Oct 222017
 
 October 22, 2017  Posted by at 9:14 am Finance Tagged with: , , , , , , , ,  


Edmund Melzl The Buddhas of Bamiyan in Afghanistan 1958

 

Political Economics (Snider)
Smart Money And Dumb Money Are Moving In Opposite Directions (MW)
Beijing Is The Covert Buyer Of A Quarter Of All Chinese Real Estate (ZH)
The Mathematics of Inequality (TuftsNow)
New Zealand’s New Prime Minister Brands Capitalism A ‘Blatant Failure’ (Ind.)
Euroskeptic Billionaire on Route to Czech Election Victory (BBG)
US Immigrant Population Climbed To Record 43.7 Million In 2016 (F.)
After 54 Years America Deserves To Know Everything (PP)
Into the Cold and Dark (Jim Kunstler)
Google’s Plan To Revolutionise Cities Is A Takeover In All But Name (O.)
Put Drivers In Control (NEF)
“Success, Greeks No Longer Seek Food In Garbage Bins” (KTG)
5 Year Old Syrian Girl Dies In ‘Concentration Camp’ Funded By UK Taxpayers (RT)

 

 

“How can anyone claim the Fed under Yellen or Bernanke performed even minimally well?”

Political Economics (Snider)

The political winds are changing, and the parties themselves are being realigned in different directions (which is not something new; there have been several re-alignments throughout American history even though the two major parties have been entrenched since the 1850’s when Republicans first appeared). Who the next Fed Chair is could tell us something about how far along we are in this evolution. What Krugman wants, meaning, it is safe to assume, what all those like him want, is simple: success. He believes that the central bank has given us exactly that, therefore it is stupid to upset what works.

“In particular, both Bernanke and Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and on the political right in general. And their intellectual and moral courage has been completely vindicated by events.” This is right here is the very central point of political difference that is pulling the world slowly apart. Krugman offers no evidence for his assertion, that the Fed has performed admirably and successfully, he just states it as if it was so (a common tactic in the mainstream, the fallacy of authority). Whenever challenged on this contention, the argument will always go back to “jobs saved.”

A worse counterfactual downside is not a rational standard for evaluation in any discipline or context. The only benchmark that should matter is recovery, as any economy facing recession, even an unusually severe one, has to make it back to the prior condition. On that score the Fed has utterly and unambiguously failed. One reason for it is the one thing Economists like Krugman never bring up; the 2008 panic. How can anyone claim the Fed under Yellen or Bernanke performed even minimally well? The very fact that the panic happened at all is a direct indictment on monetary policy and the people who were there during it (you had one job to do!).

[..] The irrational, emotional defense for the ideology is what is driving political upheaval, including Donald Trump’s occupying the White House. To most people, Krugman’s ideas and assertions are nonsense. They don’t have to know anything about QE’s effect on the TBA market and dollar rolls, how exactly McDonald’s was borrowing from FRBNY, or what it was that AIG did that ultimately made the Federal Reserve profits. People know the Fed did a bunch of stuff that didn’t work because they can tell there is something very wrong with the economy.

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Short, long, smart, dumb.

Smart Money And Dumb Money Are Moving In Opposite Directions (MW)

While all seems calm in the U.S. equity markets, with stocks continuing to hit all-time highs, an interesting trend has emerged beneath the surface. Combing through the latest Commitments of Traders report from the Commodity Futures Trading Commission (CFTC), we found that commercial traders (“smart money”) have a record number of short positions in the Dow Jones Industrial Average. At the same time, noncommercial traders (“dumb money”) have a record number of long positions. You may be thinking “one group thinks stocks will go up, and the other thinks stocks will go down. What’s the big deal?” Here’s the big deal. There’s a strong negative correlation between commercial traders’ short positions and the Dow Jones Industrial Average, as the below chart shows. When short positions increase, the DJIA usually falls … perfect timing!

The opposite also is true. When noncommercial traders increase their long positions, the market usually drops shortly thereafter. It seems they have a habit of buying the market at exactly the wrong time.

Given that the “smart money” usually wins this tug of war, let’s focus on the reasons behind their negative outlook for stocks. Here’s some of the reasons professional money managers may be growing cautious about stocks today. Findings from Goldman Sachs Asset Management (GSAM) show that by just about every measure, stocks are expensive today. But it’s not only U.S. stocks that are trading at all-time highs. This chart from Deutsche Bank shows that, in their own words, “we’re in a period of very elevated global asset prices — possibly the most elevated in history.”

Lofty valuations are likely a big factor in Warren Buffett’s and Seth Klarman’s reasoning for holding record levels of cash in their portfolios. In September, Buffett’s Berkshire Hathaway had $99.7 billion in cash on the sidelines. Klarman’s Baupost Group held 42% of its portfolio in cash, the largest single position. So U.S. stocks are expensive by most measures. But they have been expensive for quite some time. High valuations don’t mean a crash is imminent. They do, however, tell us something about future returns.

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Absolutely nuts. But then, the Fed buys mortgage backed securities…

Beijing Is The Covert Buyer Of A Quarter Of All Chinese Real Estate (ZH)

According to a fascinating new WSJ report, China’s housing downturn is likely far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market, As the WSJ notes, this latest backdoor bailout “It is a sharp illustration of China’s economy under President Xi Jinping and the economic challenges he will face as he renews his 5-year term at a twice-a-decade Communist Party Congress that opens on Wednesday.”

Rosealea Yao from Gavekal Dragonomics, who was also quoted above, wrote that “the government’s creativity in coming up with new ways of supporting the housing market is impressive—but it’s also an indication that it still depends on housing for growth.” While traditionally, China’s government used to build homes for families who lost theirs to development or decay, last year, local governments, from the northeast rust belt to the city of Bengbu with 3.7 million amid the croplands of central Anhui province, spent more than $100 billion to buy housing from developers or subsidize purchases, according to Gavekal Dragonomics. In other words, the reason why China no longer has ghost cities is because the government is buying them in just as concerning, “ghostly” transcations.

The underlying structure is yet another typically-Chinese ponzi scheme: “Underpinning the strategy is a cycle of debt. Cities borrow from state banks for purchases and subsidies, then sell more land to developers to repay the loans. As developers build more housing, they, too, accrue more debt, setting up the state to bail them out again. The burden on the state rises, as does the risk of collapse.” [..] Beijing is now the (covert) marginal buyer of a quarter of all Chinese real estate. That, in itself, is a mindblowing statistic. What is scarier, is that despite this implicit backstop, property sales are once again declining after 30 months of increases. One can only imagine the epic crash that would ensue at this moment, if – for some reason – the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from below the middle class of the world’s fastest growing economy.

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“..And even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result..”

The Mathematics of Inequality (TuftsNow)

Seven years ago, the combined wealth of 388 billionaires equaled that of the poorest half of humanity, according to Oxfam International. This past January the equation was even more unbalanced: it took only eight billionaires, marking an unmistakable march toward increased concentration of wealth. Today that number has been reduced to five billionaires. Trying to understand such growing inequality is usually the purview of economists, but Bruce Boghosian, a professor of mathematics, thinks he has found another explanation—and a warning. Using a mathematical model devised to mimic a simplified version of the free market, he and colleagues are finding that, without redistribution, wealth becomes increasingly more concentrated, and inequality grows until almost all assets are held by an extremely small% of people.

“Our work refutes the idea that free markets, by virtually leaving people up to their own devices, will be fair,” he said. “Our model, which is able to explain the form of the actual wealth distribution with remarkable accuracy, also shows that free markets cannot be stable without redistribution mechanisms. The reality is precisely the opposite of what so-called ‘market fundamentalists’ would have us believe.” While economists use math for their models, they seek to show that an economy governed by supply and demand will result in a steady state or equilibrium, while Boghosian’s efforts “don’t try to engineer a supply-demand equilibrium, and we don’t find one,” he said. [..] The model tracks the data with remarkable accuracy, he said. He and his team will soon publish a paper on how it relates to U.S. wealth data from 1989 to 2013.

“We have also begun to apply it to wealth data from the ECB, and so far it seems to work very well for certain European countries as well,” he said [..] It turns out that when agents do well in early transactions, the odds are so increasingly stacked in their favor that—without redistribution from taxes or other wealth-transfer mechanisms—they will get more money, and keep accruing wealth inevitably. “Without redistribution of wealth, our market economy would not be stable,” said Boghosian. “One person would run away with all the wealth, and it would keep going until it came to complete oligarchy.” And even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result,” Boghosian said.

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Well that’s clear enough.

New Zealand’s New Prime Minister Brands Capitalism A ‘Blatant Failure’ (Ind.)

New Zealand’s new prime minister called capitalism a “blatant failure”, before citing levels of homelessness and low wages as evidence that “the market has failed” her country’s poor. Jacinda Ardern, who is to become the nation’s youngest leader since 1856, said measures used to gauge economic success “have to change” to take into account “people’s ability to actually have a meaningful life”. The 37-year-old will take office next month after the populist New Zealand First party agreed to form a centre-left coalition with her Labour Party. They will be supported by the liberal Greens. New Zealanders had been waiting since 23 September to find out who would govern their country after national elections ended without a clear winner. Ms Ardern has pledged her government will increase the minimum wage, write child poverty reduction targets into law, and build thousands of affordable homes.

In her first full interview since becoming prime minister-elect, she told current affairs programme The Nation that capitalism had “failed our people”. “If you have hundreds of thousands of children living in homes without enough to survive, that’s a blatant failure,” she said. “What else could you describe it as?” Incumbent prime minister Bill English, whose National Party has held power for nine years, has said his party grew the economy and produced increasing budget surpluses which benefited the nation. But Ms Ardern said: “When you have a market economy, it all comes down to whether or not you acknowledge where the market has failed and where intervention is required. Has it failed our people in recent times? Yes. “How can you claim you’ve been successful when you have growth roughly three per cent, but you’ve got the worst homelessness in the developed world?”

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He won by a landslide. An even more far-right and anti-EU party also won. More problems in the heart of the Union.

Euroskeptic Billionaire on Route to Czech Election Victory (BBG)

A Czech billionaire looks set to win parliamentary elections Saturday, overcoming traditional political parties on a pledge to run the state like a business, fight Muslim immigration and oppose deeper integration with the European Union. Andrej Babis, who has drawn comparisons to Donald Trump and Silvio Berlusconi, had a wide lead in opinion polls before two days of voting started Friday. With a chemical, food and media empire employing 34,000 in 18 countries, the Slovak-born businessman – and second-richest Czech – increased his popularity while serving as finance minister before he was fired by his coalition partner, Prime Minister Bohuslav Sobotka. Taking credit for the EU’s lowest unemployment, one of its fastest rates of economic growth, and a budget surplus, Babis has portrayed himself as a competent manager struggling against traditional parties.

That’s lifted his ANO party’s support, while his attacks against Muslim immigration and criticism of the EU have helped fuel the rise of anti-establishment political forces similar to Germany’s AfD and Austria’s Freedom Party. It’s also raised concern that a Babis victory may add another source of tension within the EU, which has clashed with Poland and Hungary over democratic values. “Babis has managed to take advantage of the crisis of traditional parties and offer something new,” Josef Mlejnek, a political scientist at Charles University in Prague, said by phone. “He has depicted his rivals as an incompetent, corrupt bunch and he is presenting himself as the only one who can get things in order.” [..] Sobotka dismissed Babis in May in a conflict over his past business dealings.

The premier’s Social Democrats later teamed up with the opposition to strip the billionaire of his parliamentary immunity from prosecution to make way for an investigation into fraud allegations. Police have since charged Babis, 63, in the case of a 50 million-koruna ($2.3 million) in EU subsidies transferred to his Stork Nest recreation complex. Babis denies wrongdoing and says the allegations are an attempt to sideline him from politics. Despite the scandal, he’s held on to support siphoned from both the Social Democrats and other traditional parties. He has boasted of streamlining government operations and, via a law requiring retailers to link their cash registers to the Finance Ministry, boosting budget revenue and cracking down on tax evasion. At the same time, he’s railed against EU “meddling,” a stance that resonates with voters in the bloc’s most euroskeptic member.

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What about the time when almost all Americans were immigrants?

US Immigrant Population Climbed To Record 43.7 Million In 2016 (F.)

According to new data released by the U.S. Census Bureau, the nation’s immigrant population, both legal and illegal, climbed to a record 43.7 million in July 2016. That’s an increase of half a million since 2015 and 12.6 million since the turn of the century. Immigrants now comprise 13.5% of the U.S. population, roughly one out of eight residents, the highest share in 106 years. The all-time highest immigrant share of the U.S. population was 14.7%, recorded in 1910 when the country had 13.5 million immigrants. According to the Census Bureau, that will be eclipsed by 2030 when the immigrant share reaches 15.8% or 56.9 million people. Up to 2050, the influx is expected to continue its upward trajectory, with the number of immigrants projected to reach 72.3 million and account for an 18.2% share of the population.

Currently, Mexico has the highest share of America’s foreign-born population by far with over 11.5 million people. Despite also being the top sending nation with a grand total of 1.1 million new arrivals between 2010 and 2016, the Mexican-born population has not grown in the past six years due to return migration and natural mortality. During the same time frame, the sending countries with the highest increases were Saudi Arabia (122%), Nepal (86%) and Afghanistan (74%). Out of all states, Texas recorded the greatest numeric increase in immigrants (587,889) between 2010 and 2016, ahead of Florida (578,468) and California (527,234).

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There won’t be much left.

After 54 Years America Deserves To Know Everything (PP)

President of the United States Dwight Eisenhower, a five-star general in the Army before his presidency, upon departing the White House in January 1961, issued a bone-chilling warning about the dangers of the Deep State to President John F. Kennedy before Kennedy took office. Eisenhower warned Kennedy that the “military industrial complex created an imperative for development… It was compelled to create a permanent armaments industry.” Kennedy stood up against the military-industrial complex. Did that lead to Kennedy’s assassination? Did Kennedy’s assassination trigger the Deep State’s birth of a baby vampire squid with tentacles spread throughout many industries? We did have the Warren Commission, but did that commission provide any reasonable explanation as to how President Kennedy was assassinated?

Given what we know today, it’s likely that the truth has been withheld from the American public and the world. For example, doubt remains widespread about the Warren Commission’s conclusions since several trajectory analyses show that one bullet could not have caused all the damage that occurred. Are the CIA and the Deep State colluding to keep this information secret? In one set of recently declassified CIA documents, the American people learned that JFK’s assassination led to the CIA creating the highly derogatory term “conspiracy theory” and “conspiracy theorists”. This was the beginning of Deep State psychological operations used to malign, slander, discredit, and undermine the credibility of anyone who dared to voice dissent towards the government. The CIA called this branch the Clandestine Services unit and its aim was to ruin anyone who wanted to take on the establishment and the military industrial complex.

The military-industrial complex has garnered far too much power in Washington since World War II, and it now presents the biggest threat to democracy and liberty in America. And it has only gotten bigger since George W. Bush entered office and declared “a war on terror”. Just take a look at the stock prices of military-industrial complex participants — they have skyrocketed over 1000% (e.g. Northrop Grumman). The presence of a Deep State became very clear and even more pronounced during the 2016 presidential election cycle, which unearthed Washington’s culture of pay-to-play and cover-ups. This led to the December 2016 proclamation to America by President-elect Trump that he was going to “drain the swamp.” In response, Senate minority leader Chuck Schumer went on The Rachel Maddow Show in January 2017 and delivered the following warning to President Trump: “Let me tell you: You take on the intelligence community—they have six ways from Sunday at getting back at you,”

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“The revolution to come out of this frozen swamp of irresponsibility will be the messiest and most incoherent in world history.”

Into the Cold and Dark (Jim Kunstler)

Many, including yours truly, have expected the distortions and perversions on the money side of life to express themselves in money itself: the dollar. So far, it has only wobbled down about ten percent. This is due perhaps to the calibrated disinformation known as “forward guidance” issued by this country’s central bank, the Federal Reserve, which has been threatening — pretty idly so far — to raise interest rates and shrink down its vault of hoarded securities — a lot of it janky paper left over from the misadventures of 2007-2009. I guess the lesson is that when you have a pervasively false and corrupt financial system, it is always subject to a little additional accounting fraud — until it’s not.

And the next thing you know, you’re sitting in the rubble of what used to be your civilization. The ever more immiserated schnooks who make up the former middle-class know that their lives are crumbling, and may feel that they’re subject to the utterly overwhelming forces of a cruel destiny generated by a leviathan state that hates and despises them. And of course that is exactly why they turned to the Golden Golem of Greatness for salvation. Alas, Mr. Trump has not constructed a coherent strategy for defeating the colossus of fakery that drives the nation ever-deeper toward the cold and dark. He has a talent for distraction and disruption, though, and so far that gave cover to a whole lot of other people in power who have been able to stand around with their hands in their pockets doing nothing about the sinking state of the nation.

Now, the vaudeville act is coming to a spectacular conclusion as the trappings of Halloween go back in the closet and the pulsating, LED-studded Santas go up on the rooftops. Every ceremony of American life seems drained of meaning now, including the machinations of government over the budget and taxes. The revolution to come out of this frozen swamp of irresponsibility will be the messiest and most incoherent in world history. Nobody will have any idea what is going on outside the geo-storm of failure. About the only thing one can say for sure is that the American life which emerges from this maelstrom will not look a whole lot like what we’re living in today. I remain serenely convinced that when it finally passes, the air will be fresh again and the sun will shine, and a lot more people will know what is real and what is not.

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Pay attention.

Google’s Plan To Revolutionise Cities Is A Takeover In All But Name (O.)

Last June Volume, a leading magazine on architecture and design, published an article on the GoogleUrbanism project. Conceived at a renowned design institute in Moscow, the project charts a plausible urban future based on cities acting as important sites for “data extractivism” – the conversion of data harvested from individuals into artificial intelligence technologies, allowing companies such as Alphabet, Google’s parent company, to act as providers of sophisticated and comprehensive services. The cities themselves, the project insisted, would get a share of revenue from the data. Cities surely wouldn’t mind but what about Alphabet? The company does take cities seriously. Its executives have floated the idea of taking some struggling city – Detroit? – and reinventing it around Alphabet services, with no annoying regulations blocking this march of progress.

All of this might have looked counter-intuitive several decades ago, but today, when institutions such as the World Bank preach the virtues of privately run cities and bigwigs in Silicon Valley aspire to build sea-based micronations liberated from conventional bureaucracy, it does not seem so far-fetched. Alphabet already operates many urban services: city maps, real-time traffic information, free wifi (in New York), self-driving cars. In 2015 it launched a dedicated city unit, Sidewalk Labs, run by Daniel Doctoroff, former deputy mayor of New York and a veteran of Wall Street. Doctoroff’s background hints at what the actual Google Urbanism – as opposed to its theoretical formulations – portends: using Alphabet’s data prowess to build profitable alliances with other powerful forces behind contemporary cities, from property developers to institutional investors.

On this view, Google Urbanism is anything but revolutionary. Yes, it thrives on data and sensors, but they only play a secondary role in determining what gets built, why, and at what cost. One might as well call it Blackstone Urbanism – in homage to one of the largest financial players in the property market. [..] Alphabet’s weapons are impressive. Cheap, modular buildings to be assembled quickly; sensors monitoring air quality and building conditions; adaptive traffic lights prioritising pedestrians and cyclists; parking systems directing cars to available slots. Not to mention delivery robots, advanced energy grids, automated waste sorting, and, of course, ubiquitous self-driving cars.

