the Fed, it is almost all illusion as the cash produced by QE has largely ended up back at the Fed in the form of excess reserves. The BOJ has been more aggressive, buying not just JGBs but also stocks and REITs on the stock exchange, something the Fed is prevented from doing (sarcasm alert) only by their strict adherence to the statutes that govern their behavior. For the ECB the threat of intervention has so far allowed them to avoid having to do much but recent emanations from the Draghi hint at a Yen to join the party. Leave it to the Europeans to be fashionably late and arrive just as the lampshades have become party hats.

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Capitalism Simply Isn’t Working And Here’s Why (Guardian)

Suddenly, there is a new economist making waves – and he is not on the right. At the conference of the Institute of New Economic Thinking in Toronto last week, Thomas Piketty’s book Capital in the Twenty-First Century got at least one mention at every session I attended. You have to go back to the 1970s and Milton Friedman for a single economist to have had such an impact. Like Friedman, Piketty is a man for the times. For 1970s anxieties about inflation substitute today’s concerns about the emergence of the plutocratic rich and their impact on economy and society.

Piketty is in no doubt, as he indicates in an interview in today’s Observer New Review, that the current level of rising wealth inequality, set to grow still further, now imperils the very future of capitalism. He has proved it. It is a startling thesis and one extraordinarily unwelcome to those who think capitalism and inequality need each other. Capitalism requires inequality of wealth, runs this right-of-centre argument, to stimulate risk-taking and effort; governments trying to stem it with taxes on wealth, capital, inheritance and property kill the goose that lays the golden egg.

Thus Messrs Cameron and Osborne faithfully champion lower inheritance taxes, refuse to reshape the council tax and boast about the business-friendly low capital gains and corporation tax regime. Piketty deploys 200 years of data to prove them wrong. Capital, he argues, is blind. Once its returns – investing in anything from buy-to-let property to a new car factory – exceed the real growth of wages and output, as historically they always have done (excepting a few periods such as 1910 to 1950), then inevitably the stock of capital will rise disproportionately faster within the overall pattern of output. Wealth inequality rises exponentially.

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Raising World Economy’s Speed Limit Emerges as Challenge (Bloomberg)

Global finance chiefs are trying to soup up their crisis-hit economic engines. How to do so was a theme of weekend talks of the International Monetary Fund’s spring meetings in Washington as economists from JPMorgan Chase & Co. estimate the financial crisis and subsequent world recession knocked the potential growth rate of rich countries down to about 1.5% from 2%. Such a decline in the speed limit of the growth rate at which inflation ignites is troubling because it risks pressuring central banks to raise interest rates sooner than they might otherwise want. The weaker potential also hurts the ability of businesses to boost profits, workers to win pay increases and governments to cut debts.

“It is clear to me and not just to the IMF but many other players around the world that there is a real significant potential” to be tapped, IMF Managing Director Christine Lagarde told Bloomberg Television’s Tom Keene in Washington. The debate marks a pivot after six years of worrying over how to spur demand to considering how to increase the supply side of economies so they can handle faster expansion. While growth rates for a time can exceed potential — which is determined by the growth of the labor force and of worker productivity — it cannot do so for an extended period. The IMF predicts advanced nations will grow faster than 2 percent this year for the first time since 2010.

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UN: ‘World Must Triple Nuclear And Renewable Energy’ (RT)

‘Clean’ power plants and nuclear stations need to triple their energy output to avoid a global warming doomsday. More than $17 trillion in investment in the next 21 years is needed to meet electricity demand alone, UN research has found. Governments worldwide need to speed up renewable and nuclear energy developments to replace carbon emissions and cut down on greenhouse gasses, United Nations researchers said at the Intergovernmental Panel on Climate Change in Berlin on Sunday. Fresh investment into renewables, nuclear, and carbon energy capture and storage must rise by $147 billion, and an increase of $336 is needed on making buildings and transportation more energy efficient, the researchers said.

Polluting fossil fuel plants such as coal-fired stations need to be wound down, and spending should fall by $30 billion to make sure that global warming is limited to a 2 degrees Celsius increase by 2030. Another top priority is to slash greenhouse gases by anywhere from 40 percent to 70 percent by 2050. “This report brings out the need for an unprecedented level of international cooperation,” Rajendra Pachauri, chairman of the IPCC, told reporters in Berlin. “After the boom of coal in the last decade, the 21st century is now the century of renewable energies,” said Martin Kaiser, a climate policy analyst at Greenpeace.

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Europe is bound to fall part in many small pieces. As it always was.

Basque Town Votes In Referendum On Independence From Spain (RT)

Citizens of Etxarri Aranatz in Navarre voted in an unofficial referendum on Sunday over whether they wished to be citizens of a separate Basque country and secede from Spain. From 9am, nearly 2,500 eligible residents voted on the question: “Would you be a citizen of an independent Basque Country?” The Basque country is made up of the regions of Álava, Biscay and Gipuzkoa, in Northern Spain. The area has had a long history of regional demands for autonomy along with Catalonia, and both regions have their own language. Locals of Navarre celebrated over the course of the day with Basque songs and traditions.

Support for Basque independence is particularly strong in Navarre. “This is a significant and meaningful day today, not only for the Basques but also for the Catalans and also for all nations in Europe that actually are in the process of self-determination,” Anna Arqué, Catalan spokesperson for the ‘European Partnership for Independence’ (EPI) told RT. Etxarri Aranatz is a town in the heart of Navarra and 40 km from Pamplona. The majority of its residents consider themselves Basque and speak the Basque language – which is only spoken by just over a quarter of all Basques. While both Catalonia and the Basque Country have strong regional identities, they have very different roots and Catalonia’s language lies more strongly at the heart of its regional identity.

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