Alphabet essentially wants to be the default platform for other municipal services. Cities, it says, have always been platforms; now they are simply going digital. “The world’s great cities are all hubs of growth and innovation because they leveraged platforms put in place by visionary leaders,” states the proposal. “Rome had aqueducts, London the Underground, Manhattan the street grid.” Toronto, led by its own visionary leaders, will have Alphabet. Amid all this platformaphoria, one could easily forget that the street grid is not typically the property of a private entity, capable of excluding some and indulging others. Would we want Trump Inc to own it? Probably not. So why hurry to give its digital equivalent to Alphabet?

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Sort of the opposite of what Google wants.

Put Drivers In Control (NEF)

Last weekend, Jeremy Corbyn raised an intriguing possibility. “Imagine an Uber,” he said, “run co-operatively by their drivers, collectively controlling their futures, agreeing their own pay and conditions, with profits shared or re-invested.” Many have since dismissed this idea as wishful thinking. First, there is Uber’s undoubted popularity among its users – hundreds of thousands of people signed a petition protesting against Transport for London’s decision not to renew Uber’s licence. Then there is its market dominance, which only ever seems to intensify. How can any rival hope to compete in the increasingly monopolistic world of private hire? Finally there is the factor which underpins both its popularity and its dominance. And that’s its price point. When Uber came on the scene, it undercut other taxi services by a huge margin.

And it appeared to do so by spending vast amounts of venture capital in a bid to achieve global dominance of the market. Any co-operative, driver-owned alternative to Uber has to be competitive on price or it will never break through Uber’s grip on the market. How can they do that without spending vast amounts of capital? Where would that money come from? None of these arguments holds water. At the New Economics Foundation we recently called for ‘Khan’s Cars’, a mutually owned taxi platform for London which would give drivers real control over their working lives while still providing people with the cheap and convenient transport they need. We believe a driver-owned alternative could genuinely compete with Uber on price and convenience, especially if supported by the Mayor of London.

In fact, Uber isn’t as cheap as it seems. The company’s use of surge pricing, which inflates prices during periods of high demand, allows it to present cheaper prices at other times. Partly as a result of this, Uber makes a profit in the UK – suggesting the basic pricing model is financially viable without vast capital resources. So the gap to close isn’t as wide as it may look at first glance. Furthermore, Uber takes between 20-25% of the fares it charges. Khan’s Cars could reduce that %age since it will not have shareholders looking to extract profit.

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Delusionary.

“Success, Greeks No Longer Seek Food In Garbage Bins” (KTG)

“There are no people seeking food in the garbage bins as in 2014,” Culture Minister Elena Kountoura said adding that citizens congratulate the government for its social policies. People are congratulating the government because “in 2014 there were people struggling to have a meal on their table. It is a success that people do not eat from the garbage anymore, “Kountoura from junior coalition partner Independent Greeks claimed speaking to private Skai TV on Saturday morning. “Despite the difficulties, people manage it.” “At least, Greeks are now living in dignity,” she said further adding “we brought growth.” She claimed further that “no minister cuts pensions, no minister introduces taxes.” The Culture Minister said further that “we have ten difficult months ahead” until the Greek program ends in August 2018. She said that also this year was an unprecedented success for the tourism industry saying that “90% of the capacity” was fully booked.

PS no taxes, no pension cuts? I propose, Minister Kountoura to take a fresh look into the 2015 bailout agreement and the additional agreement the coalition government signed last May in order to enable the conclusion of the second review. As for the meals from garbage bins… well… I wonder why neighbors still leave bags with food on the street, bags that quickly disappear. Probably they didn’t hear of the growth and the government success story.

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“Their daughter had just died and they were left there. They had nothing. No visit from a psychiatrist. The mother was silent. They were in shock and the children were saying ‘my sister died – she died just here.’”

5 Year Old Syrian Girl Dies In ‘Concentration Camp’ Funded By UK Taxpayers (RT)

British aid money is propping up a European migrant camp routinely likened to a prison. In just one appalling example, a Syrian girl who survived war, smugglers and the Aegean Sea, died last week in a cold, damp tent in Moria, on the Greek island of Lesbos. She was five. The girl, her parents and her five siblings had been offered a freezing tent in the squalid camp when they arrived in search of safety a week earlier. Her body was discovered last Sunday by her father and pregnant mother, who just hours before were denied extra blankets to keep their daughter warm and given just paracetamol to treat her medical issues. “I crawled inside and the blankets on the floor were wet, it was so cold and dirty and damp,” Daliah, a volunteer and former protection team employee who visited the family, told RT UK.

Their daughter had just died and they were left there. They had nothing. No visit from a psychiatrist. The mother was silent. They were in shock and the children were saying ‘my sister died – she died just here.’ “There was a volunteer there in tears. He told me they just pulled her out like a dog and took her away. There was no dignity.” Following her “unexplained” death, her tiny body was buried without an Islamic funeral and without her mother being present. “She became nothing but a number – she didn’t even get her last respect,” Daliah said. The child, whose parents did not wish to be identified, is yet another victim of the migration crisis Europe has mishandled and misjudged. With grotesque irony, European Union ministers who advocate saving refugees from war zones enjoy worldwide praise for funding camps like these.


The grave of a five-year-old girl who died on Lesbos © Zoie O’Brien / RT

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Jan 152017
 
 January 15, 2017  Posted by at 11:28 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle January 15 2017


John Collier Street Corner, Monday after Pearl Harbor, San Francisco 1941

Trump Team Denies Report Of Meeting With Putin In Iceland (Fox)
Trump is Hand Grenade Thrown by American Working Class Against the System (Sp.)
Americans Overwhelmingly Support Bernie Sanders’ Economic Policies (Salon)
Tulsi Gabbard Has a Bill to Stop the US Arming ISIS (RI)
We Are Getting Worried About Paul Krugman (ZH)
RealVision’s 15 “Killer Charts” For Q1 2017 (ZH)
Aid In Reverse: How Poor Countries Develop Rich Countries (G.)
More Than 100 Refugees Drown As Boat Sinks In Mediterranean (Ind.)

 

 

Something will happen though. And it should.

Trump Team Denies Report Of Meeting With Putin In Iceland (Fox)

President-elect Donald Trump’s incoming press secretary Sean Spicer denied a report from the Sunday Times on Saturday that said Trump was seeking to have a summit with Russian President Vladimir Putin in Iceland. The Sunday Times reported that Trump aides told British officials that Trump plans to meet with Putin on his first foreign trip, possibly in Reykjavik. The paper, citing unidentified sources, reported that Trump plans to begin working out a deal to limit nuclear weapons and that Moscow agreed to the meeting. According to the newspaper, Trump sought to emulate former President Ronald Reagan’s meeting with the Soviet Union’s Mikhail Gorbachev in 1986 that took place in the Icelandic capital. The two met in an effort to work on a major nuclear disbarment treaty at the height of the Cold War. Spicer lashed out at the report on Twitter, calling it “100% false.”

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When left became right.

Trump is Hand Grenade Thrown by American Working Class Against the System (Sp.)

The last year has taught us, with Brexit, the US elections, growing anti-EU sentiment on the continent of Europe, that ignoring national interests, which are more and more often expressed in terms of national culture and identity, is not possible anymore. Will this translate through into the reconstruction of economic protectionism? Professor Steve Keen, from the University of Kingston, an economist and an author answers this question. Are identity and culture the new important subjects in politics? Professor Keen gives an explanatory answer. To him, a progressive form of identity and gender politics and socialist politics have been bedfellows for the past 40 years.

One of the clearest examples is in France, he says, where you have Hollande; a socialist leader imposing austerity whilst talking about progressive attitudes to identity politics. Progressive identity politics has been tainted with the brush of austerity politics imposed by the European Union. The socialists have been sunk by it, with a resurgent Marine Le Pen benefiting from the support of middle aged white farmers, and white workers in America supporting Trump. It was a massive mistake, Professor Keen says, for the ‘left’ to align itself with neoliberal economics and failed economic policies which are now falling apart. The centre left, Professor Keen continues, which has been the mainstream socialist thought for some time are basically saying that we have to get into power, and then make capitalism work better.

This is a complete travesty, because success was only brought about by leveraging unsuccessful economies. They ended up deregulating the financial sector, and the next thing they know, economies come crashing down. There is identification of failed social policy with the failed neoliberal policy. The main sufferers have been what is used to be called the industrial workers, they are now saying that if you can’t protect us, we are going across to the people who might be able to. They might be ugly but they might allow us to throw a political hand grenade into the system to wake up those Americans who have been neglected ideologically by the left and also because they have actually lost their jobs to benefit people in China, as Trump has been arguing.

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Title continues: So how’d we end up here? Interesting question. What happened? Hillary happened.

Americans Overwhelmingly Support Bernie Sanders’ Economic Policies (Salon)

During a CNN town hall held by Sen. Bernie Sanders last Monday, the Vermont senator and progressive icon tried to drive home a point that he has frequently made in the past: There is widespread support for most of the economic policies that he ran on, even if they were often portrayed as radical and divisive by the media. “The overwhelming majority of the American people – including many people who voted for Mr. Trump – support the ideas that we’re talking about,” insisted Sanders. “On many economic issues you would be surprised at how many Americans hold the same views. Very few people believe what the Republican leadership believes now: tax breaks for billionaires and cutting Social Security, Medicare and Medicaid.”

Public polling tends to support his claim. A Gallup survey from last May, for example, revealed that a majority of Americans (58%) support the idea of replacing the Affordable Care Act with a federally funded health care system (including four in 10 Republicans!), while only 22% of Americans say they want Obamacare repealed and don’t want to replace it with a single-payer system. A Kaiser Family Foundation poll from last year had similar results: Almost two-thirds of Americans (64%) had a positive reaction to “Medicare-for-all,” while only a small minority (13%) supported repealing the ACA and replacing it with a Republican alternative. These are surprising numbers when you consider how the Sanders campaign’s “Medicare-for-all” plan was written off by critics as being too extreme.

On other issues, a similar story presents itself. Public Policy Polling (PPP) has found that the vast majority (88%) of voters in Florida, Nevada, Ohio, Pennsylvania and Wisconsin – four crucial swing states, three of which went to Trump this fall – oppose cutting Social Security benefits, while a majority (68%) oppose privatizing Social Security. Similarly, 67% of Americans support requiring high-income earners to pay the payroll tax for all of their income (the cap is currently $118,500), according to a Gallup poll. America’s two other major social programs, Medicare and Medicaid, are also widely supported by Americans, and the vast majority oppose any spending cuts to either. In fact, more Americans support cutting the national defense budget than Medicare or Medicaid. It goes on and on. A majority of Americans, 61%, believe that upper-income earners pay too little in taxes.

A majority of 64% believe that corporations don’t pay their fair share in taxes. Significant majorities believe that wealth distribution is unfair in America, support raising the minimum wage (though perhaps not as high as Sanders would like), and say they are worried about climate change. So a consistent majority of Americans would seem to agree almost across the board with a self-proclaimed democratic socialist and object to the reactionary agenda of congressional Republicans. How, then, did we end up with a Republican-controlled Congress that is dead set on repealing the ACA without a viable replacement (let alone a single-payer type of system supported by the majority); cutting and possibly privatizing Medicare, Social Security and Medicaid; slashing taxes for the wealthiest Americans; and ignoring climate change?

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Go Tulsi.

Tulsi Gabbard Has a Bill to Stop the US Arming ISIS (RI)

FOX’s Tucker Carlson scored another great interview when he spoke to Hawaii’s congresswoman Tulsi Gabbard. Rep. Gabbard talked about her meeting with President-elect Trump some weeks ago to discuss the danger of further neocon escalation of the war in Syria. She has also recently introduced a bill in congress aimed at preventing the US from funding terrorist groups like ISIS in the future. The bill is brilliantly named the “Stop Funding Terrorists Act.” Seems guaranteed to pass – who could possibly justify voting against it to their constituents? Having this on the books would be a useful tool to stop any further terror-funding operations. Something to watch.

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Too good to skip.

We Are Getting Worried About Paul Krugman (ZH)

When a delicate snowflake is suddenly faced with a perceived reality so devastating as to be an existential crisis, the mind's reaction to dealing with this cognitive dissonance can be disabling for some. Certainly for The New York Times' flip-flopping, hate-mongering, fact-twisting, Keynesian poster-boy Paul Krugman it appears coping with "no" is not going well and his tirade last night in Twitter has us gravely concerned for his mental stability, which is ironic given how he began yesterday…

But that was followed quickly by a six-tweet-rant nothing short of what we would expect from a dejected five-year-old who just got denied another scoop of ice cream

Krugman once again blames the ignorance of the deplorable masses (who just don't get what a "fraudster" Trump is) in shunning him and his "know-it-alls", but he has been heading down this hill of manic-depressive lashing out for weeks now having recently suggested Trump will unleash a 9/11-style attack to legitimize his presidency.

Is he hoping to maintain a groundswell of "well, if he is not hitler… he must be worse" thoughts among those so easily led? Still, coming from a man who has prognosticated alien invasions as a global economic growth engine, we are not sure if he is mental situation is improving or deteriorating. We wish him well.

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I picked 3.

RealVision’s 15 “Killer Charts” For Q1 2017 (ZH)

Ranging from the most expensive stock market ever to the dis-similarity in the economic situations facing Donald Trump and Ronald Reagan; and from the excess liquidity driving the price oil to the extraordinarily dangerous growth of credit (debt) relative to GDP, Raoul Pal’s Real Vision has expanded its exceptional services into investment research by publishing the “killer charts” that every market participant should comprehend for the first quarter of 2017…

 

 

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And there are people surprised to see this?! How then do they think we got so rich? Simple: we rape and pillage.

Aid In Reverse: How Poor Countries Develop Rich Countries (G.)

We have long been told a compelling story about the relationship between rich countries and poor countries. The story holds that the rich nations of the OECD give generously of their wealth to the poorer nations of the global south, to help them eradicate poverty and push them up the development ladder. Yes, during colonialism western powers may have enriched themselves by extracting resources and slave labour from their colonies – but that’s all in the past. These days, they give more than $125bn (£102bn) in aid each year – solid evidence of their benevolent goodwill. This story is so widely propagated by the aid industry and the governments of the rich world that we have come to take it for granted. But it may not be as simple as it appears.

The US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics recently published some fascinating data. They tallied up all of the financial resources that get transferred between rich countries and poor countries each year: not just aid, foreign investment and trade flows (as previous studies have done) but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight (more of this later). As far as I am aware, it is the most comprehensive assessment of resource transfers ever undertaken. What they discovered is that the flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction.

In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn – that’s how much money has been drained out of the global south over the past few decades. To get a sense for the scale of this, $16.3tn is roughly the GDP of the United States.

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Checked your account at the karma bank lately?

More Than 100 Refugees Drown As Boat Sinks In Mediterranean (Ind.)

More than 100 refugees have drowned after a boat sank in rough conditions in the Mediterranean Sea as the crisis shows no sign of slowing. The Italian Navy was searching for survivors from the vessel, which was believed to be carrying up to 110 people. Only four survivors were pulled from the water, with at least eight bodies found so far. Flavio Di Giacomo, from the International Organisation for Migration, told The Independent around 106 people were thought to have died and described the conditions at sea as “extremely bad”. The boat went down in waters between Libya and Italy, which has become the deadliest sea crossing in the world since the start of the refugee crisis.It claimed the vast majority of more than 5,000 lives lost in treacherous boat journeys to Europe in 2016, the deadliest year on record, with people drowning or being crushed or suffocated in overcrowded smugglers’ boats.

Saturday’s disaster was the worst single incident so far this year, which has already seen at least 122 deaths at sea. Rescue workers warn that the crisis is showing no sign of slowing in the Central Mediterranean, which has become the main route since the EU-Turkey deal was implemented in March to reduce comparatively shorter and safer crossings over the Aegean Sea. At least 550 refugees were rescued on Friday alone off the coast of Libya, where continuing conflict and lawlessness since the British-backed defeat of Muammar Gaddafi has allowed the smuggling and exploitation of migrants to thrive. Two people were found dead at the bottom of one of the four boats saved and the bodies of four other migrants were found off the coast of Spain. Several asylum seekers have also died in the extreme weather conditions gripping much of Europe in recent weeks.

More than 5,000 refugees were drowned, suffocated or crushed while attempting to cross the Mediterranean and Aegean seas in 2016, making it the deadliest year on record. Many deaths are thought to go unrecorded, with bodies either disappearing or washing up on the shores of Libya, where authorities do not routinely release casualty figures. Some boats are sighted by Italian authorities but disappear before they can be reached by rescue ships. The Unravelling the Mediterranean Migration Crisis (Medmig) project partly blamed Britain and EU nations for rocketing death rates, concluding that the refusal to open up legal routes for those seeking safety in Europe has increased demand for people smuggling on ever more dangerous routes.

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May 172016
 
 May 17, 2016  Posted by at 9:22 am Finance Tagged with: , , , , , , ,  


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 062015
 
 July 6, 2015  Posted by at 12:23 pm Finance Tagged with: , , , , , , ,  


DPC ‘On the beach, Palm Beach’ 1905

Minister No More! (Yanis Varoufakis)
Our NO Is A Majestic, Big YES To A Democratic, Rational Europe! (Varoufakis)
Yanis Varoufakis: Why Bold, Brash Greek Finance Minister Had To Go (Guardian)
Discussing Syriza’s Stunning Victory On The BBC (Steve Keen)
Defiant Greeks Reject EU Demands As Syriza Readies IOU Currency (AEP)
Yanis Varoufakis: Greece’s ‘Erratic Marxist’ (AFP)
What Are the Geostrategic Implications of a Grexit? (Foreign Policy)
Greece Votes No — Now What? (Peter Spiegel)
Why The Yes Campaign Failed In Greece (Wolfgang Münchau)
UN Debt Expert Says Greece Can’t Take More Austerity (Reuters)
Europe Wins (Paul Krugman)
Ending Greece’s Bleeding (Paul Krugman)
Thomas Piketty: “Germany Has Never Repaid.” (Medium)
We May Soon Be Able To See Polar Bears Only In Picture Books (MD)

Sorry to see him go, but he may be better able to lead things from the background.

Minister No More! (Yanis Varoufakis)

The referendum of 5th July will stay in history as a unique moment when a small European nation rose up against debt-bondage. Like all struggles for democratic rights, so too this historic rejection of the Eurogroup’s 25th June ultimatum comes with a large price tag attached. It is, therefore, essential that the great capital bestowed upon our government by the splendid NO vote be invested immediately into a YES to a proper resolution – to an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms.

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today. I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum. And I shall wear the creditors’ loathing with pride.

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government. The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

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There is no democratic rational Europe.

Our NO Is A Majestic, Big YES To A Democratic, Rational Europe! (Varoufakis)

On the 25th of January, dignity was restored to the people of Greece. In the five months that intervened since then, we became the first government that dared raise its voice, speaking on behalf of the people, saying NO to the damaging irrationality of our extend-and-pretend ‘Bailout Program’.

We
• spread the word that the Greek ‘bailouts’ were exercises whose purpose was intentionally to transfer private losses onto the shoulders of the weakest Greeks, before being transferred to other European taxpayers
• articulated, for the first time in the Eurogroup, an economic argument to which there was no credible response
• put forward moderate, technically feasible proposals that would remove the need for further ‘bailouts’
• confined the troika to its Brussels’ lair
• internationalised Greece’s humanitarian crisis and its roots in intentionally recessionary policies
• spread hope beyond Greece’s borders that democracy can breathe within a monetary union hitherto dominated by fear.

Ending interminable, self-defeating, austerity and restructuring Greece’s public debt were our two targets. But these two were also our creditors’ targets. From the moment our election seemed likely, last December, the powers-that-be started a bank run and planned, eventually, to shut Greece’s banks down. Their purpose?
• To humiliate our government by forcing us to succumb to stringent austerity, and
• To drag us into an agreement that offers no firm commitment to a sensible, well-defined debt restructure.

The ultimatum of 25th June was the means by which these aims would be achieved. The people of Greece today returned this ultimatum to its senders; despite the fear mongering that the domestic oligarchic media transmitted night and day into their homes. Today’s referendum delivered a resounding call for a mutually beneficial agreement between Greece and our European partners. We shall respond to the Greek voters’ call with a positive approach to:
• The IMF, which only recently released a helpful report confirming that Greek public debt was unsustainable
• The ECB, the Governing Council of which, over the past week, refused to countenance some of the more aggressive voices within
• The European Commission, whose leadership kept throwing bridges over the chasm separating Greece from some of our partners.

Our NO is a majestic, big YES to a democratic Europe. It is a NO to the dystopic vision of a Eurozone that functions like an iron cage for its peoples. It is a loud YES to the vision of a Eurozone offering the prospect of social justice with shared prosperity for all Europeans.

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Curious piece by Helena Smith

Yanis Varoufakis: Why Bold, Brash Greek Finance Minister Had To Go (Guardian)

When historians look back at the great Greek debt crisis, the figure of Yanis Varoufakis will feature large. Bold and brash, he did more to internationalise the folly of austerity politics than any other member of the radical left government of Athens. Alexis Tsipras, the young prime minister, was much indebted to him, and Varoufakis’s resignation was quickly followed by effusive praise. “The prime minister feels the need to thank him for his ceaseless effort to promote the positions of the government and the interests of the Greek people under very difficult circumstances,” government spokesman Gavriel Sakellaridis announced.

Varoufakis may have been forced to leave front-line politics, but he does so hugely vindicated by the historic no vote delivered by Greeks on Sunday. There are not a few in Athens today who believe he is also a victim of his own success. The resounding rejection of further belt-tightening in a referendum that pitted Greece against all its eurozone partners was a high-stakes gamble associated squarely with the 54-year-old’s penchant for game theory and buccaneering style. The morning after, he had to go. In announcing his resignation, the controversial finance minister recognised that of all the impediments to a prospective deal (and there are still many) he would be the biggest.

Even by the standards of a crisis that long ago dispensed with diplomatic niceties, the combative politician had pushed the boundaries of acceptable fighting talk too far. On the eve of the vote, he accused Europe of indulging in terrorism, saying it was instilling fear in people in its bid to get Greece to acquiesce to “neoliberal dogmas.” In April, when eurozone counterparts expressed exasperation at his hectoring and lecturing style after an especially explosive Eurogroup, Varoufakis had felt fit to announce: “They are unanimous in their hate for me – and I welcome their hatred.”

By June, when it became apparent that Varoufakis would take things to the brink, senior Greek government officials in Athens were also finding it hard to contain their consternation. Many were enraged by tactics they saw as deliberately confrontational and a danger to the country’s relationship with Europe. Varoufakis’s showy lifestyle and shameless narcissism also jarred. But his apparent endorsement of a parallel currency and IOUs appears to have been the straw that broke the camel’s back. His ability to represent Greece abroad was over. Ever the maverick, Varoufakis is unlikely to vanish overnight. Although never a member of the ruling Syriza party, he remains an MP and, very possibly, will continue to influence Tsipras behind the scenes. There are few who doubt he will also be working on an unexpurgated version of the euro crisis, Varoufakis style.

He has already said he is looking forward to life on the backbenches. But will his sacrifice be enough to placate creditors? Varoufakis leaves an economy in meltdown, banks closed, capital controls imposed and shortages growing by the hour. If his removal is not enough, the mess that has also been the price of his brinkmanship may well end up being his lasting legacy – a legacy that historians will not forget.

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On the nose.

Discussing Syriza’s Stunning Victory On The BBC (Steve Keen)

After yesterday’s remarkable victory in the Referendum, I was interviewed on the BBC News Channel. Someone has posted a recording from the BBC News Channel stream on YouTube.

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The parallel currency issue is a big one.

Defiant Greeks Reject EU Demands As Syriza Readies IOU Currency (AEP)

Greek voters have rejected the austerity demands of Europe’s creditor powers by a stunning margin, sweeping aside warnings that this could lead to the collapse of the banking system and a return to the drachma. Early returns in the historic referendum showed the No side -Oxi in Greek =- running at 61pc versus 39pc for the Yes side as the Greek people turned out en masse to vent their anger over six years of economic depression and national humiliation. A volcanic revolt appeared to have swept through Greek islands. The shock result effectively calls the bluff of eurozone leaders and the heads of the European Commission and Parliament, forcing them either to back down or carry out drastic threats to eject Greece from monetary union.

The European Central Bank faces an immediate decision over whether to continue freezing emergency liquidity assistance (ELA) for Greek banks at €89bn, a stance that would amount to liquidity suffocation. “If they do that, the situation would be very serious. That would be pretty close to trying to bring down the government,” said Euclid Tsakalotos, the country’s chief debt negotiator. The Bank of Greece (BoG) said on Sunday evening that it will make a formal request to the ECB for fresh support. The EU’s leadership was in utter confusion as it became clear during the day that support was swinging back to the “No” camp, despite blanket coverage from the private TV stations warning that a “No” meant Armageddon. “The Greek people have proven that they cannot be blackmailed, terrorized, and threatened,” said Panos Kammenos, the defence minister and head of the coalition’s ANEL party.

French president Francois Hollande said he would bend over backwards to keep Greece in the euro despite voting no. He is to meet German Chancellor Angela Merkel in Paris on Monday to draw up a joint response to what has turned into the biggest EU fiasco since the rejection of the European constitution by France and Holland in 2005. Martin Schulz, head of the European Parliament, was still insisting on Sunday that a “No” vote must mean expulsion from the euro, but his view is becoming untenable. Jean-Claude Juncker, the Commission’s chief, is equally trapped by his own rhetoric after warning last week that a No vote would be a rejection of Europe itself, leading to calamitous consequences. Top Syriza officials say they are considering drastic steps to boost liquidity and shore up the banking system, should the ECB refuse to give the country enough breathing room for a fresh talks.

“If necessary, we will issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago,” said Yanis Varoufakis, the finance minister. California issued temporary coupons to pay bills to contractors when liquidity seized up after the Lehman crisis in 2008. Mr Varoufakis insists that this is not be a prelude to Grexit but a legal action within the inviolable sanctity of monetary union. Mr Varoufakis and ministers will hold an emergency meeting tonight with the private banks and the governor of the Greek central bank, Yannis Stournaras, to decide what to do before the cash reserves of the four big lenders dry up tomorrow. Louka Katseli, head of the Hellenic bank Association, said ATM machines will run out of money within hours of the vote. One official say that Eurobank was “flat out of money” late on Sunday, even though Greek depositors have been limited to €60 a day since capital controls were imposed a week ago.

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“Varoufakis’s father Giorgos told the Greek daily Ethnos that his son’s critics “want to run him down because he is competent.”

Yanis Varoufakis: Greece’s ‘Erratic Marxist’ (AFP)

Yanis Varoufakis, Greece’s finance minister who resigned on Monday despite the government having secured a resounding victory in a weekend referendum, rose to fame and infamy this year for his urban-cool look, his abrasive style, and acerbic attacks on austerity. In a shock announcement just hours after Sunday’s referendum results on bailout terms were announced, Varoufakis said he was quitting to help Prime Minister Alexis Tsipras in ensuing negotiations with creditors. “Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today,” Varoufakis said on his blog.

During the past five months of negotiations between Athens and its international creditors, the self-described “erratic Marxist” seemed more at ease chatting with unemployed anarchists than with fellow European finance ministers, who often groaned about his blunt negotiating tactics. European Economic Affairs chief Pierre Moscovici commented that Varoufakis “is a smart person, not always easy, but smart.” His straight-talking style produced notable moments including his characterisation of the austerity imposed on Greece as “fiscal waterboarding”. After negotiations broke down between Greece and its creditors, Varoufakis slammed Europese governance. “This is not the way to run a monetary union. This is a travesty. It’s a comedy of errors for five years now, Europe has been extending and pretending,” Varoufakis said in a BBC interview.

After becoming finance minister in January, there were some growing pains as he adapted to the burning glare of the global media spotlight. He allowed himself to be pictured in Paris Match magazine at a piano and dining in style with his wife on the roof terrace of his “love nest at the foot of the Acropolis”, while telling the magazine how he abhorred the “star system”. Though the maverick minister has always taken a stance protecting ordinary Greeks, his background was anything but common. He is the son of Giorgos Varoufakis, who at 90 still heads one of Greeces leading steel producers, Halyvourgiki. He also attended the Moraitis School, which has alumni including prominent Greek leaders and artists.

His early career was spent at the English universities of Essex, East Anglia and at Cambridge, and he has often been linked with research into game theory. In 1998 Varoufakis moved to Australia, and he is now a dual Greek and Australian citizen. He moved back to Greece in 2000 to teach at the University of Athens, and in January 2013 accepted a post at the University of Texas in Austin. Varoufakis has had a rebellious streak since a young age. He told the BBC he has deliberately misspelled his name Yanis, writing it with one “n”, since a confrontation with a teacher in elementary school. “I had an aesthetic problem with the double ‘n’, he said. “So I decided to write my name with one. My teacher gave me a bad grade, which made me very angry and I’ve kept writing my name with one ‘n’ ever since.”

As finance minister Varoufakis, his head shaved clean, shook up the staid world of EU summits by arriving to meetings in rock-star-style leather jackets and untucked shirts. He was quickly dubbed “Greece’s Bruce Willis”. His swagger and penchant for lecturing annoyed some EU counterparts at meetings on Greece’s debt and he was eventually pulled from frontline negotiations. Varoufakis’s father Giorgos told the Greek daily Ethnos that his son’s critics “want to run him down because he is competent.” “Yanis is a very good boy, and is always telling the prime minister what to do, which is why he adores him,” he said. A prolific blogger, Yanis Varoufakis has written several books, including “The Global Minotaur: America, Europe and the Future of the Global Economy”.

Varoufakis has said he believes his shattered country can only recover once it has rejigged the terms of an international bailout, and said early on that Greece’s massive debt could not be paid back in full. The minister said he would step down if disavowed by Greek voters who vote Sunday on whether they accept or reject bailout conditions that are no longer on the table. In his latest blog, Varoufakis gave reasons why Greeks should vote ‘no’ in the referendum, one being that the country “will” stay in the euro regardless of the outcome. He told Bloomberg TV that he would rather “cut my arm off” than stay on as minister in the case of a ‘yes’ vote.

Read more …

NATO worries.

What Are the Geostrategic Implications of a Grexit? (Foreign Policy)

At the moment, it is unclear how Greece will ultimately fare in the current duel of wills with the Troika over its technical default, the upcoming referendum, and the possibility of a continuation of the long-running bailout drama. The two sides are locked in acrimonious finger-pointing, Greek banks are shuttered for the week, and the logical but ever elusive diplomatic and economic solution — a reasonable negotiation between the parties — seems further away than ever. As a proud Greek-American, I am saddened by the situation. Meanwhile, the July 5 referendum is judged too close to call at the moment, and most Greeks will likely be confused about the implications and uncertain how to vote.

Macroeconomic theory appears to have been the first casualty of the process, and the doomsday economic scenarios — a crashed Greek economy, a battered if not broken euro, and a deeply shaken European project — are looming large on the horizon. But in the midst of all of the appropriate Sturm und Drang of the Greek financial and economic crisis, it is worth considering the geostrategic implications of the “Grexit” — which have been largely ignored. Let’s face it: A Greece that goes crashing out of the eurozone will be an angry, disaffected, and battered nation — but one that will continue to hold membership in the European Union and NATO, both consensus-driven organizations. (“Consensus-driven” means that without unanimous consent among all members, the organization cannot take decisions or execute effective operational actions.)

Many times in NATO councils as the supreme allied commander I watched the agonizing process of building consensus, one compromise at a time. In both the EU and NATO, an uncooperative Greece in the future could time and time again put the organizations “in irons,” which is to say becalmed and not moving effectively forward. This could manifest itself very quickly in, for example, decisions about sanctions against Russia (from which Greece is avidly courting support and funding, logically enough). It could easily affect day-to-day governance in the European Union over issues from negotiating the Transatlantic Trade and Investment Partnership to agricultural subsidies to what should be done about refugee flows across the Mediterranean. Greece could become a troublesome and obstructionist actor in complex negotiations involving the EU, such as the Iranian nuclear treaty efforts.

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More Troika hubris.

Greece Votes No — Now What? (Peter Spiegel)

Even before the polls closed in Greece, Emmanuel Macron, the French economic minister, insisted that even with a No vote in Sunday night’s referendum, talks must resume between the leftwing government in Athens and its eurozone creditors. But despite predictions by Greek ministers that a new bailout deal could be just days away, other than Mr Macron and his French colleagues, there are few elsewhere in the eurozone who predicted a resounding No would lead to much more than continued stalemate. If that is the result of overwhelming rejection of creditors’ terms, it would mean a slow march to Greece exiting the eurozone. “Greece has just signed its own suicide note,” predicted Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy.

“Only the French will want to salvage something from this vote, but they’re unlikely to win the debate in the eurogroup.” Angela Merkel, the German chancellor, is due to fly to Paris on Monday for consultations with President François Hollande on what steps to take next. The most critical immediate response to the vote is likely to be in Frankfurt, where the European Central Bank’s policy making governing council is due to meet on Monday afternoon. With Greek voters unequivocally rejecting the bailout proposal, ECB policy makers may find it difficult to resist the argument made by council hardliners, particularly Jens Weidmann, the Bundesbank president, that the Greek government-backed securities the country’s banks use as collateral for emergency loans are heading to default.

The key date in the crisis is now July 20, when Greece owes €3.5bn on a bond held by the ECB. If Athens defaults on that bond, it would be almost impossible for the ECB to continue accepting collateral from Greek banks, and the €89bn in emergency liquidity assistance (ELA) would be withdrawn, devastating Greece’s banking sector. Without central bankers providing euros, Athens would be forced to print its own currency to reopen banks, and the dice would be cast on the path to “Grexit” from the eurozone.

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“Contempt for democracy and economic illiteracy are not merely tactical errors.”

Why The Yes Campaign Failed In Greece (Wolfgang Münchau)

It is not that hard to explain why Alexis Tsipras won the referendum by a landslide. It is a lot harder to see what’s going to happen now. His opponents, both inside Greece and in the European Union went wrong because of serial misjudgments, ranging from the petty to the monumental. For me, three stand out. The biggest was the clearly concerted intervention by several senior EU politicians, who said that a No vote would lead to Grexit, a Greek exit from the eurozone. One of them was Sigmar Gabriel, the German economics minister and SPD chief. He even doubled up on this threat right after the results came out. The Greeks correctly interpreted these threats as an attempt to interfere in the democratic process of their country.

The news last week that eurozone officials tried to suppress the latest debt sustainability analysis of the International Monetary Fund did not help either. The IMF report essentially revealed that the Greek government had been right after all to demand debt relief. The rest of the EU gave the impression that it wanted to rig the referendum, and it did not even bother to conceal this. If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma.

The second error of the Yes campaign was a failure to explain how the bailout programme could work economically. This is not a debate between Keynesian and neoclassical economics, the kind that keeps us endlessly busy on these pages. The Greek referendum united economists with very diverse views of how the world works, including Paul Krugman, Jeffrey Sachs and Hans-Werner Sinn. There is no reputable economic theory according to which an economy that has experienced an eight-year-long depression requires a new round of austerity to bring about economic adjustment.

The third monumental error was arrogance. The Yes supporters thought they had it nailed. Like the British Labour party before the last general election, they had been relying on polls, which turned out to be wildly inaccurate. What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened. If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma. Contempt for democracy and economic illiteracy are not merely tactical errors. Those two “qualities” are now the remaining ideological planks of what is left of the European project. Greece is a reminder that the European monetary union, as it is constructed, is fundamentally unsustainable. This means it will need to be fixed, or it will end at some point.

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“..if the parties involved in the Greek tragedy paid more serious attention to what human rights law has to say, everything would be easier..“

UN Debt Expert Says Greece Can’t Take More Austerity (Reuters)

Greece cannot take any more austerity as it will cause more social unrest and lessen the chance of an economic recovery, a United Nations debt expert said on Monday. Greeks overwhelmingly rejected conditions of a rescue package from creditors on Sunday, throwing the future of the country’s euro zone membership into further doubt and deepening a standoff with lenders. Juan Pablo Bohoslavsky, the U.N. Independent Expert on Foreign Debt, told reporters in Beijing that Greece’s creditors in the European Union should have paid more attention to what international law says on the matter of debt. “I have the impression that the EU had forgotten that international human rights law plays and should play a key role in finance. The international community attaches great importance to the interlinks between human rights and finance,” said Bohoslavsky, who operates under the auspices of the U.N.’s High Commissioner for Human Rights.

“The message here is that if the parties involved in the Greek tragedy paid more serious attention to what human rights law has to say, everything would be easier, for the Greek population particularly,” he added. Bohoslavsky said the austerity demanded of Greece had not worked, adding he will visit Greece later in the year. “It’s very clear the message from the Greek population – no more austerity measures. Actually if you look at the figures, austerity measures didn’t really help the country to recover.” In a separate statement, Bohoslavsky said he was concerned at reports of food and medicine shortages, and that he was asking to meet EU officials to remind them of their human rights obligations to Greece.

Bohoslavsky, visiting at the invitation of China’s government, said he carried a message of the need for human rights to be considered in global lending, something important for China which is setting up two new multilateral lenders – the Asian Infrastructure Investment Bank and the New Development Bank. “A narrow idea of efficiency in which human rights plays a limited role should not find its way into these two banks,” he said. China has promised that the infrastructure bank will follow global best practices in transparency and governance. Rights groups often criticize China for its “no-strings” loans to countries, especially in Africa, for encouraging corruption and abuses with a lack of oversight.

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“.. European institutions have just been saved from their own worst instincts..”

Europe Wins (Paul Krugman)

Tsipras and Syriza have won big in the referendum, strengthening their hand for whatever comes next. But they’re not the only winners: I would argue that Europe, and the European idea, just won big — at least in the sense of dodging a bullet. I know that’s not how most people see it. But think of it this way: we have just witnessed Greece stand up to a truly vile campaign of bullying and intimidation, an attempt to scare the Greek public, not just into accepting creditor demands, but into getting rid of their government. It was a shameful moment in modern European history, and would have set a truly ugly precedent if it had succeeded.

But it didn’t. You don’t have to love Syriza, or believe that they know what they’re doing — it’s not clear that they do, although the troika has been even worse — to believe that European institutions have just been saved from their own worst instincts. If Greece had been forced into line by financial fear mongering, Europe would have sinned in a way that would sully its reputation for generations. Instead, it’s something we can, perhaps, eventually regard as an aberration. And if Greece ends up exiting the euro? There’s actually a pretty good case for Grexit now — and in any case, democracy matters more than any currency arrangement.

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ECB needs to start acting as a central bank.

Ending Greece’s Bleeding (Paul Krugman)

Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief. Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice. But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap. But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency. Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth. In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

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Good analysis.

Thomas Piketty: “Germany Has Never Repaid.” (Medium)

In a forceful interview with German newspaper Die Zeit, the star economist Thomas Piketty calls for a major conference on debt. Germany, in particular, should not withhold help from Greece. This interview has been translated from the original German. Since his successful book, “Capital in the Twenty-First Century,” the Frenchman Thomas Piketty has been considered one of the most influential economists in the world. His argument for the redistribution of income and wealth launched a worldwide discussion. In a interview with Georg Blume of DIE ZEIT, he gives his clear opinions on the European debt debate.

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?
Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.
Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe. “Germany is the country that has never repaid its debts. It has no standing to lecture other nations.”

ZEIT: But shouldn’t they repay their debts?
Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

ZEIT: But surely we can’t draw the conclusion that we can do no better today?
Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

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Unspeakable sadness fills my heart.

We May Soon Be Able To See Polar Bears Only In Picture Books (MD)

According to a recent report, polar bears may soon go extinct if global warming continues at the current flabbergasting rate. And about one third of the furry animals face risk of extinction in no more than ten years, the report also showed. Study authors said that reducing the rate of climate change may save polar bears on the long run. Other methods of trying to shield them from an ever warming ocean and dwindling food stocks have only short-term effects, researchers explained. As ice sheets continue to melt, polar bears are forced to retreat inland to find something to eat. While that may be a temporary solution during winter time, in summer months the move is no longer viable.

Loss of sea ice, which the bears use in their hunt for prey, and fewer food sources both inland and out in the sea are two major factors that may force polar bears to soon go extinct. But there are also some other threats including oil rigs, new diseases and trans-Arctic vessels. Yet these factors only pose a “negligible” threat on polar bear populations, study authors wrote in their report. The hidden enemy, authors claim, are greenhouse emissions. In an attempt to assess their effects on the bears’ habitat loss, scientists employed two models. In the first model, emissions were at the current levels we all experience. The second model tried to simulate Arctic conditions if those emissions were lower and climate change more stable.

The first model showed that at the current pace of sea ice loss and food stock reduction some polar bear populations would soon reach a dramatic decline by 2025. In the second model, the scenario emerged roughly 25 years later. Yet both models shared the same conclusion – some polar bear populations may soon go extinct. Even though we may reduce harmful gas emissions by that time, populations would still be affected, scientists said,

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Feb 112015
 
 February 11, 2015  Posted by at 11:09 am Finance Tagged with: , , , , , , , , , , ,  


John M. Fox WCBS studios, 49 East 52nd Street, NYC 1948

Truth to Power: This Man Will Never Be Invited Back On CNBC (Zero Hedge)
Nobody Understands Debt – Including Paul Krugman (Steve Keen)
Cornered Greeks Brace For Confrontation (BBC)
Greek PM Tsipras Wins Confidence Vote Before Talks With Creditors (NY Times)
Greece’s Last Minute Offer To Brussels Changes Absolutely Nothing (AEP)
Europe’s Greek Showdown: The Sum Of All Statist Errors (David Stockman)
Germany Rejects Greek Claim For World War II Reparations (Reuters)
Lazard Sees $113 Billion Greek Debt Cut as ‘Reasonable’ (Bloomberg)
Wednesday is Going to be Huge for Europe (Bloomberg)
Germans Swoon Over Greek God, Yanis (Irish Ind.)
Schaeuble Says ‘Over’ for Greece Unless Aid Program Accepted (Bloomberg)
EU-Greek Relations Soured by Leaks; Sides Further Apart (MNI)
Getting Rich Greeks to Pay Taxes Is Tsipras Biggest Test at Home (Bloomberg)
Greece To Collect €2.5 Billion From Tax Evaders ‘Straight Away’ (Kathimerini)
Greece Inches Closer to Renewal of Debt Crisis (Spiegel)
Meet Greece Halfway, Europe (Bloomberg Ed.)
EC President Juncker Poses Challenge To Merkel And Austerity Policies (Spiegel)
This Single Currency Move Pressures The Entire Eurozone (Das)
US Farmers Watch $100 Billion-a-Year Profit Fade Away (Bloomberg)
Moody’s: Lower Oil Prices Won’t Boost Global Growth In Next 2 Years (MW)
World’s Biggest Oil Trader Warns Crude Prices Could Dive Again (Bloomberg)
OPEC Producers Cut Oil Prices to Asia in Battle for Market Share (Bloomberg)
Ukrainians Rage Against Military Draft: “We’re Sick Of This War” (Antiwar.com)

Brilliant.

Truth to Power: This Man Will Never Be Invited Back On CNBC (Zero Hedge)

And now for something completely unexpected: 2 minutes of pure truth (courtesy of Mizuho’s Steve Ricchiuto) on CNBC… 148 seconds of awkward uncomfortable truthiness…

While Steve had a number of hard to hear quotes for the CNBC anchors – such as: “There is no acceleration in underlying economic activity,” and “There’s this wrong concept that I keep on hearing about in the financial press about the acceleration in economic growth… It’s not happening!” A stunned Simon Hobbs rebuffs, “That’s a long list of non-ideal situations we find ourselves in,” to which Ricchiuto snaps back “and we can keep on going!”

“After a string of dismal data on durable goods, retail spending, and inventories, we get a good jobs number and everyone saying the economy’s good – it’s not good! It was Sara Eisen that had the quote of the brief clip… (which has unbelievably been edited out since we posted it seems at around the 1:40 mark) when faced Steve’s barrage of facts about the real economy, replied: “but the key is that’s not what The Fed is telling us.” Summing up the unbelievable ‘faith’ (misplaced beyond all reputational loss) that so many have in the central planners of the world.

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Very lucid explanation of one of Steve’s longtime big themes and squabbles with Krugman: the role of banks in debt creation.

Nobody Understands Debt – Including Paul Krugman (Steve Keen)

Paul Krugman has published a trio of blog posts on the issue of debt in the last week: “Debt Is Money We Owe To Ourselves” (February 6th at 7.30am), “Debt: A Thought Experiment” (same day at 5.30pm), and finally “Nobody Understands Debt” (February 9th in an Op Ed). There is one truly remarkable thing about all three articles: not one of them contains the word “Bank”. Now you may think it’s ridiculous that an economist could discuss the macroeconomics of debt, not once but three times, and never even consider the role of banks. But Krugman would tell you why you don’t need to consider banks when talking about debt, and call you a “Banking Mystic” if you persisted. Well Krugman would be wrong, and you would be right.

This is one of the many times where “experts” in economics have it all wrong, and the general public’s gut feelings about banks, debt and money are closer to the truth. Bank lending is fundamentally important to the performance of the economy, and it is also fundamentally different to lending between individuals. But mainstream economics has convinced itself of the opposite propositions—that lending (most of the time) has trivial macroeconomic implications (the exception being during a “liquidity trap”), and that bank lending to individuals is really no different to lending between individuals. Bunkum—and it’s easy to show why using that boring but vital tool of the accountant, double-entry bookkeeping.

Imagine that you want to buy a new iPhone 6, but you don’t have the $299 Apple wants for it. There are two ways you can get the money: you can borrow from a friend—who transfers money from her bank account to yours—which we can call “Peer to Peer” lending. Or you can add to your credit card debt with your bank—which obviously is “Bank Lending”. Are the two operations macroeconomically equivalent? Or if they are not, are there rules that constrain bank lending so that it’s effectively just the same as “peer to peer” lending? I’ll consider the first point in this article and tackle the second in a later post.

If you borrow from a friend—let’s call you “Impatient” and your friend “Patient” to borrow Krugman’s terminology—then from the situation, as seen from the bank’s point of view, is as shown in Table 1. When you borrow the money, Patient’s deposit account falls by $299, while yours rises by $299. Then when you buy the iPhone, your account falls by $299, and Apple’s rises by $299. Apple gets an extra $299 in income, but since Patient’s bank account has fallen by that much, she is likely to spend less over time, which will reduce someone else’s income by about as much as Apple’s income rose.

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“Nothing is going to go worse, every day is the worst day.”

Cornered Greeks Brace For Confrontation (BBC)

Everyone in Greece has been watching closely as the rhetoric hardens, because they all have something at stake. At a union office in a northern suburb of Athens, a radio programme was going on air. Former employees of the former state broadcaster, ERT, who were abruptly fired in 2013, are still working without pay, determined to talk to the nation. Their makeshift studio is just across the road from their old headquarters, and Syriza has promised to rehire them and reopen ERT. “If we’re building a new country,” argued radio host Andreas Papastamatiou, “we have to [give people] the proper information.” “But we must [also] find a way to live together as European countries. Not as the emperor and his subjects.”

Opinion polls suggest that a growing number of people like the fact that Greece is trying to stand up for itself, and is taking its argument to the rest of the Europe. But they know they will not get everything they want. Now as eurozone finance ministers prepare to meet for what could be a stormy emergency session, the Greek government is floating proposals it clearly sees as a compromise. “What we are proposing,” the Minister for International Economic Affairs, Euclid Tsakalotos, told me, “is that we are given some room for manoeuvre.” “We are presenting a fair case – you cannot reform when people are frightened and uncertain. You need a certain amount of stability first.” [..]

An hour’s drive west of Athens tugboats pull large cargo ships along a narrow channel between the sheer limestone walls of the Corinth Canal. There is no room for manoeuvre – a familiar story for the Greek economy. But it is not hard to find out why Syriza is determined to negotiate some wiggle room. In a cafe overlooking the entrance to the canal, locals described the economy as a disaster, and their own prospects as bleak. The cafe owner, Vassiliki Kourtaki, said she was well aware of the increasingly bitter dispute between Greece and some of its Eurozone partners. But the sense of looming confrontation no longer scared her. “Scary is what we have now,” Vassiliki said. “Nothing is going to go worse, every day is the worst day.”

“The government has to do something now, because we need a lot of help. “And when you are down, the only way is up.” That is where Syriza believes its mandate comes from. And the tone of the prime minister’s speech suggests that he is willing to take his country right to the brink if necessary. The recent history of the European Union suggests that compromise is still on the cards. But if there is no deal by the end of the month the money will run out. And there is a clear and present danger of failure, with consequences impossible to predict.

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“There is no way back,” he said. “As long as we have the people by our side, we cannot be blackmailed by anyone.”

Greek PM Tsipras Wins Confidence Vote Before Talks With Creditors (NY Times)

With Greece preparing for tough talks with creditors in Brussels, Prime Minister Alexis Tsipras’s government easily won a confidence vote in Parliament early Wednesday with assurances that it would reverse an economic program that has slashed living standards. Speaking to Parliament before the vote, Mr. Tsipras said his government would seek a short-term “bridge” agreement to a new deal and a “necessary” reduction of Greek debt. He appealed for “space and time,” instead of an extension of the current loan program, saying the country could not “return to an age of bailouts and suppression.” Mr. Tsipras told lawmakers, “This is our red line” – a short-term bridge agreement without further austerity.

In the vote, his government, which came to power last month, secured the support of all 162 coalition lawmakers in the 300-seat House. But winning over international creditors – the EC, ECB and IMF, which have extended Greece more than $270 billion in bailout loans since 2010 – will be much more difficult. Mr. Tsipras said he was optimistic about a “mutually acceptable agreement” with creditors. But earlier in the day, Wolfgang Schäuble, the finance minister of Germany, which has championed austerity in economically troubled eurozone states, appeared to dismiss the prospect of a new plan for Greece. “We are not negotiating a new program,” Mr. Schäuble said amid a flurry of diplomacy aimed at laying the groundwork for a compromise.

Greece’s finance minister, Yanis Varoufakis, is expected to present his compromise plan at a summit meeting Wednesday in Brussels. The proposal anticipates a bridge financing program through the end of August and a change in the mix of economic measures imposed by creditors, a Greek official said Monday. Mr. Tsipras did not give details on the proposal but indicated that Greece would press its case. “There is no way back,” he said. “As long as we have the people by our side, we cannot be blackmailed by anyone.” Polls indicated that seven in 10 Greeks backed the tough stance toward the country’s creditors. The same proportion said they wanted Greece to remain in the eurozone “at all costs” amid renewed speculation about the Greece’s defaulting on its huge debt, which stands at 175% of GDP, and about its leaving the single-currency union.

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“Greece is in a sense escalating its demands. It now wants to repeal the Troika Memorandum, and raise its T-bill issuance limit by a further €8bn, AND secure loans as well. Good luck.”

Greece’s Last Minute Offer To Brussels Changes Absolutely Nothing (AEP)

The art of Game Theory brinkmanship is to convince opponents that you are utterly defiant, almost insane, and willing to bring the temple crashing down on everybody’s heads. Then you smile and talk turkey. Greece’s Syriza radicals are proving good at this, at least in demonstrating, or feigning, madness. Finance minister Yanis Varoufakis – by all reports the new heart-throb for the thinking German woman – is a theorist on the subject. He wrote a book, “Game Theory: A Critical Text” in 1995. Now he is putting it into practice with great relish. His latest letter to European Commission chief Jean-Claude Juncker is a sudden switch in tone. You can almost hear the sighs of relief in Brussels. The Eurogroup may not have to hit the pre-GREXIT button this week after all. The crunch can be put off for a bit longer. Greek newspaper Ekathimerini calls it a plan with four pillars:

1) Keep 70pc of the “good” EU-IMF Troika reforms. This means scrapping the other 30pc of course, as yet unnamed. These will be replaced ten new reforms in cooperation with the OECD that in principle go deeper and tackle the cartel/oligarchy system of the old dynasties. Abolish the Troika. Europe could live with this.

2) Cut the target for the primary budget surplus to 1.5pc of GDP over the next two years, instead of 3pc in 2015 and 4.5pc in 2016 as demanded by the Troika. This will stabilize fiscal policy, and open the way for durable recovery. Europe will scream, fretting that fiscal discipline will collapse across Club Med. The Spanish will scream because it will embolden Podemos. But the Americans and Chinese will scream at Europe. The G2 superpowers matter.

3) A debt swap to replace €195bn of loans from EMU governments and rescue funds. These will be GDP-linkers based on Keynes’s Bisque Bonds. No growth, no interest payments. Creditors put their money where their mouth is. The €27bn owed to ECB will be turned into “perpetual bonds”, parked on ECB balance sheet, more or less for ever. This averts a debt write-off – and therefore spares Chancellor Angela Merkel the unpleasant task of explaining to the Bundestag and Bild Zeitung why German taxpayers have just lost a great deal of money – but it amounts to the same thing by the back door. It is further debt relief. Lazard in Paris said today -seemingly on behalf of Athens – that Greece wants a €100bn cut in the ultimate debt stock. They are pitching their opening bid very high.

Europe will scream. Italy and Spain will scream loudest, since they pay too. If they accept this, it would amount to capitulation by Brussels. Furthermore, Mr Varoufakis is extending the plan until September 1. He wants to bite deep into the next Troika loan payment – something Syriza said before that it would never do – in order to pay off ECB loans. This means Europe will have to hand over fresh money. Greece is in a sense escalating its demands. It now wants to repeal the Troika Memorandum, and raise its T-bill issuance limit by a further €8bn, AND secure loans as well. Good luck. The country has funding needs of €17bn by the end of August. Some of this can be covered from a plethora of extraordinary items if EMU wants to play ball, but not all.

4) An emergency humanitarian plan worth €1.86bn. Food stamps. Free power for 300,000 homes below poverty threshold. Free health and transport for the poor. A pension boost for lowest cohort. Europe can live with this. So there we have it. Syriza has not backed down (though I note that the rise in the minimum wage is not on this very provisional list). Its core demands remain. Panagiotis Lafazanis, head of Syriza’s powerful Left Platform, reiterated in the Greek parliament that there will be no fundamental concession. “Greece is not a protectorate. If the EU’s ruling elites think they can blackmail us, they are very wrong,” he said.

What has changed is that Mr Varoufakis will go to Brussels on Wednesday with a package that will most likely throw enough sand in everybody’s eyes – and exploit mounting alarm in EMU circles that this showdown is becoming dangerous – to force a delay. EMU lives on. Yet nothing of substance has changed. The eurozone still faces its Morton’s Fork: either it finds a way to surrender to the Greek mutineers on austerity and debt (calling it victory), or it persists in holding Syriza to the letter of a discredited and destructive Troika deal agreed by a previous government, and in doing so risks blowing up the European Project. Either way, we are already in an entirely different Europe.

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“The real nightmare for Merkel’s government is that the next two largest countries in the capital key are on a fast track toward their own fiscal demise.”

Europe’s Greek Showdown: The Sum Of All Statist Errors (David Stockman)

The politicians of Europe are plunging into a form of ideological fratricide as they battle over Greece. And “fratricide” is precisely the right descriptor because in this battle there are no white hats or black hits – just statists. Accordingly, all the combatants—the German, Greek and other national politicians and the apparatchiks of Brussels and Frankfurt – are fundamentally on the wrong path, albeit for different reasons. Yet by collectively indulging in the sum of all statist errors they may ultimately do a service. Namely, discredit and destroy the whole bailout state and central bank driven financialization model that threatens political democracy and capitalist prosperity in Europe – and the rest of the world, too. The most difficult case is that of the German fiscal disciplinarians.

Praise be to Angela Merkel and her resolute opposition to Keynesian fiscal profligacy and her stiff-lipped resistance to the relentless demands for “more stimulus” from the likes Summers, Geithner, Lew, the IMF and the pundits of the FT, among countless others. At least the Germans recognize that if the EU nations are going to devote 49% of GDP to state spending, including nearly a quarter of national income to social transfers, as was the case in 2014, then they bloody well can’t borrow it. Notwithstanding the alleged German led austerity regime, however, that’s exactly what they are doing. Germany has managed to swim against the surging tide of EU public debt, lowering its leverage ratio from 80% to 76% of GDP in the last four years.

Indeed, Germany’s frustration with the rest of the European fiscal sleepwalkers is more than understandable, as is its fanatical resolve not to give an inch of ground to the Greeks. Or as Merkel’s deputy parliamentary leader, Michael Fuchs told Bloomberg, “There is no way out” for Greece from its treaty obligations….. conditions set for Greece by The Troika (EU, ECB, IMF) for bailout funds “have to be fulfilled…. That’s it, very simple.” This isn’t just teutonic rigidity. It’s actually all about the so-called capital contribution key—-the share of the EU bailout fund that must be covered by each member country in the event of a default.

At dead center of Greece’s $350 billion of debt is $210 billion owed to the Eurozone bailout mechanism. Germany’s share of that is 27% or roughly $57 billion. Yet the prospect of tapping the German taxpayers for some substantial part of that liability in the event of a Greek default is not the main problem—-even as it would mightily catalyze Germany’s incipient anti-EU party. The real nightmare for Merkel’s government is that the next two largest countries in the capital key are on a fast track toward their own fiscal demise. So what puts a stiff spine into its insistence that Greece fulfill the letter of its MOU obligations is that if either France or Italy is called upon to cover losses, the whole bailout scheme will go up in smoke.

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“As part of a wider appeal to Europe for solidarity, Greece’s new finance minister has suggested a parallel between his country and the rise of Nazism in a bankrupt Germany in the 1930s..”

Germany Rejects Greek Claim For World War II Reparations (Reuters)

– Germany said on Monday there was “zero” chance of it paying World War Two reparations to Athens, following a renewed demand from Greece’s new leftist Prime Minister Alexis Tsipras. Tsipras, in his first major speech to parliament on Sunday, laid out plans to dismantle Greece’s austerity program, ruled out any extension of its €240 billion international bailout and vowed to seek war reparations from Berlin. The demand for compensation, revived by a previous Greek government in 2013 but not pursued, was rejected outright by Sigmar Gabriel, Germany’s vice chancellor and economy minister. “The probability is zero,” said Gabriel, when asked if Germany would make such payments to Greece, adding a treaty signed 25 years ago had wrapped up all such claims.

Germany and Greece share a complex history that has complicated the debt debate. Greece was occupied by German troops in World War Two, an issue that has resurfaced since it has been forced to endure tough reforms in return for a financial bailout partly funded by euro zone partners. Many Greeks have blamed euro zone heavyweight Germany for the austerity, leading to the revival of a dormant claim against Berlin for billions of euros of war reparations. As part of a wider appeal to Europe for solidarity, Greece’s new finance minister has suggested a parallel between his country and the rise of Nazism in a bankrupt Germany in the 1930s, referring to Greece’s far-right Golden Dawn party.

Gabriel referred to the “Treaty on the Final Settlement with respect to Germany”, also known as the “Two plus Four Treaty” signed in September 1990, by the former West and East Germanys and the four World War Two allies just before German reunification. Under its terms, the four powers renounced all rights they formerly held in Germany. For Berlin, the document, also approved by Greece among other states, effectively drew a line under possible future claims for war reparations. Germany thus denies owing anything more to Greece for World War Two after the 115 million deutsche marks it paid in 1960, one of 12 war compensation deals it signed with Western nations. But Athens has said it always considered that money as only an initial payment, with the rest of its claims to be discussed after German reunification, which eventually came in 1990.

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“Greece is in a situation of financial distress, it knows a humanitarian crisis like Europe has not known since World War II..”

Lazard Sees $113 Billion Greek Debt Cut as ‘Reasonable’ (Bloomberg)

Canceling €100 billion of Greece’s debt would enable the country to cut the load in line with targets set by the international authorities that bailed out the nation, the country’s debt adviser, Lazard Ltd.’s Matthieu Pigasse, said in a radio interview Tuesday. A debt-to-gross-domestic-product ratio of 120% in 2020 is “a target that looks reasonable to me and that effectively allows bringing Greece into a sustainable pattern,” Pigasse, who leads Lazard’s sovereign advisory team, said on France Inter radio. “An effort is absolutely necessary” and negotiations are ongoing, he said, speaking in French.

European leaders on Monday urged Greek Prime Minister Alexis Tsipras to pare back his ambitions for easing the financial pressure on his people, saying they would go against the conditions attached to the country’s bailout. Greece’s public debt currently stands at more than €320 billion, or about 175% of GDP, making it Europe’s most-indebted state when measured against output. “It’s a negotiator’s position,” said Michel Martinez, an economist at SocGen in Paris. “A debt cut of this magnitude politically is very difficult, or even unacceptable. One should explain to German and French taxpayers that have lent to Greece that there will be losses,” Martinez said.

Canceling the debt isn’t the only option to reduce Greece’s debt-to-GDP ratio, and interest rate cuts and longer maturities are also possible, he said. Debt can be canceled, or reduced, in several ways, Lazard’s Pigasse said, without elaborating. “Greece is in a situation of financial distress, it knows a humanitarian crisis like Europe has not known since World War II,” Pigasse said. “The austerity cure that was imposed to Greece by what’s called the troika, which is the IMF, the ECB and European states has led to a true disaster.”

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Find the common thread.

Wednesday is Going to be Huge for Europe (Bloomberg)

[Today] sees two big meetings in Europe, the success or failure of which could have major repercussions for markets, and the European political landscape. In Minsk, Belarus, the leaders of Germany, France, Ukraine and Russia are due to meet to try to hammer out a peace agreement. Failure to reach an agreement will lead to further EU economic sanctions against Russia, which were delayed at yesterday’s EU foreign minister’s meeting meeting to allow time for the diplomatic offensive tomorrow. Failure would also make it easier for The United States to step up its plans to send lethal aid to Ukraine – plans that US president Barack Obama has not yet committed to. If the prospect of all out war on its eastern border is not enough for Europe to worry about, there is also the real prospect of a major sovereign debt blow-up on its southern border.

Tomorrow evening the finance ministers of the euro area meet to see if a new deal can be done for Greece. Greece is pushing for a €10 billion bridging loan to allow it avoid a funding crunch, while also giving the new Greek government time to come up with a new plan for the sustainability of Greek finances. So far Greek plans have met with very little support from other euro area finance ministers, with German’s Schaeuble saying that Greece must agree to a full plan, rather than a bridging loan, or commit to the existing bailout program. There are hints this morning that there may be some room to compromise on both sides ahead of the meeting tomorrow, but with both the Greeks and the other euro area finance minsters still seeming so far apart on the details, chances of failure are still high.

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“Visually, he’s someone you could imagine starring in a film like ‘Die Hard 6’..”

Germans Swoon Over Greek God, Yanis (Irish Ind.)

Greek Finance Minister Yanis Varoufakis has become an improbable heartthrob in Germany, where his charm and appearance have not gone unnoticed. ZDF television has even lampooned its own news anchor for enthusiastically comparing the minister with Hollywood tough guy Bruce Willis, while ‘Stern’ magazine published a gushing article on Varoufakis’s “classical masculinity”. “Varoufakis is without doubt a man full of charisma,” ZDF anchor Marietta Slomka said on air. “Visually, he’s someone you could imagine starring in a film like ‘Die Hard 6’ – he’s an interesting character.” Varoufakis’s casual appearance – and the fact that he does not tuck his shirts in and leaves their tops unbuttoned – was an unlikely focus of news reports in Germany. “What makes Yanis Varoufakis a sex icon” was a headline in the conservative newspaper ‘Die Welt’ while ‘Stern’ magazine wrote that Varoufakis’s appearance reminded Germans of a Greek hero in marble, even though media elsewhere in Europe say he looks more like a bouncer.

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Bluster.

Schaeuble Says ‘Over’ for Greece Unless Aid Program Accepted (Bloomberg)

German Finance Minister Wolfgang Schaeuble doused expectations of a positive outcome for Greece at an emergency meeting with its official creditors tomorrow, saying there are no plans to give the country more time. Speaking to reporters in Istanbul after a two-day meeting of finance chiefs from the Group of 20, Schaeuble said “it’s over” if Greece doesn’t want the final tranche of the current aid program. Greece’s creditors also “can’t negotiate about something new,” Schaeuble said. Greek government bonds had risen today for the first time in five days on optimism there might be room to move toward an agreement that will help ensure the nation isn’t left short of funds. That had come after Greece had offered compromises in a bid to push for a bridge plan to stave off a funding crunch and to buy time for negotiations to ease austerity demands.

Any accord, however, would require an easing of Germany’s stance in the standoff between Greece and its creditors over conditions attached to its €240 billion lifeline. An impasse risks leaving Greece without funding as of the end of this month, when its current bailout expires, and may put Europe’s most-indebted state’s euro membership in danger. Schaeuble damped expectations, saying euro region finance ministers meeting in Brussels tomorrow won’t negotiate a new program for the cash-strapped country as a program is already in place and was arrived at after “arduous” negotiations. He also said media reports that the European Commission will give Greece six more months to reach an aid deal “has to be wrong” because he’s not aware of such a plan and the commission isn’t in charge of making such decisions. Schaeuble said he had discussed the rules of the aid programs at a meeting with his Greek counterpart Yanis Varoufakis in Berlin last week.

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Not a good tone to start a debate with: “A senior European official described the situation as “berserk” and said, “there is no plan.”

EU-Greek Relations Soured by Leaks; Sides Further Apart (MNI)

The carefully orchestrated dance between the new Greek government and its European creditors appeared to crack Tuesday, with top Brussels officials infuriated by what they see as wildly misleading claims coming from Athens. Apparent claims from Athens officials to other governments and media suggesting that the U.S. Treasury supports a plan by the Syriza-led government to alleviate Greece’s debt, and that the European Commission president Jean-Claude Juncker either backed the plan or had an alternative himself, have enraged senior economic officials in Brussels. A senior European official, who spoke on condition of anonymity, described the situation as “berserk” and said, “there is no plan.” He added that the European Commission and U.S. Treasury were both perturbed at the way they had apparently been represented externally by Greek officials.

A team from the U.S. Treasury led by Daleep Singh, deputy assistant secretary for Europe & Eurasia, was in Athens late last week. “The Greeks are digging their own graves,” the EU official said. At the G-20 meeting in Istanbul Tuesday, the U.S. Treasury secretary Jack Lew said that Greece and its international creditors must find a pragmatic solution to that country’s debt crisis, adding that US officials would like to see rhetoric on the issue toned down. “I don’t think that there should be casual talk about the kind of resolution that would end up leaving Greece in a place that is unstable or the EU in a place that is unstable,” Lew said. Early Tuesday, Greece floated its latest funding plan via press leaks, including to the Kathimerini newspaper, proposing a bridge financing programme that would lead to a “new deal” with creditors from September onwards.

There were reportedly four parts to the new deal: 30% of the existing memorandum with the Troika will be cancelled and replaced with 10 new reforms agreed with the OECD; Greece’s primary surplus target would be cut from 3% of GDP this year to 1.49%; Greek debt would be reduced via an already announced swap plan; and the “humanitarian crisis” would be alleviated via policies announced by Prime Minister Alexis Tsipras Sunday. Putting aside frustrations about communications from Athens, initial reactions from Eurozone capitals to the ideas in the draft plan have not been positive.The first official described the plan as “hopeless” and added, “how can you have a plan when you make no payment obligation till the autumn and then you probably scrap that.”

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Boy, would they be welcome: “German Finance Minister Wolfgang Schaeuble said he repeated his offer to send 500 German tax officials to Greece to tackle the problem..”

Getting Rich Greeks to Pay Taxes Is Tsipras Biggest Test at Home (Bloomberg)

As Greek Prime Minister Alexis Tsipras goes into a Battle of the Titans with German Chancellor Angela Merkel, he may find he has as big a fight closer to home: taking on rich tax-evaders. People like Angeliki Katsarolia, a waitress at the Julia café lounge bar in the rundown neighborhood of Omonia in Athens, want to see him cast his net wide. Gesturing to a receipt for coffee curled up in a small glass on a recent afternoon, one of the few signs of success in five years of attempts to get Greeks to pay taxes, she said she’s doing her bit. “I pay my taxes straight from my wages,” said Katsarolia, 38, who gave up working in luxury hotels where her employers avoided paying her. “I can’t accept that big employers aren’t taxed. They have to pay their taxes too.”

The age-old problem of getting more Greeks to pay their taxes adds pressure on Tsipras, who’s trying to convince Merkel and other euro-area partners he can put his fiscal house in order while raising wages and reinstating government workers. He wants his official creditors to ease the austerity demands that have helped wipe out a quarter of gross domestic product since the start of the crisis. His election pledge to snag Greeks who under-pay or don’t pay their taxes is key both to his rise to power and to his staying there. Germany, the largest holder of Greek debt among euro-area countries and vital to any compromise that will keep Greece in the euro, remains skeptical. German Finance Minister Wolfgang Schaeuble, meeting his Greek counterpart Yanis Varoufakis in Berlin last week, said he repeated his offer to send 500 German tax officials to Greece to tackle the problem, an offer that has not yet been taken up.

“We can well understand and support it that the wealthy in Greece must also contribute, that the tax base gets broadened and the efficiency of tax administration is improved, that corruption is fought energetically,” Schaeuble said. Greek wage-earners and pensioners have suffered punishing taxes to plug a yawning budget deficit revealed in 2009 in five years of an overhaul of Greek taxes that the International Monetary Fund, one of Greece’s lenders, said could have been more fairly distributed. Just a day after Tsipras’s election on Jan. 25, figures from the finance ministry showed that revenue for the government last year amounted to €51.4 billion, lower than a €55.3 billion target, in part due to a €1.4 billion shortfall in tax revenue. “The great struggle is the struggle against tax evasion, which is the real reason our country reached the brink,” Tsipras said in parliament on Feb. 8. “The new government guarantees that in this country justice will be served.”

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“..a law allowing SDOE to rubber-stamp the imposition of tax rather than having to pass it over to tax offices, which often lack the resources to follow up..”

Greece To Collect €2.5 Billion From Tax Evaders ‘Straight Away’ (Kathimerini)

The strengthening of the Financial Crimes Squad (SDOE) will lead to Greece immediately collecting €2.5 billion from tax evaders, State Minister for Combating Corruption Panayiotis Nikoloudis said Tuesday. Nikoloudis, the former head of the anti-money laundering authority, said the government would pass a law allowing SDOE to rubber-stamp the imposition of tax rather than having to pass it over to tax offices, which often lack the resources to follow up. He said there are currently some 3,500 cases of tax evasion, totaling €7 billion, which have been unearthed by authorities but the state has yet to collect the taxes due. He said that €2.5 billion of this total could be retrieved straight away.

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The view from Berlin.

Greece Inches Closer to Renewal of Debt Crisis (Spiegel)

After new Greek Finance Minister Giannis Varoufakis had been repeatedly rebuffed on his introductory tour of European capitals, he opted for flattery and solicitation during his visit to Berlin last week. German Finance Minister Wolfgang Schäuble, Varoufakis said, had been an object of his admiration since way back in the 1980s for his dedication to Europe. He said that his host’s career, focused as it has always been on European unity, has been impressive. Varoufakis went on to say that Germans and Greeks are linked by their experiences of suffering. Just like the Germans, who were yoked with the burdensome Versailles Treaty after losing World War I, his country too has been humiliated by agreements forced onto it from the outside.

Both countries, he said, suffered from deflation and economic depression, the Germans in the 1930s and the Greeks today. “The Germans understand best how the Greeks are doing,” Varoufakis said. Schäuble’s sympathy for Varoufakis’ plight was limited. Indeed, the German finance minister sees Greek demands for an end to the troika and for a renegotiation of previous agreements as an affront. “We agreed to disagree,” is how Schäuble summed up their meeting, a tête-à-tête that took 45 minutes longer than the one hour that had been scheduled.

Just one day prior to his meeting with Schäuble last Thursday, Varoufakis had been given the cold shoulder at European Central Bank headquarters in Frankfurt. ECB head Mario Draghi rejected virtually all of Varoufakis’ requests, including his demand for more leniency on debt repayments. That evening, the ECB opted to stop accepting Greek government bonds as collateral, a move which will make it even more difficult for banks in Greece to access liquidity. The move came as a surprise to Varoufakis. Draghi had told him nothing about it during their meeting that morning.

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“If Greece declines Germany’s offer of national humiliation, and the other EU governments follow through on Schaeuble’s threat, Greece will have no recourse but to default..”

Meet Greece Halfway, Europe (Bloomberg Ed.)

Varoufakis wants a bridge loan while talks take place on the consolidation of Greece’s enormous external debts. So far, the rest of the euro area has said, “No way.” Greece’s initial position deserved a stone-faced response because it seemed to allow for no compromise: Greece’s debts would have to be partly written off, whether Europe liked it or not. But on his tour of EU capitals last week, Varoufakis climbed a long way down from that. He now says Greece wants not outright forgiveness but further debt restructuring, including a swap into debts with repayment linked to growth rates. Rather than refusing to have policy conditions tied to the new deal, he’s indicating that many of the reforms bundled into the existing bailout program will stay in place, together with some new ones.

These proposals aren’t as bad as the initial pitch would have led you to expect. Actually, they make a lot of sense. The existing bailout program is widely recognized to have failed: It imposed too much austerity, flattened the economy and, as a result, failed to get the ratio of debt to national income under control. Right or wrong, Greece’s modified position should be seen, at the very least, as a basis for negotiation. Yet some EU governments, and Germany’s especially, are refusing to budge. There’s nothing to talk about, they say. On Tuesday, German Finance Minister Wolfgang Schaeuble ominously pronounced that if Greece doesn’t want the final tranche of the bailout program, “it’s over.” Greece’s creditors “can’t negotiate about something new,” he added. Why on earth not?

Missed targets, failed programs and renegotiated agreements aren’t exactly unheard of in the EU: A cynic might call that sequence standard operating procedure. It seems perverse bordering on deranged to try to break this habit at the very moment when a sudden commitment to unwavering rigidity threatens the survival of the euro system. Taken at his word, Schaeuble is telling Greece that nothing short of unconditional surrender will do. What are Greek voters, rallying behind their new government, to make of that? If Greece declines Germany’s offer of national humiliation, and the other EU governments follow through on Schaeuble’s threat, Greece will have no recourse but to default and, in all likelihood, to impose capital controls as a prelude to exit from the euro system. EU creditors will be worse off than if they’d come to an accommodation – and possibly much worse off, if the collateral damage from a Greek exit can’t be contained.

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Power struggle in the EU.

EC President Juncker Poses Challenge To Merkel And Austerity Policies (Spiegel)

Jean-Claude Juncker deliberately chose to deliver his warning in German. “Commissioners are proposed by the member states, but they do not represent the interests of their member state,” the newly appointed president of the European Commission said as he introduced his team last September. In the event a commissioner confused “national and European policies,” he threatened, he would move that appointee to another portfolio. Germany’s Commissioner Günther Oettinger paid little heed to the warning. On Jan. 8, he met in Hamburg with German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble to warn them that Juncker was planning to loosen the rules of the Stability Pact for the common currency zone. The three quickly agreed at the meeting that the development would not be in Germany’s interest, and they agreed to thwart Juncker’s plans.
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It had been clear for some time that Europe’s most powerful leader would eventually clash with the head of the European Commission, the EU’s executive, but it happened earlier than some might have expected. Juncker’s commission hasn’t even been in office for 100 days yet and conflicts between Berlin and Brussels are already surfacing. Policy differences are at the forefront, with Juncker feeling that Merkel has bound Europe to austerity policies for too long. But the conflict also touches on a more fundamental question: Who holds the power in Europe?Merkel’s ascendency to the most powerful woman in Europe is rooted to a large degree in the euro crisis, which shifted the balance of power from the European Commission to the European Council, the body representing the leaders of the 28 member states.

As the crisis heated up, leaders gathered regularly to hold crisis summits under the auspices of the European Council in order to save the common currency from collapse. The decisions fell to the European Council because it was European leaders who had to make money available for the bailout packages. Given that Germany had the most money to offer, Merkel quickly became the most important player. Juncker now wants to level the playing field again. He’s the first Commission president to have campaigned as a leading candidate in European Parliament elections to head the commission, and he sees his rebellion against Merkel as an act of emancipation. He believes that the man backed by European Parliament should be at the European helm rather than the woman backed by money.

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“Insofar as the SNB decision was dictated by concern about the risk of losses from continued expansion of its balance sheet, it highlights the limit to central bank actions.”

This Single Currency Move Pressures The Entire Eurozone (Das)

A more serious problem will be externally induced deflationary forces, which will affect the Swiss economy through the stronger currency. It will accelerate deflationary pressures, expected to reach as much as negative 2% to 3%. This will create problems for both asset prices and the increased levels of debt. The Swiss are already being forced to contemplate measures such as capital inflow controls to minimize further pressure on the currency. But the biggest ramifications of the abandonment of the ceiling will be felt outside Switzerland. First, the move opens a new front in the currency wars. There will be pressure on other currencies. Following the Swiss decision, the Danish central bank has cut interest rates three times in a few weeks to a record low, from minus 0.05% to minus 0.75%.

This was designed to discourage capital inflows and due to speculation that Denmark would be forced to discontinue its peg to the euro. It also increases speculation on the sustainability of the euro itself. The Swiss decision will drive reductions in interest rates and currency devaluations as nations seek to preserve competitiveness and limit unstable capital movements. The Swiss National Bank set an interest rate on sight deposit accounts of minus 0.75%, well below the minus 0.25% previously assumed to be the effective lower-bound on interest rates. Other countries may be forced to follow, sending global interest rates even lower. This may exacerbate asset price bubbles, increasing the risk of future financial system problems.

Second, the Swiss now have drawn attention to the ability of central banks to intervene in and control market prices. Given assurances from the Swiss National Bank (SNB) in late 2014 about the continuation of the ceiling, the change in policy reduces trust in central banks’ forward guidance. Insofar as the SNB decision was dictated by concern about the risk of losses from continued expansion of its balance sheet, it highlights the limit to central bank actions. Central banks can operate without conventional capital, creating reserves and printing money. However, a large loss may affect a bank’s credibility and ability to perform its functions and implement policies. It may also affect market acceptance of the currency. This means that it would require recapitalization by governments, which would draw political attention to the issue.

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Where commodities go to die. Grow your own!

US Farmers Watch $100 Billion-a-Year Profit Fade Away (Bloomberg)

The squeeze on U.S. farmers is getting worse as low crop prices and rising costs erode incomes that not long ago were the highest ever. Illinois grower Jason Lay said he will buy 30% less fertilizer for his 2,500 acres of corn and soybeans, and 7% fewer seeds for spring planting. After his most profitable year ever in 2012, Lay said he upgraded his combine, tractor, sprayer and planter. With crop futures now near five-year lows, he has no plans to buy any new equipment. “You spend when times are prosperous so you don’t need to when they’re not,” Lay, 41, said by telephone from outside Bloomington, Illinois. “That’s how you make it through.” He estimates his profit is down by a quarter from its peak. Farm income in the U.S., the world’s top agricultural producer and exporter, is poised to drop for a third straight year in 2015.

While raising livestock remains profitable, as tight meat supplies keep prices high, growers of corn, soybeans and wheat saw crop and land values fall faster than many of their costs. That’s pinching sales for equipment maker Deere and seed and chemical producers including DuPont. “The budget picture for corn and soybeans is as negative as we’ve seen in a long time,” said Brent Gloy at Purdue University in Indiana. “You will see some farmers not able to cover their production costs.” The U.S. Department of Agriculture, in a report today at 11 a.m. in Washington, probably will forecast 2015 net-cash income from all farm activity at below $100 billion, which would be the lowest since 2010, Gloy said.

Last year, cash income dropped 17.5% to $108.2 billion, as expenses jumped to a record $370 billion and crop receipts tumbled 11.5%, USDA data show. Even a 14% increase in livestock receipts, which topped crop revenue for the first time in eight years, wasn’t enough to prevent a 2014 decline in overall farm profit. The agriculture industry has boomed over the past decade as record land and crop prices boosted sales of seed and farm equipment. Net net-cash income touched a record $137.1 billion in 2012. Land values have kept rising, up 8.1% last year to an all-time high of $2,950 an acre, while beef and pork prices were the highest ever.

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Duh!

Moody’s: Lower Oil Prices Won’t Boost Global Growth In Next 2 Years (MW)

Amid a death spiral for oil prices, a comfort in some corners has been the belief that lower energy prices will be a boon for global growth. Wrong, according to Moody’s Investors Service, which said Wednesday the pain of lower oil prices won’t result in any boost to global growth over the next two years, due to headwinds from the euro area, China, Japan and Russia. The only beneficiaries? The U.S. and India. Backing what plenty of economists have been saying, Moody’s said indeed, lower oil prices will give a lift to U.S. consumer and corporate spending over the next two years. The ratings service lifted its U.S. forecast for 2015 growth in GDP to 3.2%, from 3% in its last quarterly report. For 2016, it should stay strong at 2.8%, said Moody’s.

But for the Group of 20 countries as a whole, Moody’s expects growth of just under 3% for 2015 and 2016, mostly unchanged from 2014. That’s based on the assumption that Brent crude prices will average $55 a barrel this year, and rise to $65 in 2016. Moody’s expects oil prices will stick to current levels in 2015, because demand and supply issues won’t dramatically change in the near term. Where oil isn’t going to help much is in the eurozone. Moody’s is forecasting its GDP to increase just under 1% in 2015 — not much change from 2014 — and 1.3% in 2016.

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You betcha.

World’s Biggest Oil Trader Warns Crude Prices Could Dive Again (Bloomberg)

The world’s biggest independent oil trader said crude could resume a slump that saw prices fall 61% between June and January, as unrelenting growth in U.S. output leads to a “dramatic” build in the nation’s stockpiles. The oil market seems slightly oversupplied and another downward move is possible in the first half of this year, Ian Taylor, chief executive officer of Vitol Group, said Tuesday. There are no signs of slowing U.S. output even as the country’s drillers idle rigs, he said. Oil inventories in industrialized nations may climb near a record 2.83 billion barrels by the middle of the year because supplies remain abundant, the International Energy Agency said in a report.

Brent crude, a global benchmark, has rallied 29% from its low point this year. It’s still down by half from last year’s peak as the U.S. pumps the most oil in three decades and OPEC responds by maintaining its own output to keep market share. While companies have pulled rigs off oil fields and cut billions of dollars of planned spending, it will be some time before there is an impact on production, according to the IEA. “The market looks a little bit long in the first half of the year,” Taylor said in an interview at a conference in London. “We think there are going to be quite dramatic builds in stock for the next few months” before the market moves into balance in the second half.

The IEA, a Paris-based adviser to 29 nations, cut its forecast for oil-supply growth from nations outside the Organization of Petroleum Exporting Countries for a second consecutive month Tuesday, citing cuts in company spending. Production will increase by 800,000 barrels a day this year, the slowest rate expansion since 2012 and down from an estimate of 1.3 million a day in December. “Extreme cuts in investment in output now could lead to an oil deficit by the fourth quarter,” Igor Sechin, chief executive of Russia’s largest oil producer OAO Rosneft, said in a speech at the London conference.

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“For the Saudis, it’s market share at any cost. Saudi is the leader in this and the others have to follow the leader.”

OPEC Producers Cut Oil Prices to Asia in Battle for Market Share (Bloomberg)

Iraq and Iran joined Saudi Arabia in cutting their March crude prices for Asia to the lowest level in more than a decade, signaling the battle for a share of OPEC’s largest market is intensifying. Iraq’s Basrah Light crude will sell at $4.10 a barrel below Middle East benchmarks, the lowest since at least August 2003, the Oil Marketing Co. said Tuesday. National Iranian Oil lowered its official selling price for March Light crude sales to a discount of $2.10 a barrel, the lowest since at least March 2000, according to a company official who asked not to be identified because of corporate policy.

The cuts come after Saudi Arabia, the largest crude exporter, reduced pricing to Asia last week to the lowest in at least 14 years. OPEC left its members’ output targets unchanged at a November meeting, choosing to compete for market share against U.S. shale producers rather than support prices. Iraq is the second-biggest producer in OPEC and Iran is fourth. “This is an effort by some producers to protect market share,” Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone Tuesday. “It’s really straightforward; cutting prices is how you keep your foot in the door.”

Middle Eastern producers are increasingly competing with cargoes from Latin America, Africa and Russia for buyers in Asia. Oil prices have dropped about 45% in the past six months as production from the U.S. and OPEC surged. The International Energy Agency said Tuesday that the U.S. will contribute most to global growth in oil supplies through 2020 as OPEC’s attempts to defend its market share will hurt other suppliers including Russia more. “If they go out and sell at a higher price, they won’t sell much,” John Sfakianakis, Middle East director at Ashmore, a London-based investment manager, said in an interview in Dubai Tuesday. “For the Saudis, it’s market share at any cost. Saudi is the leader in this and the others have to follow the leader.”

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“Kotsaba’s particular crime, according to prosecutors, was in describing the conflict as a civil war rather than a Russian “invasion.”

Ukrainians Rage Against Military Draft: “We’re Sick Of This War” (Antiwar.com)

When Ukrainian army officers came to the Ukrainian village of Velikaya Znamenka to tell the men to prepare to be drafted, they weren’t prepared for what happened next. As the commanding officer was speaking, a woman seized the microphone and proceeded to tell him off: “We’re sick of this war! Our husbands and sons aren’t going anywhere!” She then launched into a passionate speech, denouncing the war, and the coup leaders in Kiev, to the cheers of the crowd. What she did is now a crime in Ukraine: the only reason she wasn’t arrested on the spot is that the villagers wouldn’t have permitted it. But in Ukrainian Transcarpathia, well-known journalist for Ukrainian Channel 112 Ruslan Kotsaba has been arrested and charged with “treason” and “espionage” for making a video in which he declared: “I would rather sit in jail for three to five years than go to the east to kill my Ukrainian brothers. This fear-mongering must be stopped.”

Kotsaba may sit in jail for twenty-three years, the prescribed term for the charges filed against him. Kotsaba’s arrest is part of a desperate effort by the Ukrainian government to intimidate the growing antiwar and anti-draft movement, which threatens to upend Kiev’s dreams of conquering the rebellious eastern provinces. Kotsaba’s particular crime, according to prosecutors, was in describing the conflict as a civil war rather than a Russian “invasion.” This is a point the authorities cannot tolerate: the same meme being relentlessly broadcast by the Western media – that an indigenous rebellion with substantial support is really a Russian plot to “subvert” Ukraine and reestablish the Warsaw Pact – now has the force of law in Ukraine. Anyone who contradicts it is subject to arrest.

Also subject to arrest, and worse: the thousands who are fleeing the country in order to avoid being conscripted into the military. In a Facebook post that was quickly deleted, Defense Minister Stepan Poltorak wrote: “According to unofficial sources, hostels and motels in border regions of neighboring Romania are completely filled with draft dodgers.” President Petro Poroshenko, the Chocolate Oligarch, is readying a decree imposing possible restrictions on foreign travel for those of draft age – which means anyone from age 25 to 60. Ukrainians may soon be prisoners in their own country – but they aren’t taking it lying down.

Draft resistance is at an all-time high: a mere 6% of those called up have reported voluntarily. This has forced the Kiev authorities to go knocking on doors – where they are met either with a mass of angry villagers, who refuse to let them take anyone, or else ghost towns where virtually everyone has fled.[..] The frantic Ukrainian regime is now contemplating conscripting women over 20.

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Nov 212014
 
 November 21, 2014  Posted by at 12:47 pm Finance Tagged with: , , , , , , , , , ,  


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

Americans, With Record $3.2 Trillion Consumer Debt, Borrow More (Guardian)
How Wall Street Banks Traded Lending For Oil, Gas And Nukes (MarketWatch)
Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)
China ‘Triple Bubble’ Points To Long Slide For Commodities (MarketWatch)
ECB Dips Toe Into Dead Sea Of Rebundled Debt (Reuters)
ECB’s Draghi: ‘Strong Recovery Unlikely’ (CNBC)
Draghi Says ECB Must Raise Inflation as Fast as Possible (Bloomberg)
Greece To Submit Contentious Budget For 2015 (CNBC)
Hanging Around: Why Abe’s Holding an Election in a Recession (Bloomberg)
Abe Listening to Krugman After Tokyo Limo Ride on Abenomics Fate (Bloomberg)
US Federal Reserve To Review How It Supervises Major Banks (Reuters)
Hugh Hendry: “QE ‘Worked’ By Redistributing Wealth Not Creating It” (Zero Hedge)
Britain Abandons Banker Bonus Fight After EU Court Blow (Bloomberg)
Russia Warns US Against Supplying ‘Lethal Defensive Aid’ To Ukraine (RT)
EuroMaidan Anniversary: 21 Steps From Peaceful Rally To Civil War (RT)
Dutch Government Refuses To Reveal ‘Secret Deal’ Into MH17 Crash Probe (RT)
Creativity, Companies, And The Wisdom Of Crowds (Robert Shiller)
China Starts $2 Trillion Leap Forward to Slash Pollution (Bloomberg)
The Magical Thought That’s Assumed in Climate Studies (Bloomberg)
Rhino Poaching Death Toll Reaches Record in South Africa (Bloomberg)
Growth First. Then These Other Things Can Be Dealt With (Clarke&Dawe)

This is going to end well, right?

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

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

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

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

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

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

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

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

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

Citigroup Ejected From ECB FX Group for Rigging (Bloomberg)

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

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

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

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

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

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

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The headline tells the story.

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

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

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

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Gee, we had no idea.

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

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

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

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Mario must be needing tranquilizers by now.

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

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

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

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When will the next bond attack start?

Greece To Submit Contentious Budget For 2015 (CNBC)

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

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

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Power games save faces, but not countries.

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

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

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

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Say sayonara Nippon.

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

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

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

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Timing is everything. What year is today?

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

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

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

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

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More Hugh. He has very original insights.

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

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

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

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Cameron keeps on losing against the EU.

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

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

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

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

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

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

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

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Useful timeline.

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

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

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

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

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

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

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More secrets, just what the situation needed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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This is who we are. This is mankind.

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

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

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

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

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

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Apr 232014
 
 April 23, 2014  Posted by at 2:12 pm Finance Tagged with: , , , ,  


Arthur Rothstein Planting beans near Belle Glade, Florida January 1937

QE Is A Fraud Perpetrated By Made Men

A lot of words are being spent again these days on deflation and the QE measures that are supposed to “cure” it. Paul Krugman, who when it comes to stimulus is a hammer seeing nails only, now has it in for Sweden’s central bank, which he labels monetary sadists for not opening the spigots. But it’s all a hugely deceptive false flag; it’s not an issue of whether you launch QE or not. There’s a third, and much more valid, way of looking at this.

First of all, one should wonder if QE is the right kind of stimulus, if growth and recovery in the real economy is the objective. Which in present circumstances is a very big IF ,that is surprisingly, hardly ever questioned. But if the real economy is the target area, it’s highly likely that something like Steve Keen’s version of a debt jubilee, where every citizen receives an X amount, first to be used to pay off any debts, would be far more effective. Or the Positive Money ideal, in which central banks, not commercial banks, have the ability to create fresh credit.

However that may be, what everybody should realize is that QE or another form of stimulus MIGHT work, but only if they’re executed in the proper fashion, that is, if debts are restructured at the same time stimulus is unleashed, i.e. the financial system is purged, which is the only way to restore trust and confidence. Debt restructuring must be a core element of any stimulus, and if it’s not, wherever you live, you know you’re being screwed.

In essence, what central banks have done so far, first in Japan, then in the US and EU, is to cordon off the debts residing in their banks (e.g. in the form of swaps and not-so-securities), and then flood these same banks with money/credit, in order to make them look healthy. Since all these nations’ banks have the same debt issues, they all agreed to ignore each other’s obvious sleight of hand. And anyone can understand that if these banks are still sitting on huge amounts of debt, any and all stimulus must and will at some point disappear into a bottomless black hole, albeit only after first having pumped up asset markets to new bubble heights and creating a temporary and entirely false impression of growth and recovery, with one more round of fat profits for the zombified financial system, and eventually leaving behind an economic landscape for which the term scorched earth would be sheer flattery.

If one thing should be clear, it’s that this does nothing to either fight deflation, induce growth or launch a recovery. It paints rosy pictures on a shiny and alluring screen, behind which present and future generations are being robbed blind. And even if it might be too much to ask, it would be good if it also became clear that QE has never been intended to heal the real economy, other than perhaps as a secondary side-effect. The purpose of QE is, and always has been, to keep banking systems standing as long as is deemed desirable, after which point the insiders clear out with their gains and the public at large will be left with the losses. QE is merely another way to transfer losses from “them” to you.

A stinging rebuttal of Krugman and his ilk comes, via Tyler Durden, from Phoenix Capital Research, where Kool-Aid is not a favorite in the vending machine.

Japan Has Proven That Central Banks Cannot Generate Growth With QE

The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way. Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough. Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program. In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective… $1.4 trillion is…

  1. The equivalent of 24% of Japan’s total annual economic output.
  2. Enough to fly every human being in Japan to California for a 2-week vacation.
  3. The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.

Moreover, with $1.4 trillion, you could…

  1. Buy Australia’s entire economy for a year.
  2. Fund NASA for the next 82 years.
  3. Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.

For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding. Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.

[..] Abenomics has failed to revitalize Japan. Just as importantly, this failure [..] is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now). Thus, the Bank of Japan’s massive QE campaign has revealed:

  1. That QE does not generate economic growth
  2. There will be political consequences for its failure

As much as I appreciate Phoenix Capital’s input, I also find some crucial points missing in this analysis. While I’m no fan of either Krugman or his Keynesianism on steroids, I don’t think they irrevocably refute the potential of QE as a ways to stimulate an economy. I’ve already said that I don’t think QE is the best way to accomplish that, but I think it’s more important to note that QE without debt restructuring cannot possibly work, because A) the debt is likely to swallow up all QE and more, and B) no confidence is restored. And what I find yet more important than that is that QE as it has been executed thus far is not a failure, as Phoenix contends, but a multi-trillion dollar fraud. Because central bankers are very aware of both points A) and B).

Racking up deficits and balance sheets for governments and central banks in order to prop up the zombified corpses of financial institutions that have wagered big and lost bigger, without making sure the debts and losses are purged that made them need the stimulus in the first place, is nothing but the biggest heist in human history. Moreover, if you could fight deflation with stimulus, this certainly wouldn’t be the way to go. If Japan, instead of handing it to its banks, would simply actually have given $11,200 to every man, woman, and child in Japan, the chances of raising the velocity of money, a crucial element of in/deflation, would have been much higher.

And I’m supposed to think that central bankers don’t understand this? I’m sorry, but that’s something I can’t get through my head. From where I’m sitting, people like Greenspan and Bernanke and Kuroda look far more like wise guys or made men than they look like oracles or wise old academic types who unfortunately got things wrong on occasion.

And before I forget, the fact that QE has been implemented as it has doesn’t only tell us something about the political power of the financial system, which can do this simply because they can, it also gives an indication of how vast the losses truly are, how foul the smell emanating from the paper hidden in the bank vaults truly is by now, 7-odd years into this Kabuki meets ancient tragedy performance for which ticket prices keep rising exponentially.

Yeah, the US economy is doing oh so great, isn’t it?

America’s Consumers Are Dropping, Not Shopping (Alhambra)

McDonald’s latest results confirm that something is very much amiss on the consumer side. Total global revenue grew only 1% Y/Y, including new store launches and acquisitions. However, as has been the pattern since 2012, US comparable store sales lagged markedly. The rate of contraction in Q1 was actually the worst in more than a decade.

ABOOK Apr McD Same Store US

Even if you believe that the cold and snow of January and February played a role, it could not have explained that comparison. There is simply no way that anything other than consumer exhaustion can create the chart above. One need only glance at the revenue history of companies in the S&P 500 to see that in full effect. If McDonald s persistent travails are limited to the company, or even the fast food industry, there is no way that the revenue pattern for MCD would so match closely that of the entire S&P 500. The commonality screams macro.

ABOOK Apr McD SP 500 Revenue

Current projections for the first quarter add up to about 2.5% revenue expansion across S&P 500 companies, but, as last quarter showed, that is likely overly optimistic (fourth quarter revenue was believed to be expanding at near 3% at the outset of earnings season in January 2014, only to be revised lower to almost 0%).

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I think they already figured that out.

The American Middle Class Is No Longer the World’s Richest (NY Times)

The American middle class, long the most affluent in the world, has lost that distinction. While the wealthiest Americans are outpacing many of their global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger raises over the last three decades. After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans. The numbers, based on surveys conducted over the past 35 years, offer some of the most detailed publicly available comparisonsfor different income groups in different countries over time.

They suggest that most American families are paying a steep price for high and rising income inequality. Although economic growth in the United States continues to be as strong as in many other countries, or stronger, a small percentage of American households is fully benefiting from it. Median income in Canada pulled into a tie with median United States income in 2010 and has most likely surpassed it since then. Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago.

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The weather?

Sales of Existing U.S. Homes Fall for a Third Month (Bloomberg)

Sales of previously owned homes fell in March for a third consecutive month as rising prices and a lack of inventory discouraged would-be buyers. Closings, which usually take place a month or two after a contract is signed, fell 0.2% to a 4.59 million annual rate, the lowest level since July 2012, the National Association of Realtors reported today in Washington. Purchases were down 8.5% compared with the same month last year before adjusting for seasonal patterns. Property values have climbed faster than wages, putting ownership out of reach for some Americans. Harsh winter weather in January and February also probably kept some properties off the market, contributing to a lack of supply that has further stoked price increases.

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David Stockman is on the right track.

America’s Housing Fiasco Is On You, Alan Greenspan (Stockman)

In truth, America’s baby-boom generation was robbing its own future retirement years, but the Maestro was oblivious. Instead, he was busy tracking the quarterly rate of MEW (“mortgage equity withdrawal”) and crowing about how it was contributing to unprecedented prosperity on Main Street. It ended up in a conflagration of exploitive lending, fraud, default and trillions of financial losses, of course, but not until $5 trillion of cumulative MEW during the decade through 2007 had ruined the financial well-being of America’s middle class for a generation to come.

Under a regime of free market interest rates $5 trillion of MEW—that is, robbing from the future to party today—could not have happened. Long before the 2003-2006 blow-off top, mortgage interest rates would have soared to double digit levels, causing monthly debt service requirements to double or triple. Moreover, in an environment of market-set interest rates there would have been no Greenspan Put or ultra cheap wholesale financing that enabled Wall Street to fund mortgage boiler shops with warehouse credit lines and buyers of its toxic securitization products with cheap repo.

In short, free market interest rates are the vital check and balance mechanism which prevents runaway spirals of debt issuance and frenzied bidding-up of asset prices. Yet it was Greenspan’s “wealth effects” doctrine that destroyed the mechanism of honest price discovery once and for all. The carnage that has ensued in the nation’s credit and housing markets, therefore, is on you, Alan Greenspan.

Photo

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“More Policy” is needed?

China Factory Activity Shrinks For Fourth Month

China’s factory activity shrank for the fourth straight month in April, signaling economic weakness into the second quarter, a preliminary survey showed on Wednesday, although the pace of decline eased helped by policy steps to arrest the slowdown. Analysts see initial signs of stabilization in the economy due to the government’s targeted measures to underpin growth, but believe more policy support may be needed as structural reforms put additional pressure on activity. The HSBC/Markit flash Purchasing Managers Index (PMI) for April rose to 48.3 from March’s final reading of 48.0, but was still below the 50 line separating expansion from contraction.

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Wham! Don’t miss the video.

China ‘A Ticking Time Bomb And A Big Shock’s Coming’ (Saxo Bank)


(Roll over for video)

Markets are massively underestimating the deflationary fallout that’s going to come from a big decline in China and other emerging markets. That’s according to Michael Ingram, Market Strategist at BGC Partners. China’s manufacturing sector continues to shrink. On Tuesday, the HSBC PMI index for April came in at 48.3. Anything below 50 shows a contraction. China’s yuan hit a 16-month low on the news. Michael says China’s efforts to re-balance its economy is taking its toll and he’s not sure it can be managed effectively. He says that we’re not seeing “risk off” right now, we’re seeing “growth off”. Any suggestion that emerging markets have decoupled from developed economies is “nonsense”, according to Michael and China’s a “ticking time bomb” that’s about to explode.

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I like Shilling, but seeing him quote Lagarde to get his point across makes me queasy.

Deflation Is About to Wallop Europe (A. Gary Shilling)

The euro has been defying gravity for years. Europe’s Teutonic North and Club Med South were joined under one monetary policy. But the 18-member euro area has no common fiscal policy and probably never will, given its vast cultural and economic differences. This hardly makes the euro a safe-haven currency. After dropping from 1.60 per U.S. dollar to 1.20 during the global recession, the euro has risen to 1.38. And that’s despite Europe’s follow-on recession, which began in the fourth quarter of 2011 and lasted six quarters. Real gross domestic product growth since then has averaged only 0.9% annually, well below the 2.3% in the U.S. Does the euro really deserve to be strong against the greenback?

It is true that the financial crisis has abated since European Central Bank President Mario Draghi said in July 2012 that the central bank was “ready to do whatever it takes” to preserve the euro. Since then, the yield on 10-year Spanish government issues dropped from a junk-bond level of 7.6% to 3.1%, close to the 2.6% yield on the 10-year U.S. Treasury note. Italian sovereigns, meanwhile, have fallen from a 6.6% yield to 3.1%. The days of euro strength may be numbered, however, because of mushrooming fears of deflation in Europe.

Average house prices in the euro area have dropped 5% since the second quarter of 2011. More important, inflation increased a mere 0.5% in March from a year earlier. Since January 2013, inflation has been below the ECB’s target of “just under 2.0%.” In the 28-country European Union, inflation was just 0.6% in March versus a year earlier. Bankers and policy makers worldwide are deeply worried about trivial inflation in the euro area turning into chronic deflation. Christine Lagarde, the chairman of the International Monetary Fund, said in a January speech: “We see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.”

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All roads lead to ruin.

QE From ECB? May Not Be The Panacea Many Hope (CNBC)

Amid hopes that the ECB will undertake a move to stimulate the economy that will revive sluggish growth and low inflation levels, while simultaneously easing the euro’s stubborn strength and boosting equity and bond prices, Capital Economics said there are potential routes it could take if easing takes on the form of QE. “If the main concern is that the weakness of the banking sector is holding back economic growth, it would make sense to focus additional purchases on private sector assets,” said Jessop. This option, the economist said, would have the largest positive impact on the euro zone equity and corporate debt prices. However, it could have the undesirable impact of strengthening the euro as the relative strength of the region’s riskier financial assets increase, which would be negative for core government debt.

A second option would involve the ECB specifically targeting the risk of deflation by boosting the money supply. This could prompt the ECB to focus on the purchase of government bonds. However, this could have the adverse effect of strengthening the euro if it undermines the fiscal discipline of the Southern European countries where yields have already fallen to levels hard to justify in terms of the outlook for public finances, Jessop pointed out. The third scenario would involve the purchases of higher-rated German or French bonds, which Jessop said might go furthest in weakening the euro. But the impact could be limited as yields on these instruments are already very low as investors have priced in the risk of deflation.

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Krugman Slamming Riksbank Fuels Deflation Anxiety (Bloomberg)

The Riksbank, the world’s oldest central bank, has become a sadist in its use of monetary policy, according to Nobel Laureate Paul Krugman. He says the Stockholm-based central bank’s bias toward tight policy during the financial crisis was a “terrible mistake” that now risks creating a Japan-style deflationary spiral. The criticism has the potential to weaken the exchange rate as international investors “question the Swedish economic development,” according to SEB AB, the Nordic region’s biggest currency trader. Krugman’s comments go to the heart of a debate that’s splitting policy makers at Sweden’s central bank.

Governor Stefan Ingves has consistently warned that low rates risk fueling a credit bubble. The bank’s pro-easing lobby – two of its six board members – argue too-tight policy is keeping people out of work and making the 2% inflation target harder to reach. Some economists even warn that Ingves risks undermining his debt fight if prices continue to fall. “The closer you get to deflation, the worse the debt problems get, unless you lower rates,” Par Magnusson, an economist at Royal Bank of Scotland Group Plc in Stockholm, said in a phone interview. “That is fatal. Then you have to do everything in your power to get inflation going, because that’s the only thing that can hollow out the debt and help households pay off their loans.”

Ingves, who is also chairman of the Basel Committee on Banking Supervision that Krugman describes as a “sadomonetarist stronghold,” said in an interview this month he expects inflation to return. Yet he was soon wrong-footed by a report that showed prices fell 0.6% in March from a year earlier, twice as much as the bank had predicted. “Whatever their motives, sadomonetarists have already done a lot of damage,” Krugman wrote in his April 21 New York Times column. “In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.”

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Leave it to the Telegraph to miss already in the headline.

Swedish Lessons Show Even Deflation Can’t Cure The Housing Bubble (Guardian)

Last week Sweden became the first northern European country to report that it had fallen into outright price deflation, a state of affairs that worries economists because if consumers and companies expect falling prices, they tend to postpone purchases, investment and hiring, potentially leading to a downward spiral in demand. The reason Stockholm’s plight is attracting more attention than the rest of Europe, where eight countries are now in price deflation, is because Sweden came through the financial crisis relatively unscathed. Unlike others, it also still has its own currency and therefore retains control over monetary policy.

Yet, despite these apparent advantages, Sweden now finds itself in much the same boat as the depressed periphery countries of the eurozone, at least in terms of price inflation. How did this come about and what lessons does it hold for Britain, where some of the pressures on monetary policy – including fast inflating house prices and relatively high levels of household indebtedness – look remarkably similar to those of Sweden? The standard script goes something like this. Having had its own very deep banking and economic crisis back in the early 1990s, Sweden was much better prepared for the latest one than most other European countries. In the early stages of the crisis, it also did many of the right things.

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Draghi Gauges Ukraine Effect as ECB Tackles Low Inflation (Bloomberg)

Mario Draghi can look for clues from euro-area companies this week on whether the region needs more stimulus to counter economic risks from low inflation to geopolitical tension. Purchasing managers’ indexes tomorrow are forecast to show growth in manufacturing activity holding at the weakest pace this year. Figures the following day may show declining business confidence in Germany, the region’s biggest economy, in a survey published shortly before the European Central Bank president speaks in Amsterdam.

A territorial dispute between Russia and Ukraine, which supply much of Europe’s energy, is undermining confidence in a recovery already threatened by a strengthening currency and subdued pricing power. That raises the prospect of ECB officials being called on their promise to ease monetary policy if needed, including with unconventional tools such as quantitative easing. Tension in eastern Europe “could easily spark turbulences big enough to temporarily halt the euro-zone recovery,” said Christian Schulz, senior economist at Berenberg Bank in London. “It is the biggest risk to our optimistic growth forecasts for the euro zone at the moment.”

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Japan Has Proven That Central Banks Cannot Generate Growth With QE (Phoenix)

The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way. Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.

Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program. In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective… $1.4 trillion is…

1) The equivalent of 24% of Japan’s total annual economic output.
2) Enough to fly every human being in Japan to California for a 2-week vacation.
3) The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.

Moreover, with $1.4 trillion, you could…

1) Buy Australia’s entire economy for a year.
2) Fund NASA for the next 82 years.
3) Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.

For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding. Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large. To whit, since announcing this program Japan has seen:

1) GDP growth accelerate for only two quarters before turning down again.
2) Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.
3) Household spending crater 2.5% year over year in real terms.
4) The Yen lose an astounding 25% of its purchasing power.
5) Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.
6) Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.

In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now). Thus, the Bank of Japan’s massive QE campaign has revealed:

1) That QE does not generate economic growth
2) There will be political consequences for its failure

Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.

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Hussman’s a good analyst but he sees the Fed as a charity organization.

The Federal Reserve’s Two Legged Stool (John Hussman)

In her first public speech on monetary policy, Janet Yellen made it clear that the Fed intends to pursue a more rules-based, less discretionary policy. This is good news. The bad news, however, is that Yellen focused only on employment and inflation. In that same speech, not a single word was said about attending to speculative risks or financial instability (which are inherent in Fed-induced, yield-seeking speculation). Without attending to that third leg, the Fed is resting the fate of the U.S. economy on a two-legged stool.

The problem is this. In viewing the Fed’s mandate as a tradeoff only between inflation and unemployment, Chair Yellen seems to overlook the feature of economic dynamics that has been most punishing for the U.S. economy over the past decade. That feature is repeated malinvestment, yield-seeking speculation, and ultimately financial instability, largely enabled by the Federal Reserve’s own actions. To overlook yield-seeking speculation as a central element connected to the Federal Reserve’s mandate is to invite a repeat of dismal economic consequences over and over again.

The Fed’s mandate need not explicitly refer to financial stability – it is enough to recognize that the failure to take speculation, malinvestment, and financial stability seriously has been one of the primary causes of economic and financial crises that prevent the Fed from achieving that mandate. Indeed, the Fed has again baked such consequences into the cake as a result of its policy of quantitative easing, and an associated lack of appreciation for how equity valuations work (particularly the need to consider valuation multiples and profit margins jointly, whenever one uses earnings-based measures). Nearly every argument that stocks are not in a “bubble” begin with an appeal to 2000, as if the most extreme valuations in history should be a upside objective, below which anything else is acceptable. As long as conditions are not as extreme as 2000, the word “bubble” presumably cannot be applied.

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Thing is, Bill, will the US be first to blow up? If not, how will that change outstanding bets?

America’s Empire And Credit Bubble Are Reaching Their “Sell-By” Date (Bonner)

We made an observation last week: The US empire and its credit bubble will probably come to an end at the same time. Each depends on the other. If the US were not so big and powerful, it could not impose its money as the world’s reserve currency. Without its position as the issuer of the world’s reserve currency (dollars instead of gold), the US wouldn’t be able to flood the world with its cash. Without the rest of the world’s need for dollars, the credit bubble couldn’t continue growing. And without the credit growth there would be no way to pay the expense of maintaining a worldwide empire. This does not explain the miracle of “growth without savings” we discussed last week, but it gives us a hint as to what will happen when the trick no longer works.

All bubbles… and all empires… eventually blow up. An empire that depends on a credit bubble is doubly explosive. All it takes is a turn in the credit cycle, and the fuse is lit. We wrote a book on the subject, along with co-author Addison Wiggin, in 2006. From the invasion of the Philippines to the Vietnam War… the US empire was financed by the rich, productive power of the US economy. But as the war in Vietnam was winding down, the source of imperial finance changed from current output to future output. The US switched to a purely paper money system… and turned to borrowing to finance its military adventures.

Today’s blockhead puffs out his chest and enjoys feeling like a big shot. He passes the bill on to tomorrow’s taxpayer. The argument for heavy security spending collapsed between 1979 (when China took the capitalist road) and 1989 (when Russia abandoned communism). But by then, the “military-industrial complex” (or the military-industrial-congressional complex) President Eisenhower warned us about was already firmly in control of Washington. Presidents – Democrat and Republican – came and went. Nothing nor nobody could keep resources from the security industry.

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“Enrollment in the plans – which allow students to rack up big debts and then forgive the unpaid balance after a set period – has surged nearly 40% in just six months”. Wow.

US Student-Debt Forgiveness Plans, Costs, Skyrocket (WSJ)

Government officials are trying to rein in increasingly popular federal programs that forgive some student debt, amid rising concerns over the plans’ costs and the possibility they could encourage colleges to push tuition even higher. Enrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion, U.S. Education Department records show. The popularity of the programs comes as top law schools are now advertising their own plans that offer to cover a graduate’s federal loan repayments until outstanding debt is forgiven.

The school aid opens the way for free or greatly subsidized degrees at taxpayer expense. At issue are two federal loan repayment plans created by Congress, originally to help students with big debt loads and to promote work in lower-paying jobs outside the private sector. The fastest-growing plan, revamped by President Barack Obama in 2011, requires borrowers to pay 10% a year of their discretionary income—annual income above 150% of the poverty level—in monthly installments. Under the plan, the unpaid balances for those working in the public sector or for nonprofits are then forgiven after 10 years.

Private-sector workers also see their debts wiped clean—after a longer period of 20 years—reflecting a government aim to have no one, wherever they work, paying down student debt their entire working life. An independent study estimates the future cost of the 2011 program, known as Pay As You Earn, could hit $14 billion a year. The Obama administration has proposed in its latest budget released last month to cap debt eligible for forgiveness at $57,500 per student. There is currently no limit on such debt.

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In California, this is truly sad. In Guatemala, it’s life.

Number Of Middle Age Californians Living With Their Parents Soars (LA Times)

At a time when the still sluggish economy has sent a flood of jobless young adults back home, older people are quietly moving in with their parents at twice the rate of their younger counterparts. For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development. The jump is almost exclusively the result of financial hardship caused by the recession rather than for other reasons, such as the need to care for aging parents, said Steven P. Wallace, a UCLA professor of public health who crunched the data.

“The numbers are pretty amazing,” Wallace said. “It’s an age group that you normally think of as pretty financially stable. They’re mid-career. They may be thinking ahead toward retirement. They’ve got a nest egg going. And then all of a sudden you see this huge push back into their parents’ homes.” Many more young adults live with their parents than those in their 50s and early 60s live with theirs. Among 18- to 29-year-olds, 1.6 million Californians have taken up residence in their childhood bedrooms, according to the data. Though that’s a 33% jump from 2006, the pace is half that of the 50 to 64 age group. The surge in middle-aged people moving in with parents reflects the grim economic reality that has taken hold in the aftermath of the Great Recession.

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That only voice in America that goes against the grain. What if he’s no longer there?

Ron Paul 2008 Speech On Disbanding NATO (Ron Paul)

Mr. Speaker, I rise in opposition to this resolution calling for the further expansion of NATO to the borders of Russia. NATO is an organization whose purpose ended with the end of its Warsaw Pact adversary. When NATO struggled to define its future after the Cold War, it settled on attacking a sovereign state, Yugoslavia, which had neither invaded nor threatened any NATO member state. This current round of NATO expansion is a political reward to governments in Georgia and Ukraine that came to power as a result of US-supported revolutions, the so-called Orange Revolution and Rose Revolution.

The governments that arose from these street protests were eager to please their US sponsor and the US, in turn, turned a blind eye to the numerous political and human rights abuses that took place under the new regimes. Thus the US policy of “exporting democracy” has only succeeding in exporting more misery to the countries it has targeted. NATO expansion only benefits the US military industrial complex, which stands to profit from expanded arms sales to new NATO members. The “modernization” of former Soviet militaries in Ukraine and Georgia will mean tens of millions in sales to US and European military contractors.

The US taxpayer will be left holding the bill, as the US government will subsidize most of the transactions. Providing US military guarantees to Ukraine and Georgia can only further strain our military. This NATO expansion may well involve the US military in conflicts as unrelated to our national interest as the breakaway regions of South Ossetia and Abkhazia in Georgia. The idea that American troops might be forced to fight and die to prevent a small section of Georgia from seceding is absurd and disturbing. Mr. Speaker, NATO should be disbanded, not expanded.

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Sort of good, but …

Russia Postpones Planting Of GMO Seeds By 3 Years (RT)

Russia will not start certifying GM seeds for at least three more years due to delays in creating the necessary infrastructure, Prime Minister Dmitry Medvedev told MPs. Earlier Russia had expected to allow planting such seeds from June. The delay comes amid the general GMO-skeptic mood that the Russian government adopted recently. The country may even ban the cultivation and import of genetically modified foodstuffs. Last year, the government allowed the planting of GM seeds starting July 2014 as part of Russia’s accession to the World Trade Organization. Now the deadline will have to change, Medvedev told Russian MPs.

“The government decree will be amended. Not because it was wrong, but because the deadline stipulated in it was too optimistic,” he said, explaining that at the moment there are not enough gene laboratories to meet the demand for certification in Russia. “But even if the certification starts in three years or after some time, it doesn’t mean that we will allow the use of genetically modified material,” Medvedev said. He added that the labs and the entire system of certification will still be needed, considering that even with strict regulation of the sale of GM seeds, some of them have found their way into Russia. “The problem is that GM material is already everywhere,” Medvedev said. “We need to know where and how it is being used. The labs’ task would be to do that. That’s what we are planning to invest in.”

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China’s undoubtedly the worst environmental nightmare in history. We ain’t seen nothing yet.

Even China’s Dirt Is Dirty (Bloomberg)

Even the most choking of Beijing smogs eventually gives way to blue skies. The very impermanence of air pollution encourages optimism that it can be solved one day. The poisoning of China’s land and water is another matter altogether. Unlike smog, which can be seen the moment it leaves a smokestack, chemicals leaking from pipes into China’s soil and rivers may not be discovered for years or decades. By then, the damage may be incalculable and permanent. Last week’s release of data collected during a nearly nine-year national soil survey finally gave Chinese a chance to evaluate the devastating toll that 30 years of rapid industrial development has had on them, their food supply, and their country.

The numbers are astonishing. More than 16% of China’s 3.7 million square miles of soil is contaminated. Even worse, nearly a fifth of the country’s arable land is polluted. While the report doesn’t specify how badly, hints exist. In December, a senior Chinese official conceded that 2% of China’s arable land – an area the size of Belgium – had become too polluted to grow crops at all. According to the report, the most common soil pollutants are inorganic in nature. They include nickel, arsenic, and highly toxic cadmium – all metals associated with industrial activity. Unfortunately, the report doesn’t reveal the benchmarks used to decide whether a soil sample qualifies as “polluted,” so it’s impossible to perform a comparative analysis with soil contamination in other countries.

Nonetheless, the fact that the Chinese government was willing to publicize these numbers is significant. As recently as last spring the Ministry of Environmental Protection denied a request to release the very same data to the public. No doubt authorities were concerned about how ordinary Chinese might react to the data, given already rampant fears about the safety of Chinese crops. They may also have feared that the real situation could be worse than that documented in the survey, which built its data set by taking one sample per every 6,400 hectares of land. Needless to say, it’s easy to miss contamination hot spots using such a methodology (likewise, it’s possible to oversample).

Unfortunately, the government’s change of heart only has only gone so far. The report does not reveal the specific locations of the many thousands of pollution hotspots identified over the last eight-and-a-half years. That’s the kind of information that can help an individual or community make life-extending decisions. Instead authorities have only offered broad stroke data that starts a conversation about soil pollution, but doesn’t offer any immediate benefit to anyone except local bureaucrats, who might otherwise be vilified for having allowed their districts to be polluted.

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You need 100,000 of these guys.

Spain’s ‘Robin Hood’ Swindled Banks To Help Fight Capitalism (Guardian)

They call him the Robin Hood of the banks, a man who took out dozens of loans worth almost half a million euros with no intention of ever paying them back. Instead, Enric Duran farmed the money out to projects that created and promoted alternatives to capitalism. After 14 months in hiding, Duran is unapologetic even though his activities could land him in jail. “I’m proud of this action,” he said in an interview by Skype from an undisclosed location. The money, he said, had created opportunities. “It generated a movement that allowed us to push forward with the construction of alternatives. And it allowed us to build a powerful network that groups together these initiatives.”

From 2006 to 2008, Duran took out 68 commercial and personal loans from 39 banks in Spain. He farmed the money out to social activists, funding speaking tours against capitalism and TV cameras for a media network. “I saw that on one side, these social movements were building alternatives but that they lacked resources and communication capacities,” he said. “Meanwhile, our reliance on perpetual growth was creating a system that created money out of nothing.” The loans he swindled from banks were his way of regulating and denouncing this situation, he said. He started slowly. “I filled out a few credit applications with my real details. They denied me, but I just wanted to get a feel for what they were asking for.”

From there, the former table tennis coach began to weave an intricate web of accounts, payments and transfers. “I was learning constantly.” By the summer of 2007, he had discovered how to make the system work, applying for loans under the name of a false television production company. “Then I managed to get a lot.” €492,000 (£407,000), to be exact. [..] His actions, he said, were at the vanguard of a worldwide debate on the economic crisis. The timing pushed the anti-capitalist movement into the light, just as many Spaniards were seeking alternatives to a system that had wreaked havoc on their lives.

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When David Hughes and Art Berman pop up at Bloomberg, you know something is moving.

Is the U.S. Shale Boom Going Bust? (Bloomberg)

It’s not surprising that a survey of energy professionals attending the 2014 North American Prospect Expo overwhelmingly identified “U.S. energy independence” as the trend most likely to gain momentum this year. Like any number of politicians and pundits, these experts are riding high on the shale boom — that catch-all colloquialism for the rise of hydraulic fracturing and horizontal drilling that have unleashed a torrent of hydrocarbons from previously inaccessible layers of rock. But this optimism belies an increasingly important question: How long will it all last?

Among drilling critics and the press, contentious talk of a “shale bubble” and the threat of a sudden collapse of America’s oil and gas boom have been percolating for some time. While the most dire of these warnings are probably overstated, a host of geological and economic realitiesincreasingly suggest that the party might not last as long as most Americans think. For the better part of two centuries, the American oil and gas industry drew its treasure from porous underground formations where hydrocarbons moved comparatively easily to the surface. The best of those resources began to dry up in the 1970’s and imports began to rise. Enter hydraulic fracturing and horizontal drilling, technologies that allow developers to extract oil and gas from much deeper, tighter and far-less-porous rock formations, including shale.

The problems arise when you look at how quickly production from these new, unconventional wells dries up. David Hughes — a 32-year veteran with the Geological Survey of Canada and a now research fellow with the Post Carbon Institute, a sustainability think-tank in California — notes that the average decline of the world’s conventional oil fields is about 5% per year. By comparison, the average decline of oil wells in North Dakota’s booming Bakken shale oil field is 44% per year. Individual wells can see production declines of 70% or more in the first year.

Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic. This creates what Hughes and other critics consider an unsustainable treadmill of ever-higher, billion-dollar capital expenditures chasing a shifting equilibrium. “The best locations are usually drilled first,” Hughes said, “so as time goes by, drilling must move into areas of lower quality rock. The wells cost the same, but they produce less, so you need more of them just to offset decline.”

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Canada’s native peoples have views that are so different from predatory capitalism you need to fear for their safety and their futures.

Canadian Aboriginals See No Compromise On Oil Sands Pipeline (Reuters)

Just a few miles from the spot where Enbridge Inc plans to build a massive marine terminal for its Northern Gateway oil pipeline, Gerald Amos checks crab traps and explains why no concession from the company could win his support for the project. Amos, the former chief of the Haisla Nation on the northern coast of British Columbia and a community leader, has argued for years that the risk – no matter how small – of an oil spill in these waters outweighs any reward the controversial project might offer. That resolve is shared by many in the aboriginal communities along the proposed pipeline and marine shipping route who see the streams, rivers and oceans in their traditional territories as the lifeblood of their culture.

“Our connection to this place that we call home is really important,” says Amos as he pulls three Dungeness crabs from his trap, tossing two in a bucket and holding the third up for his two young granddaughters, who shriek and giggle as the crustacean wriggles its legs. “If these little ones can’t witness us doing what we’ve done for generations now, if we sever that tie to the land and the ocean, we’re no longer Haisla.” The Northern Gateway pipeline would carry diluted bitumen 1,177 kilometers (731 miles) from Alberta’s oil sands to the deepwater port in Kitimat, in northwest British Columbia, where it would be loaded on supertankers and shipped to Asia. It is expected to cost C$7.9 billion ($7.17 billion).

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Mar 192014
 
 March 19, 2014  Posted by at 3:38 pm Finance Tagged with: , , ,  


Marion Post Wolcott Man washing car at Sarasota, Florida, trailer park January 1941

There will be many people who don’t care, there will be many more who don’t understand, and there will be boatloads who refuse to believe it’s true, but it still is. The Bank of England, in one single document, discredited, just at first count, 1) the majority of economics textbooks, 2) vast swaths of the entire field of economics, run as it is by economists educated by those same textbooks, 3) most governments’ economic policies, designed by these economists, 4) much of its own work, also designed by the same economists, 5) Paul Krugman and 6) the “committee” that hands Krugman and his ilk their Not-So-Nobel Prizes.

Indeed, the message the Bank’s people send is so devastating to economics as it is taught today that their document will most likely simply be ignored, even though that probably shouldn’t really be possible with an official central bank report. As my friend Steve Keen, whose take on this I touched on yesterday, put it:

Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.

Their dominant “tactic” — if I can call it that — will be ignorance itself: most economics lecturers won’t even know that the bank’s paper exists, and they will continue to teach from whatever textbook bible they’ve chosen to inflict upon their students. A secondary one will be to know of it, but ignore it, as they’ve ignored countless critiques of mainstream economics before. The third arrow in the quill, if they are challenged by students about it (hint hint!), will be to argue that the textbook story is a “useful parable” for beginning students, and a more realistic vision is introduced in more advanced courses.

Still, to see the Bank of England admit that the entire model most governments, including that of England, use to conduct policies, including austerity, should really be thrown out the window, is noteworthy.

Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate published in the Quarterly Bulletin 2014 Q1 a document entitled Money Creation in the Modern Economy, and introductory document, Money in the Modern Economy: An Introduction, and two videos that unfortunately seem shot with the express intent of losing the viewer’s interest within 10 seconds, but are still worth watching.

The authors’ opening statements are:

• This article explains how the majority of money in the modern economy is created by commercial banks making loans.

• Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

• The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

Where they say “banks do not act simply as intermediaries”, they do away in one fell swoop with Paul Krugman, who in his discussions with Steve Keen has always maintained just that: banks are mere intermediaries. Instead, Steve’s argument that banks create money, an argument ridiculed by Krugman, is now confirmed by the BoE. We await Krugman’s reaction.

Since I have two very good interpretations of the BoE document that I think you should read, and they’re long enough as they are, I’m not going to try and add a third one myself. I suggest you first try and stomach and process Steve Keen, plus David Graeber’s take as the Guardian published it. One thing: this confirms what most people already know, though most have never defined it as such. That makes it all the more peculiar that economists are not educated that way, and that economic policies are based on their recommendations.

Here’s Dave Graeber:

The Truth Is Out: Money Is Just An IOU, And The Banks Are Rolling In It

The Bank of England’s dose of honesty throws the theoretical basis for austerity out the window

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy”, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It’s this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say “there’s just not enough money” to fund social programmes, to speak of the immorality of government debt or of public spending “crowding out” the private sector. What the Bank of England admitted this week is that none of this is really true.

To quote from its own initial summary: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” … “In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it.

They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there’s no question of public spending “crowding out” private investment. It’s exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it’s obviously true. The Bank’s job is to actually run the system, and of late, the system has not been running especially well. It’s possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that’s what’s happening here, we might soon be in a position to learn if Henry Ford was right.

And Steve Keen:

The BoE’s Sharp Shock To Monetary Illusions

A couple of weeks ago I took a swipe at Bank of England over a speech by its Governor Mark Carney that was unrealistic about the dangers of a bloated financial sector (Godzilla is good for you? March 3). Today I’m doing the opposite: I’m doffing my cap to the researchers at Threadneedle Street for a new paper “Money creation in the modern economy,” which gives a truly realistic explanation of how money is created, why this really matters, and why virtually everything that economic textbooks say about money is wrong.

The bank is going gangbusters to get its message across, with an introductory paper on what money is, and two short videos on what money is and money creation, both shot in its gold vault. It clearly wants economic textbooks to throw out the neat, plausible but wrong rubbish they currently teach about money, and connect with the real world instead.

Economic textbooks teach students that money creation is a two-stage process. At the start, banks can’t lend because of a rule called the “Required Reserve Ratio” that specifies a ratio between their deposits and their reserves. If they’re required to hold 10 cents in reserves to back every dollar in deposits, then if deposits are $10 trillion and reserves are $1 trillion, the banking sector can’t lend any money to anyone.

Stage one in the textbook money creation model is that the Fed (or the Bank of England) gives the banks additional reserves — say $100 billion worth. Then in stage two, the banks lend this to their customers, who then deposit it right back into banks, who hang on to 10% of it ($10 billion) and lend the remaining $90 billion out again. This process iterates until an additional $1 trillion of deposits are created, so that the reserve ratio is restored ($1.1 trillion in reserves, $11 trillion in deposits).

That model goes by the name of “Fractional Reserve Banking” (aka the “Money Multiplier”), and depending on your political persuasion it’s either outright fraud (If you’re of an Austrian persuasion like my mate Mish Shedlock) or just the way things are if you’re a mainstream economist like Paul Krugman. In the latter case, it lets conventional economists build models of the economy that completely ignore the existence of banks, and private debt, and in which the money supply is completely controlled by the Fed.

In this new paper, the Bank of England states emphatically that “Fractional Reserve Banking” is neither fraud, nor the way things are, but a myth — and it rightly blames economic textbooks for perpetuating it. The paper doesn’t beat about the bush when it comes to the divergence between reality and what economic textbooks spout. In fact, as the paper explains it:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. (p. 1)

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits… (p. 1)

  • Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks… (p. 2)
  • While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality… (p. 2)
  • As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. (p. 2)

Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead.

Their dominant “tactic” — if I can call it that — will be ignorance itself: most economics lecturers won’t even know that the bank’s paper exists, and they will continue to teach from whatever textbook bible they’ve chosen to inflict upon their students. A secondary one will be to know of it, but ignore it, as they’ve ignored countless critiques of mainstream economics before. The third arrow in the quill, if they are challenged by students about it (hint hint!), will be to argue that the textbook story is a “useful parable” for beginning students, and a more realistic vision is introduced in more advanced courses.

Here the Bank of England has unfortunately given them a useful “out”, by politely pretending that the money multiplier model “can be a useful way of introducing money and banking”. But of course this feint will be pure malarkey. Firstly, the model is utterly misleading — it’s about as useful an introduction to the nature of money and banking as the Book of Genesis is an introduction to the theory of evolution. Once people believe the money multiplier model, they can rarely get their heads around the reality that bank lending creates money, and that this has drastic effects on the level of economic activity.

Secondly, the undergraduate lecturer’s “it gets better higher up” line is a ruse. Masters and PhD level courses continue to ignore banks, and though mainstream modellers are introducing all sorts of “financial frictions” into their DSGE models (as Noah Smith pointed out recently), none of them — with the sterling exception of Michael Kumhof of the IMF — are actually incorporating banks and their capacity to both create and destroy money into their models.

Why? Because if you admit the reality that banks create money by lending, and that money is destroyed by debt repayment (a point I have to admit that I took some time to appreciate), all the simple equilibrium parables of conventional economics fly out the window. In particular, the level of economic activity now depends on the lending decisions of banks (and the repayment decisions of borrowers). If banks lend more rapidly, or if borrowers repay more slowly, there will be a boom; if the reverse, there will be a slump. As the Bank of England puts it, if new loans simply make up for old ones being repaid, then there is no effect, but if new loans exceed repayment then aggregate demand will increase.

“There are two main possibilities for what could happen to newly created deposits,” the bank says. “First, as suggested by Tobin, the money may quickly be destroyed if the households or companies receiving the money after the loan is spent wish to use it to repay their own outstanding bank loans…

“The second possible outcome is that the extra money creation by banks can lead to more spending in the economy (p. 7).”

So from a realistic, hands-on perspective, the Bank of England declares that money matters in macroeconomics because it affects the level of economic activity. This really shouldn’t be a big deal — it’s what most people actually believe anyway — but incredibly, mainstream economics pretends that money only affects prices, that it has no impact (or only temporary one) on real activity, and that monetary disturbances are all the fault of the government (read central bank) anyway, because a quintessential market institution like a bank couldn’t do anything wrong, could it?

Leading economists can’t just ignore this paper, or blithely dismiss it as the foot-soldiers of the profession will do. But I seriously doubt that they will let it challenge their current position.

I will in particular be curious to see whether Paul Krugman notes this paper, and how he reacts to it. Krugman has been the most visible and aggressive defender of the proposition that banks don’t matter, with this including throwing a haymaker at me for making the case that the Bank of England is now making.

“In particular, he [Keen] asserts that putting banks in the story is essential,” Krugman wrote in 2012. “Now, I'm all for including the banking sector in stories where it's relevant; but why is it so crucial to a story about debt and leverage?

“Keen says that it's because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can't increase unless the money supply rises, but that's only true if the velocity of money is fixed; so have we suddenly become strict monetarists while I wasn't looking? In the kind of model Gauti and I use, lending very much can and does increase aggregate demand, so what is the problem?”

Since then Krugman has continued to press the belief that banks are “mere intermediaries” in lending, that they can be ignored in macroeconomics.

“Yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there,” he said in the article Commercial Banks As Creators of “Money”.

And in the same piece he wrote: “Banks are just another kind of financial intermediary, and the size of the banking sector — and hence the quantity of outside money — is determined by the same kinds of considerations that determine the size of, say, the mutual fund industry.”

Now that he has been directly contradicted on these points, not by some Antipodean heterodox economist, but by Threadneedle Street itself, I expect Krugman’s riposte will be the KISS principle: that while the “loans create deposits” argument is technically true, it doesn’t make any real difference to macroeconomics.

After all, Krugman certainly can’t just dismiss the Bank of England as being staffed by “Banking Mystics”, as he has brushed off the contrary views of others.